UR TV CAST

First, we had the mega-optimism of 1999 and 2000 when equity markets soared into the stratosphere. Then we had the extraordinary pessimism of 2001 when, one after another, markets came crashing down

Keynes’ famous animal spirits are alive and kicking. Equity markets, after all, are supposedly meant to discount the future. Back in 1999, the future was bright but it certainly isn’t anymore. Animal spirits have changed dramatically, so much so that not even Rolf Harris and his team at Animal Hospital will be able to come up with an immediate cure.Despite all this, the man and woman on the street – or, these days, in Bluewater or Brent Cross – are spending with abandon. Equity markets may be saying that the end (at least of the new paradigm) is nigh, but consumers are, apparently, indifferent.

As long as they can borrow, as long as they can put things on a piece of plastic, then they are happy to go on spending. Yet there is mounting evidence to suggest that consumers ultimately are bothered by falls in equity prices. There are a number of possible links but two stand out above all others. First, consumers can be directly affected by falls in equity prices if they happen to own a lot of equities. Second, consumers can be affected indirectly if the fall in equity prices presages a collapse in profits.

After all, falling profits are a lead indicator of rising unemployment and falling wages.In the first case – where falling equities imply a loss of financial wealth – consumers may choose to save more to compensate for the loss in wealth in the form of equities. In the second case – where falling equities tell you something about future profits – consumers may choose to save more because they recognise that their human capital is at risk, in the form of lower bonuses, wage cuts or higher unemployment.For 2002, both of these factors are likely to be key issues affecting the performance of the major industrialised economies. The losses in financial wealth have been particularly large in the US where consumers, proportionately, own a lot more equities than they do elsewhere. Consumers have not, yet, given up spending altogether but it’s worth noting that the saving ratio appears to have stabilised after many years of perpetual decline. That might suggest that consumers have finally recognised that the equity boom is over.