FINANCE AND INVESTMENT
By CUSTOS THE private investor would do well to stay out of the stock market for the time being while the professional gentlemen make up their minds about the future. In Wall Street they are busy discounting a trade recession next year. At the moment of writing railroad stocks have fallen by nearly 20 per cent., industrials by 13 per cent. and utilities by about 10 per cent. from their high levels this year. This is so far quite mild, for industrial stocks eventually fell by nearly 20 per cent. and railroads by over 30 per cent. when Wall Street began dis- counting a recession in the summer of 1946. There is at present no cloud in the American business scene to indicate a gathering storm. The boom is in full swing; production and employment have never been so high. But the market has a hunch that 1954 will see a set-back. It is not based on disarmament. It is generally thought that defence and foreign aid will take $50 billions (which is over 60 per cent. of their budget) for some years to come. But they are afraid that housing will slacken off now that the shortage is ended, that industrial capital spending will decline from its present peak, that consumer expenditure on durable goods will fall because consumer indebtedness is dangerously high and that business men generally will begin to reduce inventories. This is broadly how all trade recessions start in the United States and the market hunch may be right about 1954. But I would not expect a major slump—unless the American Treasury is foolish enough to make money dearer and tighter. (It has made money dearer but it has already reversed its credit squeeze.) Apart from the limited farm-support programme there is nothing fundamentally unsound in the American economy. It will continue to be supported by a high level of Government expenditure, by a high rate of industrial investment to keep pace with technical invention and by a steady population increase (now 2,700,000 a year). Some recession there may well be but there are no grounds at present for expecting more than a moderate one And for wha4 it is worth, the President has promised to do what he can to offset it, having called on his economic advisers to have an anti-recession plan ready by the autumn.
Wall Street and London From this brief survey I conclude that Wall Street is going to fall further but not catastrophically. As a guess I would say that perhaps two-thirds of the 1953 fall has already been seen. Stocks were not dangerously inflated before the decline set in. In May, 1946, when the first post-war bull market started to crack, industrial stocks in Wall Street were selling on the average at 23 times their current rate of annual net earnings. At the end of last month they were selling at only 9 times and railroads at only 51 times their annual net earnings. This would already make them cheap if earnings were not likely to fall. But the expected fall in net earnings is going to be moderated by the elimination of the Excess Profits Tax which expires at the end of this year. An American company paying out 70 per cent. in corporate income tax and excess profits tax could sustain a 371 per cent. drop- in pre-tax earnings without showing a change in net income— with E.P.T. eliminated. And corporate income tax is scheduled to be reduced from 52 per cent. to 47 per cent. next April. I would therefore be surprised to see Wall Street stocks fall by more than another 10 per cent. to 15 per cent. This is enough, of course, to call a halt to the boomlet in British industrial equities on the London stock exchange. Indeed, those who study the charts and point to the fall in industrial shares at the beginning of this week (they have made a "double top" this year and failed to break through their peaks) while gilt-edged stocks and foreign bonds have been rising, are convinced that Throgmorton Street will follow Wall Street. The start of the new account on Wednesday showed, however, that there is still speculative support for our "special situations."
Gestetner, Ltd.
To what extent a recession in the United States will affect our own export trade remains to be seen. It would be foolish to guess at this stage. But we must not forget that some of our exporters who know their markets have become extremely com- petitive. Take Gestetner, for example. The majority of duplicators:exported from this country are manufactured by Gestetners and their lead was increased in the year to August, 1953. Although total exports were down they actually pushed ahead in the United States and Canada. They recently developed a new range of duplicators and a new "photoscope" process of reproduction at competitive prices. When I spoke to the chairman, Mr. Sigmund Gestetner, this week, he seemed very confident and unafraid of any American recession. What a wonder- ful investment his shares have been! He has just stepped up the dividend from 15 per cent, to 20 per cent, and is giving a free 20 per cent. capital bonus in A shares. At 18s. 3d (cum dividend and bonus) the 5s. shares yield about 51 per cent. There may be opportunities for buying the shares more cheaply later on this year but good invest- ments are rarely to be had on bargain basement terms.
Gold Shares and the I.M.F.
Gold shares have been pathetically de- pressed and friendless .this week. Indeed, the index of gold share prices has never been so low since 1931. The story of this debacle is too long to tell here, but I have been wondering whether the dreary meeting of the Governors of the International Monetary Fund did not drive the last bull of Kaffirs into suicide or liquidation. There had been curious rumours in New York before the Governors met that the American Govern- ment might be considering a stabilisation loan of $2 or $3 billions to underpin sterling convertibility and that the £ would then be freed to find its own level in a fluctuating exchange market. But no decisions of any importance were taken last week. Mr. R. Maudling, M.P., our British Governor, said grandly that the time was ripe for a concerted move towards a freer trade and payments system, adding that " we cannot stand still indefinitely," but the Deputy Secretary of the U.S. Treasury, Mr. Randolph Burgess, replied that his Govern- ment could decide nothing before next March when the Committee examining their foreign economic policy would report. To the usual South African appeal for a higher dollar price of gold Mr. Burgess trotted out the conventional American objection that it would be inflationary and upsetting to his Government's views of sound money. This is all very depressing for holders of gold shares but it is not to be expected that a banker of Mr. Burgess' type, academic and rigid, would change his mind in a hurry. Besides, it will be his chief, Mr. George Humphrey, the Secretary of the U.S. Treasury, who will decide and he is said to have a more flexible mind. The facts which the expert Committees must bring home to Mr. Humphrey and Mr. Burgess next March are that if the American Government wants to see the £ convertible into dollars, as ex-Ambassador Douglas urges, but does not want to back it by a huge stabilisation loan, then they must agree to a writing up of the dollar price of gold. Otherwise the gold reserves of the International Monetary Fund, and of Great Britain and other countries making their currencies con- vertible, would be hopelessly inadequate for meeting the ups and downs of Inter- national trade caused by American recessions. There is really no other way out, it is either a stabilisation loan or a higher gold price. To avoid internal inflation following upon a writing up of the dollar price of gold the U.S. Treasury has only to sterilise the "profit" on its gold stocks by placing it a special Treasury account, as was done in 1934 when gold was written up from $20.67 to $35 per ounce. Is Mr. Burgess too old to learn?
World Bank By contrast with the I.M.F. the annual meeting of the World Bank (International Bank for Reconstruction and Development) was a cheerful occasion. It must be admitted that when it comes to lending money to foreign Governments and public boards for works of national importance this international bank is a far better instrument than private banks. It is so much better organised for conducting investigations and securing agreements at high level. Consider its good work last year. It financed iron, steel and power projects in India, a fertiliser plant in Iceland, wood products in Finland, agriculture in Peru, transport in Colombia, Northern Rhodesia and Brazil, agriculture and basic industries in Australia and pro- jects in Yugoslavia to improve Tito's balance of payments. Missions have been sent...to British Guiana, India and South Africa which will be borrowers this year. Up to date the Bank has lent $1,591 millions in 29 countries. Its total subscribed capital is $9 billions and it will be floating new issues this year. It is doing its bit to help the free world answer communism with prosperity. If any cynical , reader remains unimpressed, let him buy the 31 per cent. dollar bonds (due 1971) of the World Bank which are quoted in New York at 99 or in London at 1861. As a funk hole for those who do not believe in sterling or the survival of the sterling area, these bonds are heaven-sent.
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