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To: PaulM who wrote (25428)	1/5/1999 4:50:00 PM
From: Alex	Read Replies (2) \| Respond to of 116958

Piling up debt to power the rise in shares <Picture> by ANDREW SMITHERS Chairman of fund manager advisers Smithers & Co One of the more perverse pleasures in life is looking at economic statistics. The rewards lie in finding that "what everyone knows" is so often far from the case. A current example of this is the widespread belief that the US stock market is being driven forward by individual Americans through their investment in mutual funds. Every quarter the Federal Reserve publishes statistics on the flow of funds in the US. It has just published the data for the third quarter of 1998. This not only shows that individuals are massive sellers, but that mutual funds also sold shares. The big buyers who are keeping the stock market up, are US companies, who bought at an annual rate of $222 billion (£135 billion). Some of these purchases are companies buying in their own shares and others are the result of takeovers. The amount companies spend on buying shares is more than twice as much as their profits, after they have paid out dividends. This means that the equity capital of US companies has actually been shrinking. Not only is the expansion of US business being financed entirely with debt, but the equity base on which this debt pyramid is being built is actually shrinking, even though US companies are already heavily in debt. Half the capital they need is now borrowed and if they continue to buy shares, the situation will rapidly get worse. It seems, therefore, that if Wall Street is not to crash, US companies must be increasingly debt-ridden. This, of course, could go on for some time, as the general attitude in America is that debt is good for you and savings are for wimps. There are, however, some signs of nervousness around in the bond market, where the difference between the cost of borrowing by the government and by companies has shot up. Nonetheless, companies will continue to buy shares if they can. This pushes up share prices and makes senior executives richer through their share options schemes. As US corporations get increasingly into debt and bond markets are less willing to help out, they have turned to the banks. One result of all this is that US money supply is racing ahead and past experience warns that this will eventually lead to inflation. The Federal Reserve, however, is much more worried that the economy will be too weak than too strong. It has cut interest rates three times recently, in spite of the fact that money supply is galloping away. This is because the Fed is worried about the stock market and wants to prevent it falling. It fears that consumers will take fright if the market falls and that this will quickly bring on a nasty recession. The problem with the Fed's policy is that keeping the stock market up requires a rapid build-up of debt and the more debt builds up, the more difficult it will be to climb out of the next recession. © Associated Newspapers Ltd., 05 January 1999 This Is London <Picture: Go Back>