As the dust settles after the initial earthquake that rocked world stock markets, the period of phony war before we all find out what it really means promises to be extremely uncomfortable, and even if trading and price movements settle down to more normal levels next week, there is little doubt that there will be several after-shocks that may come close to matching the quake at its height for their intensity. Does the market really foretell recession, or does it simply create a self-fulfilling prophecy? In the US, computer companies from IBM down will be watching their forward bookings anxiously, praying that too many customers do not adopt a wait-and-see attitude and put their computer orders on hold: if you’re a big Wall Street securities trading house, not only are you almost by definition a major IBM 3090 user, but you are certain to be having second thoughts about those two new processors you were planning to add in the fourth quarter to cope with anticipated higher levels of share trades that will now not be made. Because once the fury is over, business is likely to decline to substantially lower levels than those seen in the first nine months of 1987. That in turn hits commissions, which in turn means that the high earners on Wall Street will no longer be high spenders. The impact of that extends beyond expen-sive cars to hit residential property values, but commercial property values are also sensitive to a fall-off in demand from the financial institutions that have been the biggest buyers of additional space in both New York and London over the past three or four years. Thus it is clear that unless markets zoom straight back up to their previous over-bought levels and stay there – and they won’t – the ripple effects are certain to be significant.
London no worse than fully valued
The picture in London is much more confused than on Wall Street, because while you had to be downright dishonest not to admit that shares were substanti-ally overvalued on Wall Street before the crash, shares in London looked no worse than fully valued. Yet in percentage terms, at around 28%, London suf-fered a bigger fall than Wall Street or Tokyo, an-other market that looked ludicrously overvalued (and one where much of the blood may well yet to be let). In analysis terms, the London market resembles a chess board on which all the pieces have suddenly been sent flying, and where the game has to be reconstructed as far as possible from memory. The old saw still holds true that when the market turns, the good go down with the bad, and current prices – where trustworthy ones are to be found at a time when SEAQ periodically goes down and share tables have to be compiled hours before all trades are recorded – bear no relation to underlying value. In terms of popular capitalism, the crash in London can be regarded as a wholly beneficial les-son to virgin shareholders that when financial ad-visors say prices can fall as well as rise, they really mean it. But that assumes that London prices will soon return to within 150 points or so of their levels last week, which would likely happen if London could be taken in isolation. But it can’t, and statements like the fundamentals of the British economy are sound have a habit of coming back to haunt the speakers as subsequent events belie them. But it’s too late to sell anyway…
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