Exuberance to panic

S.R. Kasbekar

Time was when stock exchanges used to be compared to casinos. But their recent behaviour, marked by volatility and instability and abetted by the absence of market morality on the part of players and regulatory authorities, sets them up for a more egregious epithet. “A famous Wall Street bear in the 1920s, Jesse Livermore, described Wall Street as a ‘giant whorehouse’ where brokers were ‘pimps’ and stocks ‘whores’, and where customers queued up to throw their money anyway.”

In this game pain for the many and pleasure for the few has become the order of the day. Power without responsibility that is the privilege of harlots has been confined to the few with access to inside information. The result in India: a raging scam unleashed through connivance among brokers, bankers and bureaucrats acting as regulators strengthens public cynicism about the probity of transactions.

Globally, the scenario has been marked by the slowdown in many economies and a bearish grip on stock exchanges too. Nearly $10 trillion, accounting for 30 per cent of global GDP, has been wiped off in the last year. Indian bourses have shredded close to Rs 138bn of investors’ money in March 2001. 38 of the 40 stock markets tracked by The Economist of London fell in the week before the Fed rate cut. American stocks fell 27 per cent on March 21 from their 2000 peak, Japanese 46, French 27, German 35, Italian 30, British 29, Canadian 37 and Swedish 50 per cent. The BSE has lost over 16 per cent value since December 2000.
It is interesting that the stocks have fallen across a wide band of economies. American stocks being in a tailspin is understandable as the American economy is in a slowdown. But European economies have not done as badly; yet their stocks have fallen all the same.

The Economist feels, “Some economists think a new form of financial contagion is spreading, via stock markets, in a way similar (if slower) to that in which Asia’s financial crisis in 1997-98 infected one economy after the other”.

Most European companies are exposed to developments in the American economy. Stock markets are becoming more correlated as research by William Goetzmann, a Yale economist, shows. Cross-border movement of capital and technology is the main reason, but during a crisis such correlation becomes stronger.

According to a recent International Monetary Fund study, the correlation between changes in American and European share prices has risen from 0.4 in the mid-1990s to 0.8 last year. The correlation between American and European IT shares between January 1999 and May 2000 was 0.85, for non-IT stocks it was just 0.54. IT shares in Asia and America had a correlation of 0.75, non-IT shares only 0.35. The ‘psychology of panic,’ has taken over where ‘ irrational exuberance’ ruled.