Investment Systems (I)
By NICHOLAS DAVENPORT
A PRETTY dismal tale you tell, writes a disgruntled investor, of the economic and financial policy of this Government, but how can I escape it? How can I get my private capital to grow if the Treasury puts a stop to economic growth for the nation whenever the balance of pay- ments runs into deficit? Is there any practical investment system
which can help me out of this quandary?
I do not believe that there is. There used to be in the old days—when L. L. B. Angas was expounding his cyclical investment policy. (See Investment, Macmillan, 1930.) Angas found that between 1801 and 1928 there were cyclical move- ments in security prices, affecting both bonds and equities, which averaged out at eight years from peak to peak or bottom to bottom. The peaks in the equity market. between the wars were in 1920, 1929 and 1937. In those days the monetary authority, which was the Bank of England, not the Treasury, used to raise Bank rate and cut down on bank credit whenever a trade boom began to get out of control. As Soon as the boom had been broken by these monetary measures Bank rate was lowered and later the base of bank credit was enlarged to speed recovery. Angas, having carefully studied this money cycle.
laid down the following investment rules. When trade begins to recover, he said, put the whole fund into equities. At the first warning signal of a rise in Bank rate, start to sell the shares which look dear. Go on selling as the boom gathers momentum. Before the boom bursts, sell every- thing and take refuge in cash, Treasuribills and local authority deposits. After the collapse, as Bank rate conies down, go first into short-dated government bonds and then, after a while, into medium-and long-dated bonds. Finally, re-enter the equity market when cheap money begins to stimulate industrial investment. Of course, Angas had a long and fairly easy cycle to play. The pre-war booms were hectic and the slumps were fierce. The potential rise or fall in equity shares was of the order of 50 per cent. In other words, the cyclical movement was big enough to make it worth while trying to get in at the bottom and out at the top.
Today this cyclical investment policy does not apply because the money cycles are quite dif- ferent. As the Chancellor of the Exchequer told the Institute of Directors at their annual con- ference in 1958: 'If there is still a cycle in business affairs it is very different from what it used to be. The alternatives then were boom and slump. Nowadays we are either expanding or checking expansion to avoid inflation and that is a very different story.' This is because every
government of the Western capitalist camp has undertaken to pursue an economic policy of 'full employment' and expansion, although 'full employment' is interpreted differently in different countries. No government, of course, has solved the problem of how to combine a full employ- ment policy with price stability. Political pres- sures from the electorate and economic com- petition from the Communist bloc force govern- ments to pursue these expansionist policies whether they believe them to be sound or not. Lord Amory, when he was Chancellor, frankly admitted a trend towards inflation because, he said, 'under our system of free industrial and collective bargaining, there is a tendency for average wages to rise faster than productivity per head.' This leads to an increase in the unit cost of production and in turn pushes up prices. When this happens or seems likely to happen, as it does today, the Government takes deflationary monetary action, which again puts up industrial costs by reducing the volume of output.
So, while the new economic policies of 'full employment' may have flattened out the deep trade cycles Angas exploited, they have set up a • new cyclical movement in the business world, depending on the alternation of government monetary measures of restraint and relaxation. These shortened business cycles seemed soon after the war to be settling down at half the duration of the pre-war cycles, that is, they appeared to be moving two years up and two years down, with a tendency of equity share prices in the cyclical trades to rise 50 per cent. and fall 335 per cent. But on this last cyclical occasion the Government applied monetary measures of restraint after only one year of recovery (from mid-1958 to mid-1959). This suggests that the monetary policy it is pursuing is becoming less and less effective. Certainly the annual or biennial wage round pursues its merry course regardless of the Treasury's doctrinaire manipulation of the rate of interest.
The investor will conclude that anything like Angas's old cyclical investment policy is in- applicable today. The conventional switching from equities to gilt-edged and back again is now right out of the question. In Angas's day the investor had to watch only the Governor of the Bank whose actions, being non-political, were predictable. Today he has to watch the Treasury whose political boss, being frequently changed, is as unpredictable as the weather. Not only that, the political control of money puts the gilt-edged market at the mercy of the monetary cranks in power. I know no investment system which could have guided the investor safely through that political labyrinth.
Gilt-edged stocks must now be left to the professional money managers: they have become short-term investments—even the 'longs.' Further, when there is a call to sell equities there is no reason nowadays to switch into gilt-edged. Liquidity can be provided by a deposit with a local authority at seven days' call or at one, three or six months' call as you prefer. (At the moment of writing the 'call' rate is over 5 per cent., for the local authorities themselves have been victims of Tory dear-money-mindedness.) I would only insist that the deposits be restricted to local authorities for safety's sake.
(To be concluded)
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