City & Business: Who will pull the trigger this time?

SO WHERE are the markets heading? After a week that began on a technology-powered high, suffered a dip, then ended on a flat note, investors are shaking their heads. Take it day by day, if not nano-second by nano- second, seems to be the conventional wisdom.

Still, on Tuesday, in pursuit of some clarity, I went along to the Savoy to sit in on the 11th annual Goldman Sachs Foreign Exchange Conference. The first thing to report is that, despite its aborted plan to partially float itself, Goldman remains a class act. Listening to Gavyn Davies and his fellow economists was like listening to Wynton Marsalis at Ronnie Scott's after other acts you thought were good until the real thing appeared on stage and began hitting its notes.

Goldman remains under a cloud for mis-timing its flotation. There may yet be more internal after-shocks from last year's decision not to sell its shares until the world financial markets were in the grip of panic. But Davies & co showed rapper cool. The brain power on display as the team spoke on "The World Economy - A Millennium Recession?" and went on to dissect Japan, euroland, and the prospects for the dollar, was entrancing.

Listening to the six presentations, followed by a lunchtime peroration by the chairman of Goldman Sachs International, Peter Sutherland, on "EMU - Will it Really Change Europe in a Positive Way" (no prizes for guessing his answer), was to be reminded of how the markets can be played. At the top there are men and women with no props other than their intellects, computers and data-collection networks seeking to divine the patterns in the randomness of world events as 6 billion people pursue their destinies.

Goldman's take contained interesting curlicues. Did you know economic growth is likely to get a 0.2 per cent boost this year purely on the back of year 2000 computer reprogramming? Or that industrial world growth is likely to be depressed by 0.6 per cent next year as that spending dries up?

In the main, however, Goldman's take was neither dramatic nor surprising. The firm foresees serious deflationary forces at large this year. But it believes interest rate cuts by central bankers will offset this.

Still, Goldman says policymakers face a "conundrum". World monetary conditions are tightening as a result of the Asian financial crisis. So the Federal Reserve and euroland are easing. This is likely to generate asset inflation in the industrialised world. But the company believes the "Group of Six policymakers will turn a blind eye" to this phenomenon in the hope that the payoff for asset inflation will be a near miss on global recession. (Goldman, by the way, does refer to the Group of Six, not Seven. Apparently, it has broken off diplomatic relations with Canada.)

Nor does Goldman foresee a crash. It doesn't even accept the proposition there is a Wall Street bubble. It does see a heavy build-up of borrowing in the US to invest on Wall Street - $160bn (pounds 100bn), according to its own calculation. This is "getting somewhat extreme," Gavyn Davies conceded. "It's beginning to worry us a little bit."

If Wall Street were to blow, Davies went on, the shock to the world economy would be significantly greater than the shocks of the Asian, Russian and Latin American crises put together. There could be a peak-to-trough dip in US economic growth of 7 per cent, he said. But: "We don't think it's going to happen, because we don't see a trigger," he said.

I tried to think of a trigger - the collapse of Chinese economy? The collapse of the single currency via a spread of the Balkans conflict? Boris Yeltsin's death and nuclear civil war in Russia? The monetisation of Japan's budget deficit getting out of hand? The victory of protectionist US Congressman Dick Gephardt over Vice President Al Gore in the Democratic Party presidential primaries next year?

Then I realised I was thinking the wrong way. The most likely catalyst for the financial system blowing up again - being seized by further panic - is the mindset which operates in the conviction that such triggers can be foreseen.

It's a 50-50 bet that globalisation is inherently destabilising. It's a 50-50 bet that the worldwide concentration of financial control is in inherent conflict with democratic impulses on the rim of the world economy - not to mention the rage of the unemployed and marginalised inside the Group of Seven (or Six debarring poor old Canada).

This Saturday, a G7 working party that was set up during last year's financial crisis to make recommendations on reforming global financial architecture is due to report. Under the Bundesbank's president Hans Tietmeyer, it will almost certainly take a do-little approach. But the idea is clear. With the judicious use of a Third Way policy-mix vaccine, the excesses of globalisation are meant to be brought under control.

Once this happens, emerging market governments will see the advantage of opening up their books to Wall Street and City trading firms. Transparency, it's called. With this improved framework in place - the new "architecture" - firms like Goldman will be more secure in assessing what is making the world go round and positioning themselves to profit from financial flows.

There remains the unresolved problem of what happens when the world's big banks, trading houses and hedge funds make the same judgement about the direction of financial flows, take the same positions, then race to be first out the exit when it becomes clear their shared judgement is wrong.

This seems to be what happened last autumn. Wall Street and the City thought the yield on emerging market bonds would converge with the yields of US Treasury and other industrial world borrowers. This is a way of saying Wall Street and the City believed in globalisation.

But then, on 17 August, Russia unravelled and this triggered a panic among the biggest financial players. The player drawing the short straw was the hedge fund LTCM, in the sense that it was the firm whose principals got seriously un-rich because of the crisis. But the other big players only just escaped with their shirts.

At the Savoy on Tuesday, Goldman was sending a subliminal message that the financial world had learned the lessons of the crisis. But the fact that Goldman does not foresee a repeat of the crisis, on the grounds there is no visible trigger, for once seems a chink in its intellectual armour.

Perhaps the same sort of cycle that climaxed in the market panic last autumn is starting up all over again - a cycle powered by the markets' confidence in a kinder, gentler version of globalisation instead of globalisation in the raw. If this is true, the absence of a discernible trigger to bring about a crash could simply mean we are too early in the cycle for one to emerge.

Cycles happen that repeat themselves can be either more muted or more exaggerated. Which raises a question: are we heading for a repeat of last autumn's panic in major or minor key?