It would have been a surprise if the members of Canada’s business world had greeted Michael Wilson’s budget with more than a yawn, even if there had been something in it: they’re all too busy counting their megaprofits from the stock market.
With market indices on a strong upswing for most of the past four years, a few of the more thoughtful prognosticators have begun to wonder what is really behind the surge in stock prices and how long it can last. It’s certainly not the state of the Canadian economy, which (outside Toronto) isn’t much better than Beirut’s. Nor is the market playing its traditional role as an economic barometer, signalling the start of an unprecedented period of prosperity six months from now. On the contrary, the one prediction all the experts endorse is that harder times are coming—probably by 1988.
The real reason for the dramatic upswing is that the stock market is acting precisely the way it should: as a reflector of the forces of demand and supply. There is too much cash chasing too few blue-ribbon shares, and so their prices keep rising. We have what the experts call a classic situation of too much liquidity in the system.
The money is coming in from everywhere. Manufacturing companies with unused capacity, unwilling to spend any more on capital improvements, are investing their cash flows in equities and debentures. In the United States the new, lower tax levels are diverting savings into market plays. Paradoxically, the huge American trade deficit has also provided strong support for U.S. stock exchanges—and thus for Canada’s—because Japanese and German investors are themselves buying shares in American companies, even while criticizing their managerial incompetence and wasteful manufacturing techniques.
It all stems from the fact that the world outside the United States is awash in U.S. dollars—two trillion or more—and is growing by more than $100 billion annually. The money, the accumulation of unbalanced transactions between the United States and the rest of the world, is sitting in the pockets of the Japanese, Germans, Brazilians, South Koreans and others.
These floating U.S. dollars are good mainly for buying U.S. goods and ser-
vices—for which foreign demand is weak—or such American assets as real estate and control of companies, which everybody wants, although there are not enough of those assets available at reasonable prices to go around.
So the next best move is for cashrich foreign customers to buy securities. And billions of U.S. dollars are going straight into the stock markets, Canadian as well as American. Some of it is also flowing into bonds,
Treasury bills and similar loan instruments.
Even though that means the stock market is reflecting a fairly shortterm phenomenon, rather than any real growth in economic values, it is interesting to speculate on why outsiders are so willing to deal in U.S. dollars. Part of the reason has to do with defence and President Ronald Reagan’s massive, worldwide arms buildup. While there is some doubt that he is awake enough to be this subtle, the
subliminal message the Americans are sending to the world runs something like this: “We provide protection for all of you—with troops, planes and ships stationed on the edges of the free world, reducing your cost of providing this expensive and controversial equipment—so instead of you paying for it yourselves, you should buy our stock and other financial instruments.” That line seems to make sense to a lot of nations, mainly Japan and Germany, and it may have something to do with Reagan’s reluctance to enter into any realistic disarmament talks with Soviet counterpart Mikhail Gorbachev.
Another reason that non-Americans are willing to deal in U.S. currency is that the United States is still the largest consumer market in the world. Selling within that market adds to the outside float of U.S. dollars. The fairly healthy American economic situation is also reinforced by low interest rates, reduced inflation and depressed oil prices.
But the current order of things can’t last. For one thing, Gorbachev is getting his propaganda message through that things really have changed and that the free world may not have to pay for protection much longer because the Soviet Union is not really a threat.
The other, more valid reason to doubt that the stock market boom can go on much longer is the mounting wave of U.S. protectionism, which was strengthened by last week’s presidential proposals to amend American trade laws. International investors and their governments are beginning to think that if the Americans are denying entry into their markets to sell goods, then foreign investors should not be buying American stocks. Protectionism will ultimately devalue the American dollar.
In terms of the Canadian situation, a drastic devaluation of the U.S. dollar (which would almost certainly drag ours down, too) would probably help us, because such other trading partners as the countries of Europe and the Pacific Rim would better be able to afford our exports.
But a major U.S. devaluation should trigger an economic recession that will roughly coincide with the winding down of Reagan’s term and the presidential election in the fall of 1988. The stock market buying wave will end with the greatest sell-off since 1929.
The story you want is part of the Maclean’s Archives. To access it, log in here or sign up for your free 30-day trial.
Experience anything and everything Maclean's has ever published — over 3,500 issues and 150,000 articles, images and advertisements — since 1905. Browse on your own, or explore our curated collections and timely recommendations.WATCH THIS VIDEO for highlights of everything the Maclean's Archives has to offer.