This bull market won't last forever


PARIS -- The proposition that the stock market will keep going up because the U.S. government cannot afford to let it go down is a new aspect of the American version of corporate socialism: public support for investors, justified by the fact that if things go badly for them they will go worse for everyone else.

The rest of the world is included in this since the amount of foreign money invested on Wall Street is the largest in history, and because as the economist David Hale writes, the world economy depends "on a robust U.S. equity market to sustain America's role as the world economy's spender of last resort."

Everyone is implicated more deeply than they would like to be. Alan Greenspan could destroy the market bubble -- if it is a bubble -- with a maladroit phrase.

Back when the market was 3,000 points lower, his comment about its "irrational exuberance" produced an immediate plunge. It came back; but will it come back next time? Whatever Mr. Greenspan's opinions, he is now muzzled by the fact that he is a walking embodiment of the principle in physics that the subject of an observation is altered by being observed. What Mr. Greenspan thinks about stock market prosperity is integral to that prosperity. Even his silences are dangerous.

The managers of investment funds are in a yet more desperate situation. Even if they think the bubble is about to burst they dare not leave the market, because if the bubble were not to burst, or there proved to be no bubble at all, they would be ruined for having pulled their clients' money out of the stampede to riches.

If they stay in, and there is a bubble and it bursts, they would be just another manager who got it wrong. Clients will be forgiving -- those who still have any money.

One manager said on CNN recently that his fund's management tells him, "we want you to perform. We want you to keep up with the Standard & Poors 500." He added, "But I'm scared stiff. I hate buying . . . I have no choice."

Repeal of reason

In this way the law of gravity has been repealed, or so it is said. Market operators can't get off the train. They look to Mr. Greenspan to offer them an easy descent. But he can't get off the train either. If all of them are not getting off the train, why should anyone else?

Why should anyone be bothered by the fact that most Internet companies whose stocks lead the stampede have yet to make any money? The romance of business is that you sell the dream.

It hasn't worked before. The big bull market, when Americans were singing "It Ain't Gonna Rain No More," ran into the crash. But possibly history has also been repealed.

Today the collateral damage from a crash would be international, although worst in the United States, where everyone's pension plans and savings depend on the market, and the market has become the driving force in the American economy.

Managers no longer manage for quality, the good of the company, its future, its market share, or for their own power and prestige. They manage for the good opinion of fund managers, by way of their quarterly earnings report. If their company's stock does not go up every quarter, they are out. That's all that counts.

Consumers go on buying not because they have money in hand but because they have a theory about future money. On paper, those who are in the market are richer than they have ever been, and yet they expect to become richer. That theory is what moves the market.

If they start to doubt their theory, they will stop buying, company profits will falter, and then the stock market will fall. This may not have been explained to them in so many words, but that is how they are behaving, and it is an entirely logical way to behave.

Investment game

Or so it is, up to a point -- a point that cannot be determined. One might consider this a vast confidence swindle, but no one is directing it, and so long as it goes on, no one is swindled. To go on, it requires the full faith and participation of everyone. It is not a vast illusion either, since so long as everyone plays along everyone does well.

It seems to be an economists' version of what game theorists call the "prisoner's dilemma": So long as all parties cooperate, the risk to each is minimized. Will they continue to cooperate, and for how long? If I knew, I wouldn't dare tell you.

William Pfaff is a syndicated columnist.

Pub Date: 1/26/99

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