Funny thing about investor confidence: often as not it relies more on
faith than facts. Give it a little unsettling heat, and it can just
melt away. Belief turns to fear, then blind panic.
Insight number two: the bigger you are, the more scared you tend to
get. So what appeared to be a sudden Japanese loss of conviction
regarding the U.S. Treasury's ability to meet its standing obligations
received close attention from the world's bankers, from Zurich to Hong
Kong. The Japanese securities outfits just kept dumping, and nervous
phone inquirers from locales as diverse as the White House and Red
Square were all advised that everybody was "in a meeting and will get
back to you." As a natural consequence the world's major financial
players succumbed to a terminal case of nerves.
When the bond markets finally reopened on Wednesday, Treasury's thirty-
year issue had scooted up four full interest points. There was still a
market for Uncle Sam's IOUs--everything on this planet will move for a
price--but buyers were wary. They wanted their newly perceived risk
sweetened considerably.
Predictably rates on corporate and municipal bonds did a similar tango
north, leaving America's conservative investors wondering what hit
them. In fact, a lot of scheduled corporate debt offerings were
scuttled to await more settled times and lower rates.
The dollar also stayed on the critical list. Everybody was worried the
U.S. Treasury might just rev up the printing presses to produce enough
greenbacks to pay off all the foreigners who wanted their money back.
Since Paul "tight money" Volcker--who probably would have thrown his
robust torso onto the ink to prevent that from happening--was now gone,
there was nobody at the Fed with a real commitment to holding back the
flood.
And the stock market. People weren't starting to call this Black
November for nothing. A lot of players feared that the higher rates
would hobble the economy, a perfect excuse to head for the exits while
the getting was good. As Henderson liked to observe: psychology is a
fundamental too. The next day the Dow sank another two hundred points;
the day after that a hundred more. (Where had those sellers been two
days before?) The fourth and fifth days it slowed, heaved an audible
sigh of exhaustion, and sort of peered up out of the bunker to see if
the bombing runs had let up. The downward pressure was still evident,
but it was finally losing some of its steam.
Yours truly did a lot of thinking as the week wore on, while the
country appeared to wobble on the brink of unprecedented disaster. I
also conferred now and then with Jack O'Donnell and with Henderson in
between their appearances on TV chat shows. Although Bill's bearish
reading of the nation's estate had been vindicated well beyond what
even he had envisioned, I can report he took small pleasure in his
newfound celebrity; he was increasingly miserable over his own missed
opportunities in the financial casino. Jack, for his part, had gained a
profound appreciation of the helplessness of government to intervene
when fear and greed seize the marketplace.
My personal ruminations on the situation turned out to be too
Machiavellian for anybody to entertain seriously. Question: If you
wanted to pull all your money out of the U.S., is this how you'd do it?
Answer: No way. Instead you'd go about it gradually, a little at a
time, in order not to stampede the markets and cause exactly what was
happening now.