CITY AND SUBURBAN
When the markets hit you over the head like this, pay attention
CHRISTOPHER FILDES
Textbooks on mule-handling pose the question: how do you attract the attention of a Missouri mule? Answer: hit him over the head with a four-by-two plank. The markets have hit all of us over the head this week, and it would be mulish not to pay attention to them, even though the experi- ence is painful and the messages they have to convey are unpleasant.
Official mules are still tossing their bruised heads and pretending not to notice. They dismiss the markets as absurd, or explain that their economies are as strong as their stocks are weak. They are to-economic forecasting what poor Mr Fish is to weather forecasting — a broker (they imply) has rung up to say that there's a hurricane on the way, but don't worry, there isn't. Some simply assert that the markets must have gone mad. It seems equally possible, and more worrying, that the markets have gone sane.
The first message from the markets is for the United States, which is why the trouble began on Wall Street. It is that the world's investors have tired of financing the US's deficits on its budget and its balance of payments. The Japanese tired in the springtime, after buying US Treasury bonds as the yen rose and the dollar fell, and ending up with a loss which looked like $20 billion. The West's central banks then began to buy billions of dollars, under the 'Louvre accord', reaffirmed last month at the IMF meetings in Washington — when the IMF was privately forecasting that if investors fought shy of dollar assets the dollar would fall by 15 per cent.
The accord was overtaken last week by noisy discord, between the Americans and the Germans, and the markets drew their own conclusions. When the world's biggest economy, now the world's biggest debtor, finds that its credit hits the buffers, the shock is shattering.
How do countries so placed respond? They impose austerity programmes on themselves, they hoist interest rates, cut spending, raise taxes. They look for per- missible ways to check their imports of goods and services, to control capital movements and conserve foreign ex- change. Unable to finance themselves in their own currencies, they borrow other peoples' — I expect the US Treasury to issue bonds in yen and marks — meaning that if they try to devalue their way out of trouble, their burden of debt grows worse. It is all peculiarly difficult in election years. Britain went through it, in the 1960s and 1970s, and Britain was never even a debtor.
There is nothing mad about markets which shudder at that prospect for Amer- ican companies and for America's trading partners. It is not consistent with our own hopes for our own fast-growing economy. Too fast for safety? The Treasury's stan- dard reply is that things will come back into balance next year, when our economy grows rather more slowly and other coun- tries' economies speed up. Which coun- tries, exactly?
The markets were right to worry — but their second message is that they have revealed themselves as unhealthy markets. Even healthy markets can be as maddening as healthy puppies — rowdy, exuberant, subject to wild swings of mood, unreliably house-trained. It is in their nature for prices to rise slowly and to fall quickly. It is in their nature to exaggerate. They do not move in straight lines. It is normal for a movement in one direction to be followed by a movement in the opposite direction, reversing between one third and two thirds of its predecessor. Their characteristic cycle runs: Confidence, enthusiasm, panic, funk. Their worst moment is when enthu- siasm gives way to panic.
We can see all these traits now, and they should surprise only those (too many) who have come to think that investment is a one-way ticket. What is new is the effect of electronic technology on markets — not the computerised trading programmes, which are only the latest version of the herd instinct, but the dealing systems. They provide what the market calls transparency — meaning that everybody can see what is going on, from right across the world. Markets are no longer confined to their own trading floors in their own financial centres. We can all join in. The number of people actually making a mar- ket, trading stock for a living as whole- salers, has not increased proportionately, and the pressures on them and their prices — in either direction — has increased disproportionately. An old Euromarket hand, Stanley Ross, sums up: 'We now have an infinite number of viewers, and a finite number of doers.'
What we now see is that these new global markets, which might have been expected to spread risk safely around the world, are spreading it round the world, but dangerously. One market's troubles is every market's trouble. It accelerates and becomes compounded. Hence the scale, until now incredible, of this week's market movements.
Swings of this size and speed must by now have got securities traders into trouble in London, New York, Tokyo and else- where. Others, cautious and sound in themselves, are still at risk — to failures which leave them with half-completed bar- gains, perhaps across frontiers, one side obliged to pay, the other unable.
London is traditionally a secure and well-supervised market, which is just as well because it now faces two complica- tions of its own. One is the backlog of stock market settlements, which means that firms may not know their own position, let alone that of their counterparties — and has also forced them to step up their borrowing from the banks. The other is that London differs from Tokyo and New York in allowing the same firm to be a deposit-taking bank and an investment bank, specialising in securities. The Bank of England ratios are designed to leave such firms free to lose all of their own money but none of their depositors'. Shall we see that fine tuning put to the test?
The ordinary investor ought not to try to second-guess this sort of market. Let some- body else have the pleasure of guessing where the bottom is, and buying there. If British Petroleum turns out to have been a snip all the time, never mind — there are always millions of BP shares to buy. Share trading this week has been like playing chicken games across a motorway. Other markets look dangerous, too. I would-not like to be exposed on the London house market or to be developing a vast complex of up-to-the-minute dealing rooms.
This hurricane will not just blow over into the record books. Even at best it will leave a lasting effect on nerves, and leave the markets more chastened places, with panic graduating into funk. When a market hits as hard as this, pay attention.
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