Memo to Brash: wait for the word from Washington

By FRAN O'SULLIVAN

Ponder this, all you "highincome" Kiwi babyboomers out there: Has US septuagenarian Alan Greenspan more to do with your fate than Reserve Bank Governor Dr Don Brash?

For God's sake, Don, don't take my pronouncements as an invitation to prove me wrong. I'm just hoping you'll hang back a bit and see what happens to the Nasdaq today before you sign off your latest official cash rate review.

But my own money is on Mr Greenspan (and his successors) - as the ultimate comma between a life on the tiles, or as a bag lady.

The Nasdaq carnage - which saw 25 per cent carved off technology stocks last week as greed quickly turned to fear with news that US consumer inflation had recorded its biggest leap in five years - has put the focus back on Mr Greenspan.

Is this the moment when he will become the ultimate arbiter on whether it's finally time to end the "irrational exuberance" in the equity market which, as chairman of the US Fed, he issued warnings against four years ago? Or will he play for time and try to orchestrate a soft landing for the US economy?

He still has a month. On May 16, the Fed will decide whether to again raise interest rates to bring the inflation surge under control. Or let the market selloff do the job for them by taking the edge off economic growth.

Dr Brash doesn't have the same time advantage.

Tomorrow, he must second-guess the medium-term future for New Zealand inflation in an increasingly volatile international outlook.

The market drum is that Dr Brash will once again nudge New Zealand interest rates up another notch or two, to stymie incipient inflation. But if I were you, Don, I would hold off from going up more than one notch to see just how much international markets drop away.

Business confidence has fallen, and while the inflation rise for the March quarter was the largest since December 1996, the huge volatility in equity markets will continue. Growth will be pegged back.

Wait and see what Mr Greenspan does - because he will ultimately have more sway on world growth rates and New Zealand's trading environment than any short-term domestic steps. Our market is vulnerable to US movements - the 4.7 per cent drop it took yesterday proved that. It was much larger than local predictions.

The last time Mr Greenspan addressed the issue was late last year at the central bankers' annual boondoggle at Jackson Hole, Wyoming. Back then, he indicated that the Fed would ease if equity prices fell sharply. The issue now is whether the market correction, which has seen the Nasdaq, the Dow and the S&P 500 record their sharpest falls since the 1987 crash, will have sufficient dampening effect on the US economy to underscore the need for an easing of monetary policy.

There is also the issue of political sensitivity to the huge numbers of small shareholders in the US. It is estimated that 45 per cent of Americans now have exposure to the equity markets. The mutual funds - which hold pension savings for many US citizens - now have $US7 trillion in assets, outweighing the $US5.5 trillion invested in banks.

The debt-laden, savings-strapped middle-class Americans are not alone. Many Kiwis - either directly, or through mutual funds - have much of their pension savings in international equity markets.

Let's cut to the chase here.

Even the beneficiaries of Government largesse, such as Ngai Tahu, have taken the sensible step of putting their multimillion-dollar Treaty of Waitangi settlement funds offshore, instead of investing in our poor-performing sharemarket.

In the US - like New Zealand - household savings are falling, personal debt is skyrocketing, and there are record trade deficits - these are the factors combined with the staggering $US250 billion borrowed on margin to play the market which will force Mr Greenspan to think carefully about the political and economic consequences of next month's actions.

Anyone who tuned into CNBC or any of the other US financial television networks in the past few days saw the graphic story. Small investors had their hands firmly in their pockets. They were spooked - even though prices were down to what would have been considered bargain rates just weeks ago.

While big institutions bet on further falls before coming back in to scoop up value propositions, even the seven million Americans now trading online are expected to back off.

The huge corporate resource allocation which has taken place in the US in the past few years will not come to a halt. The information technology revolution which has wrought fundamental change in the way we conduct both our businesses and our lives will not stop, despite the collapse in speculative technology stock values.

As long as central bankers cut economies some slack when required, the long-term outlook remains challenging.