In the City
Danger in unison
Tony Rudd
When markets move in unison it can be good news and it can be bad. We have examples of both at the moment. The concerted downward trend in international interest rates must be regarded as good news but the equally concerted downward move in stock market values is worrying, particularly as it coincides with the good news of falling interest rates.
One explanation of this contrariness could be that investors do not really trust the downward movement in interest rates, that they think that the relief is temporary and that in due course rates will be back up again at their earlier peaks. This view was all to do with the perception of the American scene; British interest rates, if left to themselves, would undoubtedly come down under political pressure from the government as well as from market forces. The problem, if there is one, lies in America. The argument that rates might go up again there stemmed from the idea that the US economy might start re-expanding in the second half of this year and that this would cause a demand for money and credit which would compete with the government's need to finance its huge budget deficit.
That perceived danger is receding: there is less and less expectation now that the economy is going to re-expand and although the problem of the budget deficit is far from resolved, it is now thought likely that the authorities there will print suffi- cient money to make the government's financing problem manageable. This does not mean to say that interest rates in the US will come down all that fast for there is still a considerable demand for credit from businesses that are stretched to survive and need to go on borrowing if they are to do so. But as the bankruptcies mount there will come a time when even demand from this distressed quarter will abate too. So the consensus view now is that rates have in- deed peaked and that, perhaps with some interruptions, they are on their way down in America and therefore in the rest of the world too. That is the good news.
Why then should the stock markets of the world be falling in unison? The single most important palliative for industry and com- merce that everybody has been waiting for, a fall in interest rates, is now occurring. Yet, at precisely the moment when even the most sceptical observers are becoming con- vinced that this trend has become irrevers- ible, the world enters a new and apparently vicious phase of the bear market. The nastiest explanation of this paradox is that we are back in the conditions of the Thirties when falling interest rates, and then very low absolute levels of interest rates, did ab- solutely nothing to stimulate industry. The problem then, which perhaps is becoming the problem now, was lack of demand. Even though the use of money, before the war, attracted a minimal cost, it was not worth using it and taking the risk because the chances of making profits were so slim. It may seem odd but it is quite possible to
go through a phase in an extended business cycle like that which we are experiencing when quite a few businesses operate at a loss, just to stay in the game.
The Americans are complaining that the European steel makers are doing exactly that. There is every prospect that the Japanese are going to sell large quantities of their goods at below cost during the next 12 months. Their reaction to falling demand has invariably been to cut costs. Demand for their massive output of consumer goods has indeed begun to slacken. Their response will be lower prices and more aggressive marketing. When one motor-cycle agent has finally got his stock of Japanese bikes at a level where he just cannot take or finance any more, the manufacturer will have no compunction in appointing another agent down the road and filling him up with a nice large allocation, and so on round the country until stocks of bikes are at astronomical levels. The same kind of thing is happening in heavy industry where, for instance, process plant manufacturers are hard put these days to find an order which will show them a profit. The fact is that we have probably reached that point in the cycle where interest rates are no longer the governing factor in in- dustrial costs and decision-making; they are still an ingredient in both but not the prin- cipal one. So when the investment analysts calculate future profitability they are still tending to forecast further falls and, as they do so, investors get less hopeful.
The major casualty of these develop' ments has been the relative strength of fat Eastern markets. This reflected the almost miraculous way in which the economies of the East weathered the difficulties winch, beset the rest of the world after the second OPEC oil crisis. It was almost as though Japan and her neighbours had found the secret of economic perpetual motion. l`terw that their economy is faltering and their markets falling pell-mell, there is nowhere for the sophisticated institutional investor to go in order to find shelter from the crisis. This is not stopping a heavy outflow of funds from London nonetheless. The reason must be that institutions expect an earlier and better recovery abroad than they do here. Alternatively they may be sending money overseas before their freedom to transfer funds at will anywhere they like 15 brought to an end. Some of them may reason that, although the reimposition 0',. exchange control is far from what the pre' sent government would like to do, there may nevertheless come a time when it has no alternative. For one of the major effects of the depression of the Thirties was the in troduction of nationalistic economic policies designed to protect what could be saved from the wreckage. If things go 011, getting worse we could see a repetition of all that; it all depends on how long this depres" sion lasts and how deep it cuts. If exchange control (and some import controls) Nver., brought back, at least it would be an 11' wind in the sense that that would be the 111°' ment to buy the British market.
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