Not much cause for exuberance

THIS week sees the fifth anniversary of Alan Greenspan's famous warning to investors about 'irrational exuberance'. The Federal Reserve chairman wanted to cool down the share boom. The Dow was then 6,400. Wall Street trembled for all of five minutes before marching on. The Dow now hovers at 9,800.

The key test of value is of course the earnings multiple (share price divided by earnings). On the broader S&P 500, this ratio stood at 21 when Greenspan spoke, but with profits rising. Today, it stands at 38 - with profits tumbling. If the first multiple suggested irrational exuberance, then 38 today, higher incidentally than in 1929, is plainly bonkers.

Consolingly for British investors, the FTSE All Share earnings multiple is a saner 21. But that remains well above our historic average. And with profits falling, it too carries obvious downside risks.

Greenspan's massive rate cuts may help the US economy by cheapening short-term borrowing. But longer-term interest rates prove tiresomely obstinate. The bond market fears he will unleash inflation. The yield on the benchmark 10-year Treasury stock is almost unchanged on a year ago.

And the rates at which businesses borrow depend very much on that. So the cost of corporate loans (after the banks have taken their turn) remains little changed. If further rate cuts add to fears about inflation, the cost of corporate loans might even rise - very frustrating for the Fed.

Euro woes
THE way the euro still struggles owes something to the financial world's lack of confidence in the European Central Bank and not least its president, Wim Duisenberg.

The ECB itself is too dominated by politics, as the 12 countries' representatives jostle to push their own national interests.

Duisenberg, another rent-a-Dutchman, became president for two reasons - he was not a Frenchman or a German. The smaller nations did not want the ECB dominated by the two biggest economies. Under pressure from Paris, it was informally acknowledged that Bank of France governor Jean-Claude Trichet would succeed him this year - an arrangement Duisenberg is now ignoring. There is also a little local difficulty about Trichet because of a lengthy judicial inquiry into his involvement at collapsing bank Credit Lyonnais.

Strains within the ECB may well grow since French and German economic performance is diverging. French GDP grew 0.5% in the third quarter, Germany's fell by 0.1%. France is expected to grow at a decent pace next year - given these difficult times - while Germany may not grow at all. It is of course impossible to set a rational common interest rate for both countries - or the other 10, whose growth also varies substantially.

What might diminish the strain would be a disappointing French perfomance. It seems possible.

Consider the woes of a British businessman whose company took over a French concern. Since April, he tells me, he has been trying to cut the labour force. But procedures require him to produce a social plan, a training plan for the redundant, and proposals for relocating staff elsewhere in the firm. He has to seek sanction for his proposals before a judge and meet payoffs four times the level in Britain. Meanwhile, the redundant remain on the payroll.

Cheer up
BRITISH industrialists expect an inflation average of 3.6% over the life of a four or five-year investment, a survey found. Why this bewildering lack of confidence in the Bank of England's Monetary Policy Committee? Since the MPC's decisions started to control the price level, underlying inflation has exceeded the 2.5% target rate in seven months, hit it in four and been below it for 31. The industrialists should cheer up.