In the City
Bluff or no?
Nicholas Davenport
The Blackpool drama passed without convulsing the City. Naturally they did not like what they heard and saw on the box but the conviction is growing that there will be an election just before or after the spring budget — depending on whether the budget is reflationary or deflationary — and that in the meantime it is good to have a Labour Godfather to deal with an awkward trade union Mafia. This is the sort of talk you hear in the City bars but this week I want to look behind the talk and examine the trading conditions of the two main markets — giltedged and equity shares.
The first fact to emerge is that the volume of trading has been drying up. This suggests that the City is perplexed by the turn of political events and does not yet know which way to make up its mind. While the Old Boys Brigade — the directors of the great life and pension funds — decide the tone of the equity market they often like to take their cue from the gilt-edged market which is largely moved by mathematicians (namely the actuaries and economists employed by the big brokers) — whose monetary calculations they rarely under stand except when they add up to a change in Bank rate. These experts have lately become highly cynical of the gilt-edged market. The reason is obvious. They think the Prime Minister and the Chancellor of the Exchequer are bluffing on monetarism and they are not prepared to take their monetarist threats seriously.
Both the Prime Minister and the Chancellor have warned us that if the 5 per cent pay guide line is broken they will resort to fiscal and monetarist measures to curb the resulting inflation. Now this is easier said than done. When Mr Healey intended to raise the employers' national insurance levy by 2i per cent the Liberals through their 'pact' got him to reduce it to 1i per cent. Would the Commons not act in the same way? As for monetarist measures, Mr Healey could sharpen up the money supply target, raise Bank rate and make the banks' 'corset' tighter, but this would be hardly logical seeing that the money supply at present is growing at less than the current target rate (now 8-12 per cent). Besides, Bank rate is already too high at 10 per cent and is adding to inflationary costs. Shortterm interest rates are presently high enough to keep domestic credit under control. I cannot believe that a Labour government would imitate the knock-out deflationary monetary policy of the late Selwyn Lloyd who brought industrial investment to a standstill.
Yet this is what the prime minister threatened in his conference speech when he said that they would tighten up the money supply until it hurt. 'That', he said, 'would have an impact on companies liquidity. . . and on the wages they can pay. . . and on the number of employees they can take on'. Professor Friedman, not to mention Sir Keith Joseph, must have been proud of their authoritarian pupil. It remains to be seen whether Mr Callaghan is bluffing. His speech seemed to be unreal — as unreal as Mr Moss Evans who reminded me of a ventriloquist's doll in speech and manner — but the sight of a Labour prime minister who clearly feels inflation is an evil, is a phenomenon as rarely seen as a ghost.
Technically the gilt-edged market is therefore in a state of suspended animation.
At the long end there are one or two stocks which are offering redemption yields of 13 per cent and at the short end, where they worry about the rise in American interest rates, there are yields rising close to 12 per cent. In normal circumstances all this would be regarded as a wonderful buying opportunity. To finance the borrowing require ment without re-fuelling inflation the sales of gilt-edged stocks to the non-bank public need to be about £600 million gross per month and although the monthly totals of sales this financial year have been erratic they seem to be working out at about the average. In the meantime public spending has been running slightly below the budget estimate, the local authorities being mainly responsible. So there is no reason for the gilt-edged market to get worried on monetary grounds. But it will continue to remain in suspended animation until the question of the official bluff is cleared up. The bull market in equities has now reached a point which could indicate either a red light for danger or a yellow light for change. The professionals who study charts have become bearish. Those who follow the coppock system are actually proclaiming 'Sell'. The FT chart from the low point at the beginning of 1975 shows a sharply converging fine for the tops and bottoms, which means that the FT index will soon have to break out of its narrow trading range around 500 with a final burst upward or a new burst downward. With the political situation as critical as it is no one expects a burst upward because no one can see an early defeat of the strong-arm unions, or an early end to the British 'disease'. Most professionals fear a burst downward if the confrontation with the union bosses over the 5 per cent pay guide line becomes critical for the economy.
Our equity share market is not historically dear, having an average dividend yield of 5.3 per cent and a price-earnings ratio of 8.8 per cent, but having failed to break through its previous index top of 549 (September 1977) the bull market begins to look tired and might well collapse for the time being. But I don't believe that the col lapse would go very far because most investors in the City feel that rising unemployment makes the average working man more conservative even if it makes some trade union leaders more stupid. It is notable that market fears of a communist take-over of the Labour Party have been lessened by the prime minister's firm stand against the TUC, on wage-cost inflation. If plain Mr Callaghan can realise that without productivity increases a 10 per cent annual rise in wages means that the real value of cash in your pocket will be halved in seven years there is hope that simple mathematics will begin to tell on the shopfloor.
A final note on the productivity deals which may lead to a wayout of the con frontation between government and TUC.
In most cases a productivity increase depends upon a reduction in the manning of machines and in many cases where a productivity deal has been agreed on these lines the management and the unions have settled on a 50/50 split in the resulting higher profits. But that still means a rise, if a smaller one, in wage-cost inflation. Which can only be avoided if the 50/50 split can take the form of worker participation in dividend-paying equity shares.
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