In the City
Power of the Crown
Tony Rudd
What we have been living through, in the world's markets, these last few weeks undoubtedly amounts to one of the most significant and dramatic movements seen since the war and perhaps this century. For example most chartists would now agree that the long term bear market in which government stocks have been clamped since 1946 has now been decisively broken on the up side. What was started by Doctor Dalton has been ended by Sir Geof- frey Howe. Quite an achievement, put like that.
However, it is too early to judge whether these dramatic movements add up to a new bull market in the full sense of the word, a market in which not only would fixed stocks do well but also equities and com- modities. It is still possible that we could have the one without the other.
It is also too early to tell to what extent the drama of the last few weeks actually represents a change in fundamental senti- ment and how much of it is really froth. That some is froth there is no doubt. Perhaps the best indication of that is the way that the biggest rise ever on Wall Street, which occurred just over two weeks ago, was attributed to the change of heart on the part of a certain Mr Kaufman. Many financial commentators, especially the more lurid ones across the Atlantic, called it Mr Kaufman's boom. The following week- end our own press was full of the same story. It was the 'guru' that turned the market on a sixpence, whatever that was.
For the benefit of those who do not follow these matters too closely it should be explained that Mr Kaufman is the extremely urbane head of Wall Street's largest bond dealing firm, Salamon and Brothers. Look- ing like a cross between Rostropovich and Peter Ustinov, soberly dressed and with the unusual gift on the American scene of being able to write extremely pithy and understandable prose about a subject, the Bond market, which normally attracts corn-
ments in language so wreathed in cotton wool that it is incomprehensible, Mr Kauf- man has built up a massive reputation.
The fact that he is well known outside Wall Street is a tribute to the way in which everybody from the President downwards has become obsessed by interest rates and their impact particularly when they are high, upon the economy, the level of infla- tion and employment. The point had been reached a few weeks ago when nothing mat- tered, not even the evacuation of the Palestinians from Beirut or the Russian gas pipeline, as much as the direction of interest rates. Unless they could be got down, we were all doomed.
Time and again the Administration tried to talk them down. But obstinately even when they started to go down they would reverse and go up again. Eventually the President did the equivalent of throwing the board room furniture into the furnace to keep the house warm; he announced a pro- gramme of tax increases. That was un- doubtedly the precursor to the boom which followed. But many took the view that until Mr Kaufman made the appropriate gesture with his baton, the orchestra wouldn't play. For it had been he, all along, that had been spoiling the fun by saying that even if in- terest rates did go down on the short term they would surely be going right back up to their previous peaks and perhaps beyond before the year was out. He had to recant this view before even the President's final rejection of the economic programme on which it had been elected, could do the trick.
On the fateful Tuesday, just over a fort- night ago, Mr Kaufman said that he had changed his view and that in his opinion there was no longer a danger that interest rates, if they came down, would go up again. He said in effect that if they fell it would be for real. That was it. The move had received official blessings, the rest of us were to be allowed to the trough.
'I notice you kids find everything fascinating about the Fifties except National Service.'
These events, must be regarded as the greatest achievement yet on the part of a living 'guru'. It was as though the multitude stood with parched lips in the desert dying from thirst. Then, miraculously, water flowed from the rock and the lake began to fill. But the multitude did not drink for the Prophet had not as yet said that, in his opinion, the water was to flow. They could see that the water was flowing but such was the power of the Prophet that they believed it to be a mirage, unreal until he had spoken. He spoke. And the tumult rushed to the water and drank.
For the fact is that on the Monday the Treasury Bill rate fell substantially. During the previous week experts had been poin- ting to the way in which the Federal Reserve System had been pumping credit into the system and were arguing that this was bound to push down interest rates eventual' ly. It was only a matter of days. Political commentators had been expecting Presi- dent Reagan to do exactly what he did on taxes. Indeed wise investors had been bur" ing bonds for months back, some even to the autumn of last year, on the expectation of the fall in interest rates which has occur' red. And finally it can be said with some confidence that eventually the fall would have occurred whatever Mr Kaufman had said because there comes a time when the multitude realise that it can't be a mirage if it is actually soaking their feet. Indeed it is, basically the case that interest rates would be what they are now whatever Mr Kauf- man had said. No individual ultimately has any impact whatsoever on the level of 10" terest rates acting purely as a commentator. If he has his hands on certain levers the that can be a different matter. But even then the forces of the market will eventually take over. So what can one say about a market in which a 'guru' can have such an effect? Can dazzle so many financial commentators! The first is that clearly you don't have to be right to be influential. You just have to be interesting. And that Mr Kaufman certainlY is. What it really shows, surely, is that we are at a time, economically and in market terms, where people don't know where they are. They don't see the way ahead. Cora' panies find it very difficult to plan for a future which is so obscure. Market operators are being made neurotic by the sheer volatility of the markets. And that volatility is being made worse by their neurosis.
When during the Forties and Fifties people looked back to 1929 what amazed them was how stupid had been the remarks, of the well informed and how gullible had been the dealers and investors rushing violently from one side to the other, creating vast market movements as they went. Compared with the very milletr oscillations of post-war markets the condi' tions of the Twenties and Thirties looked extraordinary. What the events of the last few weeks demonstrate yet again is that We are back to those pre-war conditions and there is no health in us.
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