Much more is at stake than the collapse of a few dot.coms

Things become a lot more serious if the established tech giants can't fund themselves

Things become a lot more serious if the established tech giants can't fund themselves

The "tech wreck" continues. The various high-technology markets around the world have carried on the pattern set after their peak at the start of March, where each small recovery is followed by a further, steep decline.

The extent of the fall varies a bit from market to market, but the general pattern is pretty much the same everywhere in the world: Nasdaq is down 35 per cent from the peak, Germany's Neuer Markt and Japan's Jasdaq are both off 40 per cent. But that only brings them to the levels they were at in early January, raising the question: is this just a healthy shaving of the peak, or has the carnage only just begun?

Probably a bit of both. Let's assume that there is still some way for the fall to go, but that by the end of the year at the latest there should be a solid base from which to go forward: bear markets don't usually last more than nine months. That still leaves the potential for a nasty summer as floats of dot.coms are pulled or scaled back, and hi-tech stocks (including telecommunications giants needing to raise funds to finance their mobile phone licences) find it expensive to go back to the market.

The plight of the dot.coms is going to remain the big story. If they cannot return to the market to fund their losses, they will have to find other ways of financing themselves. This will frequently mean going to larger and more established companies with decent cash flows and selling them some sort of interest. Those that fail to find the money will go under.

But, while these stories will attract the headlines, they will not have a serious knock-on impact on the world economy. These are not big companies; they don't employ many people; much of their investment has been in brand-building, so there is no large overhang of capital assets to depress the market. So, while it is sad in human terms and rough on investors that have allowed themselves to be sucked in at the wrong price, the dot.com fall-out is the least important consequence of the tech wreck.

Things become more serious if established companies cannot fund themselves. Some sort of credit crunch is building as central banks around the world tighten monetary policy. It is very difficult to know just how serious this will be, but I have come across two slightly disquieting bits of information which deserve a wider audience.

The first is the extent to which corporate bond yields have risen in the US. The London-based research group GFC Economics has just put out a newsletter showing that BB-rated bonds now have a real yield of nearly 9 per cent, higher than the yield in 1990, ahead of the early 1990s recession. This rise has taken place at a time when the economy is still expanding, whereas in 1990 there was clear evidence of a slowdown. If there is a slowdown coming and companies find it harder to finance their debt, then expect the yields to rise further.

Bond markets are quite important in funding US companies, accounting for a quarter of funds raised during the third quarter of last year. The fact that this sort of funding has become more expensive shows that investors are becoming concerned about corporate credit risk.

The other bit of information comes from Merrill Lynch's latest survey of fund managers. I hadn't realised the extent to which their level of optimism about the world economy had fallen in recent months. The graph shows this, advanced six months and plotted against world industrial production. It makes, as you can see, a neat little fit. Were the relationship to continue the peak in global growth will be this summer and next year will be pretty glum. Asked when they thought global growth would peak, the average result from the fund managers was September, so that fits too.

One should not take the views of fund managers that seriously. There is quite a lot of evidence that the peak in global growth is already past: it may well have taken place in the first quarter of this year. But the change in views - the shift from optimism to pessimism - has been disturbingly swift, with US fund managers particularly bearish. While managers in other countries see falls in tech stocks as an opportunity to buy, in the US they are becoming bears of tech funds for the first time. If this last point is right, then the tech troubles will run on awhile.

Let's assume, then, that this shift from optimism to pessimism will carry on down as suggested by the graph. What will be the regional breakdown of the period of slower growth? In 1998 virtually all the bad news was concentrated within the third time zone - in the emerging economies of East Asia, and in Japan. The rest of the world was untouched.

The US fund managers are mostly concerned about rising inflation and are raising cash, which does not of itself make a hard landing certain, but in view of the way the wealth effect is sustaining the US, it does add to worries. In the UK the big switch is to defensive stocks, while on the Continent strong growth is expected for this year, but maybe much slower next. And in Japan managers are bulls of the economy and bears of stocks.

Um. There seems to me that there are three things to watch in the months ahead. The first is whether the tech stock collapse damages the ability of big established global hi-tech firms to raise money. The second is whether the US credit crunch gets out of control. And the third is what happens to the dollar.

The first must be a worry. European capital markets in particular have not fully taken on board the cost of buying the mobile licences. In one sense this is just a switch of private funds to the public sector, with the money moving from one pocket to another. But if the credit ratings of the bidding hi-tech firms softens in any marked way, then - well, it would be a worry.

No one in the US expects the credit crunch to get out of control, such is the level of confidence in Alan Greenspan, chairman of the US Federal Reserve. But there are cracks. Two years ago he was king. Now there are mumblings that the Fed should have leant against growth earlier; the later the squeeze, the more difficult it is to control it.

And the thing that could unsettle the Fed would be any rise in inflation from a weaker dollar. The dollar at some stage is going to weaken: it is not reasonable to expect the euro to head on downwards for ever. Managing that decline is again going to be difficult. Not impossible, just difficult.