Making sense of $30 trillion in stock

Last week, for the first time in history, the value of all corporate stock on the world's stock markets exceeded the value of all the goods and services produced by every nation.

"The increase in wealth is awesome," says J. Paul Horne, London-based economist with Citibank.

The financial powerhouse keeps constant track of what is called market "capitalization." It adds up the value of all the stock issued by 3,298 corporations with total capitalization exceeding $100 million listed on world markets. The total came to $30,180,000,000,000 - or $30.18 trillion.

That edged past world gross domestic product of $30.1 trillion.

The ratio of all stock to world GDP was only 42 percent in 1989.

"Happy millennium," says Mr. Horne to prosperous stockholders.

"Bah humbug!" says Stephen Roach, chief economist of Morgan Stanley, a major New York investment firm. He's concerned that the "bubble" in stocks could pop, with prices tumbling 20 percent or so and staying there for a minimum of six to nine months.

"The biggest risk factor in the United States and global economy is the staying power of the Dow Jones Industrial Average," Mr. Roach says.

Some 47 percent of all US households now own mutual funds. Stock equity accounts for a record 35 percent of all the assets of US households. US equity holdings are the equivalent of 102 percent of disposable personal income - what people have to spend after taxes.

Roach figures a short-lived, "garden-variety" stock market "correction" is more likely than a prolonged bear market. But he worries about the possibility of an extended price drop discouraging people from buying as many goods and services: "If the stock market does the unthinkable and goes down - and stays down - then watch out below!"

Horne also is concerned about the impact of a stock decline on consumer confidence and the economy.

Since a low point Oct. 8, 1998, several weeks into Russia's financial crisis, the value of world stocks has risen a stupendous $12 trillion.

In the same time frame, the value of all US stock rose from $9.3 trillion to $15.57 trillion.

Horne wonders how the Federal Reserve is going to slow the economy and take some air out of stock prices without damaging the economy. "The Fed has to be extremely careful," he says.

Last week, Fed policymakers decided not to raise interest rates again, leaving a key short-term interest rate at 5.5 percent. But many Fed-watchers suspect the Fed will raise the so-called Fed funds rate at its next policy meeting, Feb. 2.

That possibility rose a little last Wednesday with the revision of the GDP growth rate in the third quarter to 5.7 percent from 5.5 percent.

Tom Schlesinger, an economist with the Financial Markets Center, a Philomont, Va. research group, would rather see the Fed use a more precise weapon against inflated stock prices than the economy slowing "blunt instrument" of a general hike in interest rates. This weapon is an increase in the "margin requirements."

At present, the Fed tells brokerage houses they can loan investors only 50 percent of the value of their stock accounts to buy more stock. It could cut that percentage. The margin was last altered during the 1974 recession. The 65 percent margin requirement was lowered to 50 percent to stimulate investment.

But the Fed has not sent a margin signal to the market since then. In a Nov. 8 interview with The Wall Street Journal, Fed Vice Chairman Roger Ferguson said the Fed has no intention of altering the margin.

Since then, investors have engaged in a record-setting "margin borrowing binge," says Mr. Schlesinger. For the first time, margin debt exceeds $200 billion.

With investors employing more borrowed money, the stock market has become more risky.

(c) Copyright 1999. The Christian Science Publishing Society

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