City & Business: Bulls beware: there are real risks out there

et the bulls run. The Footsie and Dow hit new record highs last week for the second week in a row. The Bank of England and European Central Bank cut interest rates on Thursday. Listen to Abby Joseph Cohen, chief investment strategist at Goldman Sachs and the most prescient of bulls.

Asked by The New York Times how she can feel good about the bull market when most of the gains have been concentrated among a few big capitalisation stocks, she replied: "We have been going through a very peculiar period of time. In the spring of 1997, investors thought all was right with the world. There was a perception the global economy was doing well. During that period, we had a broad market, when the small- and mid-caps performed reasonably well, and the so-called value stocks were performing better.

"That sense lasted for about three months, and then Thailand woke people up to the fact there is still risk out there. That made people nervous, and convinced portfolio managers to stay in large liquid names that gave them the chance to get out fairly easily.

"In the spring of 1998, small and mid-cap stocks once again started to do better, and the market started to broaden again. Then came the events of August, when Russia defaulted. Those events pushed investors back into large, liquid names.

"This year, if we have an environment in which the US economy is steady, and the global economy is getting better, not worse, that may instil investor confidence."

But bulls take heed. The events summarised by Ms Cohen as "Thailand" and "Russia" did more than "increase investors perceptions of risk". They blew a hole in the doctrine of globalisation under which the structures and values of Washington/Wall Street were meant to become the template for the world.

If Russia had not defaulted - if Washington had found a better, less triumphalist, less doctrinaire way to help Russia's transition to a market economy - its communists and ultra-nationalists would still be back in their boxes. If Russia's hardliners were still back in their boxes, the Balkan conflict would be easier to handle. It is even possible that Russia would have intervened to stop Milosevic's madness in Kosovo before the bombing started, in the name of preserving regional economic stability.

Now, instead, there is no Russian economic stability to preserve. Warlordism is supplanting agriculture, small-scale manufacturing and trading all across the rim of the global economy. The creeping chaos has now reached Europe. Those of us lucky enough to live in the US and Western Europe have been spared the economic consequences so far. But for how long?

Skimming the surface

NEXT weekend European Union finance officials gather in Dresden to chew over, among other agenda points, Brussels' proposal to impose a 20 per cent withholding tax on interest earned by EU residents depositing savings in one EU country while living in another.

The proposal is meant to stop Belgian dentists and Italian black marketeers living within easy driving distance of the Swiss banks in Ticino, and German entrepreneurs zooming their BMWs into Luxembourg from indulging in a venerable continental practice. This practice involves nipping over a border, having a good meal, shopping in the local high street for a mink or a Miro, then indulging in a little income-tax evasion.

The City hates the Brussels proposal. It says it means new taxes on international bonds traded in London but also in other EU financial centres. The new tax, the City argues, will push the 20 or so big banks dominating the international bond market to relocate this business to Zurich or New York with a consequent big hit for jobs and prosperity in the EU.

Taking this on board, EU finance officials appear to be working on a compromise. The idea is to distinguish between the retail or individual investor market and the wholesale or professional market. Having made this distinction, the wholesale international bond market would be exempt from the new tax, while individuals would be made to cough up on their interest income.

Such a compromise might, in theory, keep the international bond market in the City. The problem is that the line between individual and institutional investors is notoriously difficult to draw. When individuals group together to invest are they investing as individuals or as institutions?

A Dresden deal might satisfy the political and bureaucratic impulse for compromise. But the markets, facing a simple binary decision - stay or go, might look at the complex, carefully crafted language and still decide to go.

"Taxing at source" appeals to authorities. It is simple for them to collect money as it leaves a bank on its journey to its owner. Much of the administrative burden for this form of tax collection falls on the banks.

But a better approach to clamping down on income-tax evasion would be to clamp down on Swiss numbered accounts and other bank- secrecy stratagems. This would be difficult and uncomfortable. The Swiss would resist. We would be forced to do something about the Channel Islands, the Isle of Man, and Gibraltar. But think of it - a world in which African dictators, gun runners, drug barons, baksheesh-collecting Arabs, mafiosa and Russian oligarchs alongside the Belgian dentists, Italian black marketeers and Luxembourg-loving Germans had no place to hide.

It might be a drabber world in the end. But the spectacle of dirty financial linen washing would provide months, if not years, of amusement while improving government treasury positions.

Search for the new rich

SPEAKING OF the rich and colourful, another Sunday newspaper publishes its annual Rich List today. Many readers will be drinking tea this morning, swotting up on which Lord owns London's West End, and which owns three- quarters of Scotland. Some of us may be moved to wonder yet again how land reform bypassed this country.

Others will note which rock stars have made the transition from wild youth to financially padded middle age. Anyone for a Bowie bond?

Myself, I'll be on the lookout for the first Third Way millionaires. Not the old trusties like Lord Simon and the other businessmen who signed up with New Labour before Blair & Company came to power. But the men and women whose burgeoning wealth derives from the Government's plans to modernise the economy - perhaps in Silicon Glen or the Reading hi-tech corridor. Who and where are they?