World Markets Are Sending Us a Message

The stock market crashed almost a year ago, and there will be a lot of ink and air time expended between now and Oct. 19 expressing relief that the U.S. economy didn’t crash along with it. Retrospectives, including a series beginning in The Times today, will point out that fears of a post-crash recession proved unfounded and that the market’s decline may even have helped the economy by convincing the Federal Reserve to lower interest rates.

Friday’s healthy employment figures offer supporting evidence of a strong economy.

But such reports are incomplete if they don’t look at how markets are faring elsewhere. They miss the fact that world investors are holding back on the U.S. market until they see what the new President does about the budget deficit.

Looking at markets elsewhere may seem odd to many Americans. But the home of the Big Board is not the dominant force it once was in world finance. The total value of U.S. stocks ($2.5 trillion) now comprises a lower share of the value of all the world’s stocks ($7.9 trillion)--according to Morgan Stanley Capital International--than the value of stocks on the Tokyo exchange ($3.3 trillion). The balance represents stocks in Europe, Latin America and Asia outside Japan.

And the inescapable fact is that the U.S. economy and that of every other nation answers these days to global investment forces.

Increasingly, global investors--managers of corporate cash, pension funds, bank deposits, money of all kinds--seek values and make judgments among stock, bond and currency markets of every nation.

Taken together, those investors have great power. If they find a government’s actions or inactions threatening, they move money elsewhere. You may recall that last October a dispute among leading nations over trade and currency values unsettled global investors. Their swift and terrible response: They cashed in investments everywhere and brought down all the world’s markets.

The year since has shown that such power can encourage harmony as well as punish discord. To stabilize exchange rates, at least until after the U.S. election, the world’s central banks have increased their holdings of U.S. dollar investments by an estimated $60 billion. The resulting rise in money supplies everywhere has poured balm on troubled markets.

Interest Rates Key

But just as money made choices in the crash--New York declined 22%, but Tokyo fell less than 10%--so markets have not recovered equally from their lows. Prices in Tokyo are above pre-crash levels. In Europe, France and some smaller markets--Denmark, Sweden, Spain--are doing well.

But the U.S. market remains 20% below its high, and things are slow. “While good values can be found,” notes Barry Gillman of PCM International, a subsidiary of Prudential Insurance that invests $4 billion around the world, “it’s not easy to buy stocks when you can get 9% on the long (30-year Treasury) bond.” If interest rates fall, the U.S. market will look interesting again, says Gillman.

And the best way to get low interest rates, says Jonathan Francis, chief economist for Roh Management, a firm representing Swiss and German investors, would be strong action to reduce the budget deficit by taxes and other means.

It may seem odd, even disrespectful, to think of investment managers dictating policy to incoming U.S. Presidents. But it isn’t really, of course; historically, bankers held the purse strings over kings. And blunt as they are, money markets are no match for friendly governments that hold real power over U.S. economic policy. “Japanese savings finance the bulk of the U.S. budget and external deficits,” Masaru Yoshitomi, an official of Japan’s Economic Planning Agency angrily informed an economic conference in Pittsburgh recently. And, he said, Japan and other foreign investors would alter those investments if the United States didn’t correct contradictions in its economic policies. “Japan’s capital movements and monetary policy are now in a position to influence the value of the dollar and hence interest rates and stock prices in Wall Street,” he declared.

Better a tax increase than threats and humiliation.