A Whiff off Panic

By Christopher Byron

But Wall Street has the last laugh

For a brief period last week it looked ominously as if the bottom were about to drop out of stock markets around the world. But looming doom proved a sucker's bet. In one of the dizziest roller-coaster rides of recent times, stock markets in Tokyo, London, New York and elsewhere slumped and surged and careered wildly down and up. Yet when the dust settled, share prices in most cases were pretty much back to where they were before the week began, and in New York, they were up substantially. The Dow Jones industrial average of 30 of Wall Street's leading blue-chip stocks ended the week at 860.73, a 37-point rise over the previous Friday closing.

For dazed investors and exhausted brokers, the market's gyrations were ultimately reassuring proof that the world economy is not teetering on the, brink of collapse, as a minority of economic Cassandras have been insisting. The unwillingness of the markets to stampede into a state of panic was also a major failure for self-styled Investment Expert Joseph Granville of Holly Hill, Fla. The stock market hip shooter, whose forecasts have been wrong as often as right, has over the years gained a large and loyal following among investors who subscribe to his weekly market newsletter and hang on his words as if he were the Vicar of Value.

Seventeen months ago, Granville led the lemmings of Wall Street into a 30-point gain in a single day with an order to buy stocks. Then in January he set off a 23.80-point drop in one trading day with the command "sell everything." Even though stocks continued generally up for nearly five months after that before they started their current down phase, Granville insisted that he had the magic formula for Wall Street.

Two weeks ago, Granville, who believes that the world is in a bear market that "won't bottom until at least the middle of 1982," took his side show to international markets. And, with his usual dramatic flair, he decreed in advance that last Monday would be "Blue Monday," when stocks would drop sharply around the globe.

That was like screaming "fire!" in a burning building. Investors have been nervous for months, as they watched Wall Street's Dow Jones industrial average fall about 200 points from its peak of 1024.05 on April 27 this year. Moneymen have grown more and more skeptical of the Reagan Administration's supply-side economic policies and have begun fearing that they might lead to a synchronized global slump. Meanwhile, high interest rates in the U.S. have forced up the cost of money in other countries and raised even more concerns about future economic growth. Stocks in London, for example, have been depressed since early in September, when many of Britain's largest banks pushed up interest rates another two points to 14%. Said David Oldham of Wedd, Durkacher: "The market was on a downward path anyway due to high interest rates. The flamboyant statements made by Granville simply gave it a kick in the seat of the pants on the way down." Issues traded on the Paris stock exchange have moved uncertainly since before the May election of Socialist President Franc,ois Mitterrand, who has a program calling for wholesale nationalization of French banks and industries.

Come Monday, and it began to seem as if Granville might be right. Stock markets opened to a selling avalanche. Tokyo, which because of the time-zone difference is seven hours ahead of Western Europe and 13 hours in front of New York, felt the onslaught first. By the close of trading, the Nikkei-Dow Jones average, which represents 225 stocks on the exchange, had crashed 300 points, 4.1%, the biggest such drop on record.

Panic began rippling through world money. In Hong Kong, the widely watched Hang Seng index plunged a staggering 7.8%. By the time brokers arrived for work in London, they were facing mountains of sell orders. No sooner did trading begin at 9:30 a.m. than the exchange's ticker, traditionally a paradigm of understatement, burst forth with news of "widespread and indiscriminate price-slashing." Said a broker as the sell orders piled up and the share prices plunged: "It's like a free fall without a parachute." By the end of the morning, the Financial Times's widely quoted 30-share index was down a record-breaking 29.4 points. It seemed madness, but, says Economic Historian Charles Kindleberger, author of Manias, Panics, and Crashes: "If the ship is really sinking, it is rational for the rat to leave."

New York, the biggest stock exchange of them all, was the last to open. As soon as the 10 a.m. trading bell rang on the floor of the New York Stock Exchange, the selling pandemonium continued. The Dow Jones industrial index slumped 14 points in the first 30 minutes, and the morning edition of the New York Post proclaimed, WORLD STOCK MARKET PANIC. Said Gary Ross, research director for the Wood Gundy brokerage firm: "Our retail customers were phoning in panic-stricken."

