Wednesday, June 04, 2003

The US stock market continues its modest ascent of recent months, on the back -- we are told -- of better-than-expected profit reports. Where is all this newfound prosperity coming from? Perhaps from something as simple as the falling US dollar. Rebecca McCaughrin and Richard Berner of Morgan Stanley write this week that "22% of earnings for companies in the S&P 500 [are] derived from abroad". So the big transnational firms make over one-fifth of their revenues in Europe, trade pricy euros for cheap dollars, and -- voila! -- profitability like magic.

Of course, this kind of profitability is like magic (the General is reading the third Harry Potter book to his daughter, so he is particularly sensitive to questions of witchcraft and wizardry just now) in that it is based on market arbitrage rather than real production. And only TNCs benefit. Domestic firms still have to slug it out in the real economy, and the same goes for TNCs without big positions in Europe.

When you read the business pages clucking about the "new bull market," think 'irrational exuberance' and you'll be close to the mark.

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