Martin Barnes, the International Money Expert

Martin Barnes has a tough job. He took over the editorship of the Bank Credit Analyst, the leading newsletter of international monetary commentary, from Tony Boeckh, who put the publication on the map. Following Boeckh, who in turn had succeeded the newsletter's founder, Hamilton Bolton, was no simple task. Barnes had to be balanced but appeal to the generally conservative, absolute return clientele that he served. And he did it in a masterly way so that now the BCA, as the monthly publication is informally called, carries his stamp.

Barnes is the serious Scot of literature. But talking about finance and global figures brings forth a twinkle. He finds global finance a world of amazement and wonder. And his charge is to survey it all, to sort and make something of the pieces he likes. He brings a classicist's range of intellect to the task. And numbers are the language of his choice. Give him a set of data, and he is likely to produce a chart, perhaps going back fifty years, illustrating a parallel to the conditions he sees today.

Barnes is a real long-termer in a market where the long term typically means a week or a little longer over holidays. Thus he has trouble with the market demands of hour-by-hour trading insights. His tools are not that fine but rather suited to cycles: one of his favorites, for example, is long-wave dynamics, which have a periodicity of about 60 years. But Barnes balances the demand for nowism with perspective. And he, Boeckh and their colleagues have broadened the geographic coverage of the BCA and its stablemate publications in the BCA group to cover with equal intensity every developed market, most major developing ones and all instruments. If you had to choose between a daily chart book or the BCA, you would be better off taking Barnes' work. It not only tells you where you are on the investment map but, more importantly, which map you have.

Barnes' research and writing cover a broad spectrum of subjects of relevance to investors. In the past few years, he has written extensively about new technologies and long-wave cycles, the financial market implications of low inflation and trends in corporate profitability.

What is International Money ?

Investment decisions must increasingly be made with an eye on what is happening throughout the world economy. As barriers to trade and financial flows between countries have come down, the global movement of goods, services and capital has made national economies more and more interdependent. Daily currency flows approximate four months of world trade. A single country's long-term financial plans can be swamped in a few days by ravenous traders sensing weakness. And watertight doors of credit agreements and domestic central banks collapse under the weight of collective monetary movements.

In these circumstances, it is no longer possible for governments and central banks to conduct monetary policy at the national level: policy cooperation through international bodies like the IMF and the G-7 has become essential. And it seems certain that a crisis in one part of the world will ultimately affect everyone else. One senses that the private view of government officials and bankers is that something has to be done. But what? Disagreements that were previously guarded now flare in public. Yet all that can be agreed is to form a new committee or meeting group.

The forces of globalization and liberalization have led to major changes in the way central banks go about their principal tasks. Markets have become much more powerful: they discipline unsustainable policies; and they give participants ways to get round administrative restrictions on their freedom of action. This means that central banks have to work with rather than against market forces. Maintaining low inflation requires the credibility to harness market expectations in its support. And effective prudential supervision involves incentive-compatible regulation.

In monetary policy, attempts to exploit a supposed trade-off between inflation and unemployment have given way to a focus on achieving price stability as the best environment in which to pursue
sustainable growth. The intermediate goals of monetary policy have also changed. Monetary targets and exchange-rate pegs have proved difficult to use in practice, and an increasing number of countries have adopted inflation targets, backed up by transparency in the policy-making process and independence of action for central banks.

The objective of financial stability has acquired much more prominence in recent years, following various high-profile mishaps at individual institutions and severe problems in some financial systems. It has become harder to segment different types of financial activity or to apply restrictions to the activities of individual institutions. Systemic stability requires ensuring that financial institutions properly understand and manage the risks they acquire, and hold an appropriate level of capital against them.

The international monetary system has been through a major transformation in the past 25 years. The Bretton Woods system developed at the end of World War II was government-led: official bodies decided on exchange rates and the provision of liquidity, and oversaw the international adjustment process. Now, the system is market-led: major exchange rates are floating; liquidity is determined by the market; and the adjustment mechanism operates through market forces. The job of central banks is to see that market forces work efficiently and that any instability is counteracted. This seems to mean stable and sustainable macroeconomic policies, and, where possible, action to ensure that inevitable changes in the direction and intensity of capital flows do not destabilize financial systems.

Changes in interest rates, inflation rates and exchange rates across the international monetary system are likely to have a significant impact on investments of all kinds. But of overriding importance at this turn of the century is what has become known as the global crisis. What started in the summer of 1997 as a regional economic and financial crisis in Asia had developed into global financial turmoil by the summer of 1998. The troubles spread to Russia with its debt default and currency devaluation; and they have since threatened Latin America. Meanwhile, Japan, the number two
economy in the world, has sunk into a depression from which it seems powerless to recover.

Despite the respite seemingly provided by coordinated interest rate cuts led by the US Federal Reserve, the global crisis is still with us. It seems unlikely that the United States can continue for long to be "an island of prosperity in a sea of depression." In a new and increasingly unstable system, the benefits gained by quickly grasping the dynamics are huge. A scholarly and instinctive approach is needed.

The Future of IPO

Research shows that IPOs are far more likely when valuations are high than when they are average or low. They seem to be fixtures of a bull market an offensive strategy, often cynical though some would say that IPOs follow up markets more than they forecast down markets.

But why, for example, did Goldman Sachs decide to cancel its planned IPO as the market turned down in the late summer of 1998? Because the market no longer supported a valuation above what the insiders considered the investment bank to be worth. But as with any IPO, that implies that they were previously planning to sell it for more than they thought it was really worth and that potential buyers were getting carried away on a wave of overconfidence and overselling.

So IPOs should be treated as suspect. A simple trading rule is that if they start selling below the offer price on the first day of settlement, you should stop buying them. And if you are unable to acquire them at the offer price, the deck is stacked against you.

Otherwise, flip to your heart's and wallet's content. But buying new issues should be no different from investing in existing quoted companies, with decisions made on the basis of as much knowledge as you can accumulate on company and price. Supply is always likely to outweigh demand, so you can be highly selective.

Will IPOs be launched over the internet in future, and might that make them more accessible at a reasonable price to the private investor? Certainly, electronic trading is growing many times faster than conventional trading. But the potential for electronic IPOs will be greater when electronic brokers can overcome the traditional resistance of blending conventional selling groups with electronic commerce specialists. At the moment, there are regulatory impediments in the United States that presume new issues will be offered state by state to meet blue sky regulations rather than globally; and paper prospectuses have to be issued, which contain outmoded information compared to what a machine could do in real time.

Electronic IPOs today look more like regular issues with machines rather than telephones. They present only a modest adaptation of the old-fashioned system and maintain the normal agency price structure. However, when there is a combination of market pressure for lower costs, a regulatory framework designed for the advantages of computers and high quality issuers who demand the best technology for their issues, we shall see global electronic IPOs with an open market book, fully disclosed interests and real-time corporate information at issue costs at tiny fractions of money raised.