Then just as fast as a sudden summer's storm at sea, it was over. Said New York Floor Trader Dennis Valentino: "I've never seen a turn-around like it. The market turned on a dime and went straight up." Wall Street professionals have always been skeptical of the Barnumesque Granville, and Big Money managers in charge of directing the investments for mutual funds and pension portfolios decided that they could pick up some bargains because stocks had fallen too far. The big institutions lumbered in to buy solid stocks like General Electric, which was trading at its year's low of $52 a share, Burlington Northern, available at a near giveaway morning low of $36%, and Exxon, offered at a fire sale $30 a share. Said Michael Sherman, director of stock research for the Lehman Bros. Kuhn Loeb investment banking firm: "The Granville predictions created a classic buying opportunity. Many people felt compelled to buy because they knew stocks were being sold for emotional reasons." Quipped Stock Analyst Larry Wachtel: "I sent Joe a telegram that read: 'Having wonderful time, wish you were here.' "

By day's end, the real losers were the investors who had followed Granville's advice and sold. Instead of having crashed through the floor, the Dow Jones industrials had rocketed through the ceiling, closing up 18.55 points, at 842.56, the heftiest one-day gain in six months.

On Tuesday, Wall Street's defiance of Granville was heard round the world. The Tokyo Stock Exchange rebounded as breathlessly as it had earlier slumped and had its best day in history; the Nikkei-Dow Jones shot up 321 points. In London, institutional investors bought heavily and lifted the Financial Times's industrial ordinary index 24.3 points by midmorning, a record climb.

Last week's rebound of stock prices probably did not mark the end of the slide that has been pushing down prices on markets around the world for months. Stock values in the U.S. could weaken still further in the weeks ahead. A key reason is the towering cost of money. Although some interest rates fell slightly last week, the yield on risk-free, 30-year U.S. Treasury bonds went briefly last week to an unheard-of 15.32%. With bonds paying those rates and money-market funds giving 17% interest, few people are in a hurry to invest in common stocks.

A continuing dirge of downbeat American statistics last week underscored the sense of an economy slipping into recession and provided a gloomy setting for the annual reunion of world financiers at the International Monetary Fund and World Bank meetings in Washington. The Commerce Department reported that its index of leading economic indicators, which is supposed to predict the future course of the economy, dropped .5% during August, its third decline in the past four months. Sales of new one-family homes plummeted 14% during the month, to an annual rate of a mere 362,000 units, the lowest level since April 1980. Moreover, the Labor Department reported that unemployment rose .3% in September, to 7.5% of the nation's work force, the second such monthly rise in a row.

The IMF bankers and moneymen who gathered in Washington were indeed concerned with the U.S.'s uncertain economic prospects. While officials of industrial nations were privately worried that the American high-interest policy would push their countries into a severe slump, delegates of the less developed, nations fretted over the impact in their own countries of a U.S. drive to tighten up on World Bank lending and perhaps even further reduce the American share of world economic development assistance. Said one Mexican delegate: "Washington is arguing that more private financing is needed, but interest rates are already too high for the borrowers to afford the loans anyway. It's the U.S. that is at fault for not enforcing a policy that will bring interest rates down now."

The Reagan Administration, though, was not apologizing last week for its economic policies. In fact, it was preaching its free-market program to the less developed countries. Said President Reagan to the 11,000 central bankers and financiers: "The societies that have achieved the most spectacular, broad-based economic progress in the shortest period of time are not the most tightly controlled nor necessarily the biggest in size nor the wealthiest in natural resources. No, what unites them is their willingness to believe in the magic of the marketplace."

There is no quick fix to the interest-rate dilemma that is causing current international economic problems and the nervous stock markets. Rates are high because monetary growth is being held low to curb inflation. But boosting the money supply, as some Administration critics urge, would only fuel inflation and eventually propel interest rates higher than ever. There is every reason to believe that, given sufficient time, the Reagan program of tight money, tight budgets and lower taxes could bring about renewed American economic growth. And the best thing that could happen to the international economy and world stock markets would be for the U.S. to get back on the road to strong growth and lower inflation. --By Christopher Byron. Reported by Mary Cronin/London and Frederick Ungeheuer/New York

With reporting by Mary Cronin/London, Frederick Ungeheuer/New York

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