CITY AND BUSINESS: The markets must stop make-believing

aster bonnets, Fourth of July firecrackers, Labour Day parades, and then the US presidential election. Forget the Millennium Bug. Come autumn we will be focused on a seriously serious uncertainty: the post- Clinton and, hovering just over the horizon, post-Greenspan era. You already hear it in the City:

Q: Who do you like?

A: The Texas governor, George Bush Jr.

Q: Not Gore?

A: People are ready for a change.

Q: Not Pat Buchanan or some born-again Christian?

A. Possible. But only if the Dow crashes. Despite what the doom-mongers say, that looks like not happening.

There you have it. We're riding the great bull market of the century. Last week the Dow broke 10,000. On Thursday the Footsie touched a record 6,399.1. Economic indicators remain mixed.

But there's adequate cause for some of that good old cautious optimism. Take yesterday's headlines. US employment falls to 29-year low. Economic growth in South Korea may exceed the 2 per cent forecast by the International Monetary Fund just two months ago.

What the markets are looking for is continuity - a smooth transition from the fag end of Monica's Bill years into a newer, shinier model of the Reagan, Thatcher years. Generally speaking, they think they're going to get it.

All kinds of pundits are in worst-of-the-downturn-is-over mode. Last week, ING Barings put out a research note headlined "Economic risks fading for World Economy".

This week central bankers will be in pump-priming mode. The Bank will probably cut interest rates here, and there may be a cut in Euroland. "Recent comments by ECB Council members appear to indicate a softening of the `no change' policy bias - which leads us to believe rates will probably be cut this week," opines Deutsche Bank.

And the stock market bubble? The soaring if not unhinged values investors are putting on companies? Weren't, after all, after-tax earnings for non- financial US corporations down 2.1 per cent in the fourth quarter compared with the third quarter? Aren't we due for a crash? Well, yes, there's that little cloud on the horizon. Over the past four weeks, the value of America Online has risen $62bn (pounds 39bn), making it worth more than Walt Disney, Viacom and CBS combined. The technology story in general, and the internet in particular, could implode.

But last year's world financial crisis is rapidly fading into history. It was well managed. Look at Brazil. Its spending is within IMF limits and inflation is lower than expected.

Isn't the lesson here that, yes, we've entered an age of volatility - of frightening dips and rises in financial markets - but also an age in which the G7 leaders managing such crises have shown they have the right stuff?

Isn't this what the crystallising focus on the US presidential election is about? The market lining up behind George Bush Jr because he's the right man to make the right decisions when the next crisis hits?

I have no opinion on George Bush Jr yet. But I'm sceptical about the market's embrace. City and Wall Street political speculation is always wishful thinking. This time, however, it's worse. It betrays not only a wish for continuity but the misplaced conviction that the forces of history can be managed.

Demonstrably, the forces of history are out of control. This is what the violence in the Balkans tells us. It increasingly appears that in Kosovo the West has stumbled into something which is beyond management. I would argue that Kosovo is only the beginning. Between now and the November 2000 US election the world is likely to change beyond the imagination of even the most prescient market forecaster.

There's a reductionist economic argument backing up the notion that what lies ahead is essentially unpredictable. However else it is organised, the world economy now functions as a machine to raise US standards of living. Conversations with friends in the US tell me that Americans realise this. But they also tell me Americans have entered into a collective suspension of disbelief.

In 1980 the country voted a movie actor into the White House. Since then the US has moved on. Today national life itself has become a movie - a schmaltzy romantic comedy. Everyone knows it's make-believe. But as long as the images keep flickering on the silver screen, who wants to be a party-pooper?

The movie will end, of course - though not necessarily in tears as no law dictates there must be a Wall Street crash. But when the lights come up, the American economic miracle will be seen to have been as flawed as the Asian economic miracle. What follows when Americans wake from their suspension of disbelief is anyone's guess.

The unpredictability of the next 18 months also follows from a reductionist historical analysis. When Boris Yeltsin took power in Moscow, the US won the Cold War. It has, since, been enjoying the fruits of victory - not only through the peace dividend but from its might as sole superpower.

The US has also, haltingly, sought to impose what during the Gulf War George Bush Sr termed a New World Order. This boils down to keeping outlaws like Saddam, Gadaffi and now Milosevic in their cages while spreading the US version of the free market gospel.

In sophisticated European quarters this still raises sniffs. But the sniffs are cheap. Compared to other financial centres, the little man on Wall Street does not get screwed by the big man. As much as it sticks in sophisticated European gullets, owning shares is part of the US ideal of self-reliance. Spreading this gospel, within a framework of market openness and transparency, is not in itself wrong or venal. The problem occurs at a different level.

As the world's sole superpower, America has abused its might to bend the rules when it suits. This is what the battles over bananas, genetically modified food, and the selection of the next World Trade Organisation chief are about. Washington is discrediting the good parts of its own gospel.

It is also getting sloppy. This is what Monica Lewinsky symbolises. It is the reason for what's happening in Kosovo. Slobodan Milosevic has thought harder about his counter-offensive against the ethnic Albanians than Washington has thought about their defence.

The violence in Kosovo is a humanitarian tragedy. It is also a leading economic indicator. It suggests that the eight-year period during which the US enjoyed the spoils of the Cold War is now over.

Q: Is George Bush Jr headed to the White House?

A: Quite possibly.

Q: Can the markets take comfort in this?

A: Only a fool would do so.