Monday the Market Went Mad
The headline appeared on the
Reuters wire late Tuesday night. "Stock plunge may dent Finnish growth."
Great. Just when we thought
we were out of the woods, the damn Finns come along and throw everything
into turmoil again. And here we always thought they could take care of
themselves.
Of
course, given the fact that U.S. trade with Finland--indeed, with all of
Scandinavia--amounts to something less than 0.5 percent of our annual gross
domestic product, one would hope that U.S. fund managers will be able to handle
this news without panicking. But then the events of the past week have not done
much to inspire confidence in the rationality of the American stock market.
Take Intel, for instance. When the market closed Monday, U.S. investors thought
Intel's shares were worth $63 billion. When it closed Tuesday, they thought the
very same shares were worth $72 billion. God only knows what the news from
Finland will mean.
Asia is, of course, a much bigger and much more important
part of the world economy than is Finland. Currency and equity-market turmoil
in Asia has had, and will continue to have, real effects on America's
real economy. In other words, it would be a mistake to dismiss
all U.S. investors' worries about the impact of the Hong Kong sell-off
on U.S. companies as the fearful bleatings of people who, having read too many
silly headlines about globalization, suddenly decided--since everyone else
seemed to have decided, too--that the sky was falling. But it would not be a
mistake to dismiss most of their concerns as precisely that.
There were
solid reasons for the sharp decline in the value of equities in Hong Kong
itself, most obviously the precipitous rise in interest rates and the
precipitous drop in liquidity as the central bank fights to keep the HK dollar
pegged to the U.S. dollar. Still, it's hard to see the drop in the U.S. stock
market as much more than a classic--if short-lived--case of what economists
call "herding." In a strange way, it seems clear that people were looking for
an excuse to sell, not simply to lock in profits for the quarter but also
because the bull market had lasted too long and had risen too high. The odd
thing about this panic, after all, is how unhysterical the actual trading was.
Except for the minutes immediately following the half-hour break Monday, buy
and sell orders were easily matched up and there were no stories, as there were
in 1987, of market specialists simply refusing to pick up their phones and
trade. Everyone was racing for the exits, but they were doing so in an orderly
fashion.
The fact that investors in some way wanted the
bubble to burst, if only for a little while, can be seen also in the sense of
relief with which many on the Street spoke of Monday's drop. It was as if, with
a thousand points gone from the Dow, investors could look at the market a
little more clearly and decide what they really thought. Of course, that
feeling of clarity disappeared almost immediately Tuesday, as everyone suddenly
turned around and started racing for the entrances, but it must have been nice
while it lasted.
Is it
cavalier to dismiss this past week as a simple illustration that humans
sometimes act like sheep? Not really. (But then I would say that, wouldn't I?)
In the first place, it's hard to see how even a 600-point drop in the Dow would
seriously affect the U.S. economy. Except for IPOs (first-time public stock
offerings), most American companies raise capital internally. The stock market
is, in that sense, almost purely a secondary market. And while it's never good
for consumer confidence to have brokers jumping out of windows, short and steep
drops in the valuation of equities have nothing to do with the production of
real wealth. In the second place, and perhaps more importantly, Asia isn't
important enough to the American economy to justify a sell-off like we saw
Monday.
Now, that may seem like a dubious assertion, particularly
given the constant rhetoric about the global economy with which we are deluged
and Coca-Cola's persistent evocation of the 1.2 billion Chinese who drink only
one Coke each today but will drink two Cokes each tomorrow. But consider this:
U.S. GDP is now somewhere close to $8 trillion. Last year, U.S. exports to all
of Asia were $191 billion, or around 6 percent of GDP. Over a third of all U.S.
exports do go to Asia, and that market has been growing rapidly in
recent years. But it's still only of minor importance to the U.S. economy as a
whole. And in any case, it's not as if Asia has suddenly vanished from the map.
While growth rates throughout Southeast Asia are going to slow, those economies
are not in recession, which means they will still be buying, even if less than
before. If anything, the combination of currency devaluation and slower growth
in Asia should help the U.S. equity market by continuing to keep inflation low
and assuaging the Fed's concerns about an overheating economy (however dubious
those concerns might be).
Having
said all that, the Asian market undoubtedly is more important, in economic
terms, to large U.S. corporations than it is to your local dry cleaner, and in
that sense the GDP-export comparison is deceptive. According to some analysts,
a third of corporate profit growth in the last fiscal year came from exports.
So the rhetoric of globalization is not simply rhetoric. And that's especially
true for certain sectors of U.S. industry. As has been much (too much) remarked
upon, U.S. semiconductor-parts companies do a lot of business with Asian
semiconductor firms. If demand for computers dries up in Asia, those parts
companies will find it difficult to replace the business. The same may also be
true, on a smaller scale, of larger software and hardware companies like
Microsoft and Intel. On the other hand, many of these companies have assembly
plants in the region. And if you can pay your bills in devalued ringgit and get
paid in U.S. dollars, you're generally going to be pretty happy.
U.S. multinationals have been feeling the sting
of the strong dollar for some time now, and the continued weakening of Asian
currencies will continue to hurt their profit margins. But it seems telling
that it was IBM, which has seen currency problems erode earnings for two years
now, that led Tuesday's rally by announcing it was going to buy back $3.5
billion of its own shares after the company's stock dropped eight points on
Monday. Share-buyback plans are sketchy as long-term business strategies, but
IBM's assurance that its shares were undervalued suggests that it's not
particularly worried about the ultimate impact of Hong Kong's woes. Of course,
there is always the chance that the company's management has simply gone
mad.
In
issuing what amounted to a public vote of confidence in the market, IBM was
actually continuing a venerable tradition of Establishment attempts to quell
selling panics by intervening loudly and decisively. In October of 1907, as the
stock market was melting down, J.P. Morgan went to New York banks and compelled
them to dip into their reserves to offer loans that would allow stockholders to
cover their margins and begin buying again. In the midst of the crisis, he sent
an emissary to the floor of the Exchange, where the man raised his hand,
quieting the crowd, and said, "I am authorized to lend $10 million! There will
be enough for everybody!" And that, at least according to the story, was
that.
Twenty years later, it was J.P. Morgan and Co. again. At
the start of the October 1929 market slide, when investors were dumping shares
as fast as possible, Thomas Lamont of Morgan assembled a consortium of
investment bankers who committed themselves to putting $20 million into the
market. The Morgan representative came onto the floor of the Exchange, stepped
into the middle of the caterwauling mob trading in U.S. Steel, and bid $205 for
the company's shares at a time when the stock was already trailing well below
that. Like the first, this was a rather cinematic moment, but it didn't work
quite as well. Within three years U.S. Steel, like the market, lost 80 percent
of its 1929 value.
I suppose it's a measure of
how far we've come that IBM just issued a press release, though it would have
been stirring to see CEO Lou Gerstner storm into the Exchange Tuesday to start
buying up shares. In any case, IBM's decision was obviously not as momentous as
either Morgan's or Lamont's, because they were dealing with genuine disasters
while Big Blue was responding to a blip. Nor does Big Blue exercise the kind of
financial or cultural power that Morgan once did. But the announcement was
still a welcome slap in the face to a market that was hyperventilating for no
good reason at all. Or, rather, to a market that was hyperventilating for as
real a reason as there is: Markets are made up of people, and people sometimes
get afraid. Even in Finland.
