Money Is in a Mood to Hedge Its Bets : Markets: If the world seems to be making progress on many fronts, investors are governed by an undertone of nervousness.
Suppose people around the world all went to the polls to register their opinion about recent events from, say, the demise of the Communist Party to the release of Nelson Mandela. Assume that this question was on the ballot: “Given that peace is breaking out all over, that freedom, capitalism and democracy are everywhere on the march and that armies are laying down their weapons, do you feel confident or insecure about the future?” What would the outcome be?
Such a referendum takes place every day. It occurs through the financial markets. When the values for stocks, bonds and currencies gyrate, they measure today’s collective mood against yesterday’s, and they indicate expectations about tomorrow. They tell you whether people really believe that President Bush is in control, whether President Gorbachev will survive, whether a reunified Germany will create new problems, whether Japan’s election was more than a domestic affair.
Sometimes the market reflects exaggerated swings of moods. Sometimes it reacts to events, and sometimes it triggers them. The “voters” include individual investors, central banks like the Federal Reserve or the Bank of England, corporations like IBM or Toyota, big insurance funds like Prudential--all tied together by phones and computers. It’s worthwhile paying attention to what these heavyweights think.
What are the markets saying now? At best, they are signaling great caution. Investors seem to be nervous, hedging their bets.
There is widespread belief that the Cold War is over; you can tell by the dramatic decline in stocks for American companies that are major defense contractors. At the same time, there is anxiety about what will become of the Soviet Union; investors everywhere are buying the greenback as a security blanket, despite the fact that U.S. growth prospects are lower than our major trading partners’ and our debt and deficits remain high.
The markets are saying that German reunification ought to be a good thing for Germany in the long run. The Frankfurt stock exchange has been booming. But, as the vote on the merger draws closer, investors are starting to be cautious. In recent days, German bond prices have been declining, interest rates rising and stocks cooling. Investors are asking the tough questions: How many tens of billions will the bailout of East Germany cost Bonn? What will the impact be on West Germany of mass immigration, reconstruction of industry, mingling of currencies?
Concerning South Africa, almost everyone was touched by Nelson Mandela’s release and the prospect for a peaceful revolution. But the gold index on the Johannesburg exchange has been plummeting, revealing the difference between what people hope and what they really believe will happen.
When it comes to Japan, investors’ worries are reflected in the soft yen. The market sees general prices moving up and the specter of inflation. This could trigger interest-rate increases, which could cause a major sell-off in Japan’s highly leveraged stock market, now the largest in the world. This would have a negative reverberation on Wall Street, in London, everywhere.
In the United States there is an uneasy sense that after the savings and loan fiasco, after the Campeau Corp. bust and the Drexel bankruptcy, there still may be other shoes waiting to drop. Which gigantic leveraged buyout will crater next? How soon will it be before we hear that the Feds are occupying a major American commercial bank or securities firm? No one is ruling out being blindsided by such events; you might say they are even expecting it.
The market’s mood has meaning beyond the bank accounts of its participants. The general undertone of nervousness will likely result in the sloshing around of funds from investment to investment in response to daily events. A few weeks ago, the dollar soared when Cable News Network announced that Gorbachev was resigning from the Communist Party well before it seemed like a possibility. If major riots break out in East Germany, watch the Japanese, who have been pouring money into German stocks, beat a fast retreat. If Moody’s rating service downgrades the debt of another major securities firm, Wall Street might just go into a panic.
In the end, we could be in for volatile mortgage rates and, because of currency fluctuations, uncertain prices for everything we import, from cars to clothes. The Federal Reserve is sure to have a difficult time calibrating the right interest rates for so uncertain a situation, and it may appear that Alan Greenspan, its chairman, is switching signals all the time, which is, of course, bad for long-term growth and investment. The national mood could become defensive, protectionist, even xenophobic.
At the base of all this uneasiness is the knowledge in the market that we are moving from one era to another, in politics and in finance, but that the destination is unknown. It isn’t the first time for America. At the dawn of this century, the United States went from being a rural, agricultural nation to an urban, industrial society. At mid-century we changed from being aloof from the rest of the world to involvement in every corner of it. In each case, we were crossing a bridge without seeing the other shore. But in those instances, the winds were not so swift and harsh, and financial markets were not so broad and global.
In this time of uncertainty, Western political leaders can help by being clear and decisive. The fact is, the pace of change may have outstripped their ability to deal with it. Deep down, that’s what the markets may be telling us they fear the most.
