Date: Wed, 29 Oct 1997 17:53:36 +0000
From: James Heartfield <James-AT-heartfield.demon.co.uk>
Subject: M-TH: Stock Market Rollercoaster


Forwarded from LM online bulletins

Stock Market Rollercoaster: Is this the big one?

Phil Mullan reflects on a week of stock market upheaval

The timing could not have been more apposite. Exactly ten years after
the 1987 stock market crash, the commentators were poised, their lexicon
of dramatic headlines at the ready: 'bull market over', 'markets in
turmoil', 'markets braced for nose-dive', 'markets plunge', 'panic as
markets crash'. For over a week, ever since the Hong Kong financial
markets started to fall, speculation has been rife. That familiar, but
largely fictitious, bogey of 'globalisation' made its appearance. Would
Hong Kong be the catalyst for a shockwave spreading through the global
markets causing a meltdown of 1929 proportions? Is the market economy on
the ropes again?

After a jittery end to last week in many western equity markets, Wall
Street's performance on Monday seemed to vindicate the doom-sayers. The
Dow Jones industrial average fell over 550 points, or 7.2 per cent,
logging its biggest point decline ever. The drop triggered an early
shutdown to trading on the US stock markets, the first time that has
happened since 'circuit breakers' were instituted in the aftermath of
the 1987 market crash. Tuesday began with European bourses following the
US lead, registering early falls of 7 to 10 per cent. Professor JK
Galbraith, one of the few living economists to have experienced the 1929
crash, was wheeled out to remind us that market collapses are an
inevitable feature of capitalist markets. What goes must come down with
a thud. It has all been the same, he claimed, since the great tulip
crash of the seventeenth century. A crash is 'a natural feature of the
system. It has been for 300 years and more', he said.

So what is going on? Will the stock market falls bring about a
significant downturn in the real economy? Does it mark the return of the
bear market after the great bull market of the 1980s and 1990s? Is it,
even, the beginning of the end for capitalism? The answer to all these
questions must be an emphatic no. Stock market instability on this scale
is certainly indicative of the underlying weakness of some economic
fundamentals. But it is not a precursor to a 1930s style economic
collapse. Happenings in the financial economy are always secondary, in
cause and significance, to what is happening in the real world of
capitalist production, whether we are talking about the 1930s, the 1980s
or today.

Financial crises can never, on their own, create real social crises.
Most commentators have been too preoccupied with PE ratios, yield
curves, and anxiety about the shadowy speculators to see what is
different today. The missing ingredient compared to the 1930s is the
absence of genuine social (or, to use a pass term, class), opposition
to capitalism. It was this force and its ramifications, both
domestically and internationally, which precipitated the real turmoil of
the 1930s, not merely the 1929 collapse in share prices. Without the
pressure of this social challenge, the free market system will always be
able to muddle through. That is what we can expect today, even more so
than was the case in the late 1980s.

Nor do stock markets today signify much about movements in the
underlying economy. The state of stock markets express something about
the state of the real economy. But equity price movements, in direct
proportion, are neither caused by nor can impact significantly upon,
movements in the real economy. The relationship between the financial
and real economies is much more elastic than that these days.

We can also anticipate the financial markets will stabilise at some
point in the not too distant future. (So if you are one of the 17
million private shareholders in Britain, heed the number one rule for
investors: don't sell in a falling market.) The 20 per cent plus falls
in major stock markets in October 1987 are still remembered, especially
on anniversaries, as a serious crash. However, looking at the graphs of
the last fifteen years of bull markets in Britain and the US, 1987
represents little more than a blip in an upward trend in equity prices.

Even at the price lows of recent days, most share prices in Britain and
the US were still well up on where they stood at the start of this year.
Monday's Wall Street fall was a record in points terms, but did not even
make the top ten worst days in percentage terms, so far has the index
risen during the bull years.

The financial markets, however, do tell us something about the state of
the real economy. But it is the opposite of what most of the analysts
are saying. The received wisdom about these movements on the world's
stock markets is that the economic fundamentals are weaker than thought
in East Asia, and stronger than doubted in the west. The reverse is
true.

The source of rising stock markets around the world is the excess of
liquidity in the west. This is the by-product of years of weak economic
activity. In the hyped US discussion about a 'new era' of economics, it
is always overlooked that a buoyant IT sector in the US is not the same
as a booming western, or even US, economy.

Profits are still being realised but what is to be done with them then?
The abundance of spare cash in the advanced economies is primarily the
result of a shortage of spheres for productive investment and a loss of
nerve by capitalist institutions often unwilling to seize those
opportunities where they do arise. Greater personal savings by people
apprehensive about their living standards in the future, and especially
during their old age, have added to the pool of cash available, but the
real issue is what happens to all this money once it is in the coffers
of the financial institutions. As it is not primarily used for
investment in expanding productive capital at home, there are two
alternatives. It could be kept in cash deposits in banks; but real
interest rates are not high enough to make that very attractive. So most
is used for making investments in financial assets such as equities and
bonds.

Some of this has been attracted into the markets of the only really
booming region of the world: the markets of East Asia, the so-called
tiger economies - Hong Kong, Singapore, South Korea and Taiwan - and the
would-be tigers like Thailand, Malaysia, Indonesia and the Philippines.
When there is little else going on in the world economy, this one region
becomes recipient to a disproportionate amount of the funds available.
Consistent with the coolness towards direct productive investment
(though this is not negligible), most of it takes the form of portfolio
and other short-term capital flows.

East Asia comprises genuinely dynamic economies, but the aspirant
tigers, especially, are still too small and unevenly developed to cope
with this flood of financial capital from overseas. The fuel of these
foreign capital flows has stimulated much speculative investment in
financial paper and property, imbalancing these economies. Their
financial asset prices have risen much faster than the underlying
economies warranted, creating an unstable financial pack of cards. The
market falls in the past few months are the result. It would be more
appropriate to conclude that the problem is not that their real
productive economies have grown too fast, but not fast enough. The
ultimate cause for their market crashes is not domestic at all. It is
the circumstances back in the west that have produced the mass of excess
financial funds, which have flooded in to overwhelm them.

It is the same relative weakness of economic activity in the developed
countries that provides the liquidity sustaining the bull equity markets
back in the US and Europe. The repatriation of some western capital from
SE Asia, unnerved by financial turmoil there, will only boost this mass
of liquidity. The liquidity must still go somewhere. Hence the shift
into other forms of portfolio investment such as bonds, and the return
to buying equities before too long. The Wall Street Journal Interactive
Edition on Tuesday 28 October described this latter tendency: 'But after
the big drops Monday and early Tuesday, buyers were lured back into US
stocks. For years, dating back to the 1987 market crash, investors have
been richly rewarded for buying stocks when prices take a tumble. This
"buy the dips" mentality has helped prices to recover quickly each time
the market has made a drop.'

The stock market rollercoaster turmoil does not herald either an
economic or a social crisis, but it is a sign of the deficiencies and
weakness of the underlying market system.
-- 
James Heartfield


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