Those who believe that Meltdown Monday was only an awful warning and that the real crash is still to come are casting ever more anxious eyes across the Pacific. If there is to be a repeat of the 1929 market crash, all the signs are that it will be triggered in Tokyo, where there are […]
Those who believe that Meltdown Monday was only an awful warning and that the real crash is still to come are casting ever more anxious eyes across the Pacific. If there is to be a repeat of the 1929 market crash, all the signs are that it will be triggered in Tokyo, where there are alarming similarities with the climate that obtained in the US in the late 1920s. In the US, fuelled by a belief that the market could only go up, millions of little people were tempted in to buy on margin – that is buy shares with 10% down and the rest on credit. In Tokyo the margin buyers are not primarily individuals, although they are emphatically doing their bit, but rather, large corporations that ought to know better. Many giant corporations in declining industries are showing profits each year, but they are not profitable on their operations. Instead they operate what are known as Tokkin funds, investing in the shares of more successful companies, revaluing their portfolios as the market goes up, and feeding the profits through to the bottom line. Which is all very well while shares continue to rise, but creates all the makings of a disaster that feeds on itself when there are widespread falls in prices. Equally reminiscent of 1929 is the near universal belief that the market can only go up, that Japan is somehow different from the rest of the industrialised world, that the government, in concert with the giant securities houses, will prevent the market from crashing. Didn’t we survive the 1987 crash unscathed? goes the argument – and indeed the Tokyo market lost only 12% of its value, far less than Wall Street, London or the continental exchanges. But that is precisely why Tokyo looks so vulnerable now: it didn’t benefit from the catharsis of the 1987 crash and by the middle of 1988 was back making new highs. A third factor is program trading, widely believed to have had much to do with the severity of the plunge on Meltdown Monday. Morgan Stanley & Co is widely regarded as having the best of the programmers who write the routines that tell the computers to trigger automatic portfolio sell or buy orders when prices exceed pre-set limits – and the lads and lasses, who program in APL and are known admiringly by the less talented members of the firm as the Rocket Scientists, are right now busy teaching the eager Japanese all the tricks of their voodoo trade. Two-fingered salute The fact that the Tokyo market did not crack after Meltdown Monday is particularly important, because on current valuations which by the accepted standards elsewhere are ludicrously inflated – it is now by far the largest market in the world, eclipsing Wall Street just as New York had eclipsed London, the first world’s largest by 1929. And, in a quite startling two fingered salute to the establishment, the market failed to register the dip that we had been so confidently assured would mark the passing of Emperor Hirohito. That has to mean that greed is so overwhelmingly the dominant mood in Tokyo that fear has been squeezed right out of the psyche of investors – and that mirrors exactly the mood in America, 1929. So all the indicators point to the Tokyo stock market being a major accident looking for somewhere to happen.