LONDON — “Capitulation bottom” is the ugly and inelegant phrase used by financial analysts in London to indicate the low point in the cycle of investor optimism and pessimism — the point where investors give up in despair, sell their shrunken shareholdings, if they can find a buyer, and start putting what money they have left under the bed.
Such a point may have been reached long ago in the eternally sliding Tokyo stock market, but it is a new and unpleasant experience on Europe’s bourses, especially on the London stock exchange, where stocks and shares throughout the 1990s soared ever upward.
Today there is plenty to despair about. Rafts of corporations have joined what is grimly known as the “90 percent club” — companies whose share prices have fallen by at least 90 percent from their peak in London in 2000.
Of course, the bad news is not just confined to stock markets and share trading. Not a day goes by without some new corporate disaster in the headlines. Two weeks ago it was British Aerospace, the week before Cable and Wireless and the week before that British Energy — the near-bankrupt owners of all British nuclear power stations. Before that, there were the long string of trans-Atlantic collapses such as Enron, Tyco, WorldCom and many more. Earlier in the year, there was the spectacular implosion of Marconi, once the flagship corporation of British electronics, telecoms and heavy electrical machinery.
More corporate disasters will follow. The latest bad news comes from the quintessential global corporation, McDonald’s, the burger chain that has come to symbolize buoyant American capitalism around the planet, sometimes to its disadvantage. Even Harrods, the iconic London store, is sliding into the red.
The general collapse in share prices, now at half their 2000 level, has also played havoc with people’s pension prospects. The huge funds necessary to meet future pension liabilities are suddenly huge no more. Fund managers and life assurance companies are having to trim their commitments, and at least one is on the edge of bankruptcy. Employers are cutting down sharply on the once generous pension arrangements they used to offer their employees upon retirement.
Amid all the bad news it seems to have at last dawned on the world’s financial experts that a major, bone-shaking recession is at hand and that no obvious source of recovery is in sight. On the contrary, looming war in the Middle East adds to the uncertainty and deters even the doughtiest investor from committing any funds.
The stock market gurus who were predicting recovery in 2002 have either fallen silent or changed their tune. There have been so many false dawns that none now dare forecast anything better for 2003. In the language of investors, the growling bears still remain in charge and the hopeful bulls have vanished.
What is true, and painful, for investors and companies is also true for countries. The major European economy, Germany, once the driving force of European expansion, is now motionless. Apparently unable or unwilling to deregulate their cat’s cradle of labor restrictions, the Germans watch as unemployment soars, growth evaporates and new jobs fail to appear.
The other bigger European economies toy with the idea of lifting activity through budgetary expansion (more public spending) or monetary boosts (interest rate cuts). But the grim example of Japan, where cutting interest rates to practically nothing proved as useless as “pushing on a piece of string,” is on everyone’s mind.
Even reformed Britain, which hitherto has defied the general gloom, is catching the slowdown disease from continental neighbors and running up an enormous trade deficit, said by some to be the largest since the 18th century. Meanwhile, the swelling British property bubble is at last bursting, and house prices are already tumbling from their crazy highs — notably in central London.
The mighty American economy, the world’s economic engine, is also spluttering, despite optimistic noises from Federal Reserve Chairman Alan Greenspan. But Greenspan has been wrong before, and the great days of the central bankers, as the demigods who controlled everything, may well be over.
The politics of recession are just as challenging as the economics. With governments everywhere under pressure from their electorates to “do something,” the greatest danger of all is that they might try some of the old discredited remedies, like laws to protect industries, new barriers against foreign imports, more subsidies and unsound job creation schemes. Those with the longest memories will recall that these were the policies of the 1930s, the Great Depression years, which led to war and global disaster.
The one hope this time is that the world’s statesmen have learned the absolute necessity of maintaining open trade at all costs and the colossal dangers, indeed the impossibility in the information age, of closing their economies. The global electronic network could be the new tutor of politicians who might otherwise weaken in the face of demands for panic measures.
Remaining steadfast will not bring early relief, but it will stop things from getting worse. If finance ministers and other political leaders can resist short-term pressures sufficiently, the crisis will of course pass. After the uncontrolled boom of the late 1990s and the mad excesses of the dot.com era, a protracted period of caution, fear and stagnation was bound to follow and, in this globalized age, spread worldwide.
Many great companies will disappear. Familiar corporate brands will vanish, as many have already. But all life goes in cycles. If the policymakers can keep their nerve, there will eventually be an economic spring, but first there will be a long economic winter.
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