Just as Alan Greenspan chairman of the Federal Reserve is named the Financial Times Man of the Year the dollar is
Just as Alan Greenspan, chairman of the Federal Reserve, is named the Financial Times Man of the Year, the dollar is meeting competition from the euro as a monetary store of value There has been no such challenge in 50 years. Where it might lead is anyone’s guess, but monetary stability is not the outcome I would rate odds-on.So for the new year, a resolution: sell dollars (and the internet stocks denominated in dollars); buy things.James Grant is the editor of `Grant’s Interest Rate Observer’, New York ( www.grantspub ).. THE IMF has just published its forecast for the world in 1999. Just over a year ago it was forecasting we would grow by 4.4 per cent. Since then it has revised things down four times and now expects growth of only half that rate. If the original IMF forecasts had been correct, profits would have been strong in 1999; on the new assumptions, they should fall as competition gets tougher. Expectations are heavily influenced by recent experience.
People are therefore usually surprised when things change.The ideal background for a rising stock market is an economy that is picking up and in which shares are cheap because expectations are moderate This is a world inhabited by bears sitting on piles of cash. When things turn out better than expected, they put first toes and then whole paws into the market. Share prices rise and the gloom disappears.
In the opposite world of fully invested bulls, euphoria is at first rampant, but the mood changes via disappointment to despair. The general mood is still pretty euphoric in the US, but it is clearly more sombre here.
The difference is partly national temperament and partly that in the UK the beginnings of recession are already visible.Both stock markets are selling at high p/e ratios – which are 50 to 100 per cent above normal – and profits have begun to fall on both sides of the Atlantic. Fund managers might be expected to sell in the face of this discouraging combination.It would be different if profits were already depressed. When things are really bad, multiples are high because profits are so low. For example, p/e multiples had to be very high in 1932 because most companies were making losses.
None the less it was a wonderful buying opportunity, just as 1929, when profits were high, was a wonderful moment to sell.Fund managers, however, are not selling – though not because they are caught up in the general euphoria. Most are well aware that stock markets are wildly overvalued, but they also know share prices can stay too high for a long time They are therefore nervous of going liquid This is very reasonable. Even if they know the stock market has a 70 per cent chance of falling over the next 12 months, going liquid means a 30 per cent chance of them losing their jobs. Staying invested, on the other hand, seems the safe course for fund managers, though not of course for their clients.If managers never go liquid, there is no reason to expect markets to fall unless investors run out of money.