The great bear squeeze
Nicholas Davenport
Shares booming, gilt-edged strong — has the market gone mad? As I write, the FT 'thirty' index has touched 226 which is an advance of 54 per cent above its low of 146 on January 6. A stranger in the public gallery of the Stock Exchange, watching and hearing the hubbub, might have thought that the Chancellor of the Exchequer had dropped dead and that the socialist government had resigned. But at this very moment Mr Healey is stoutly defending in the House of Commons a Finance Bill whose Proposed Capital Transfer Tax would destroy all the attraction and incentives of private enterprise in this country and, effect a greater confiscation of private property than Cromwell achieved when he seized the royalist estates or Henry VIII when he despoiled the monasteries.
The fact that Mr Healey has promised under the lash of public Protest to ameliorate the crr clauses of his Finance Bill could hardly have been responsible for the market boom; we have not yet seen what his amendments will amount to. So it appears that the boom rests entirely on a bear squeeze based on the belief (which may be false) that the Chancellor has decided to get tough with the unions, enforce a more rigid interPretation of the "social contract" and counter excessive wage pressures by higher taxation. Yet his Performance on Panorama was distinctly equivocal and unimPressive. He refused to be drawn into any expression of toughness towards the unions; he merely admitted that the 25 per cent breakages of the social contract Which had occurred were too many. And he suggested that if the economic crisis deepened to the Point of disaster, that is, if foreigners were to refuse sterling or give us credit, he would have to impose measures which would save the whole nation and not just the trade unions. How merciful! Can he save the nation from disaster if he goes ahead with his wealth-confiscatory measures and the pilfering of profits accruing to oil companies in the North Sea? All this, is calculated to bring about the disaster we all fear — that foreigners will refuse finally to accept sterling at anything like its present depreciated value or give us credit to meet our huge debts overseas. At the
leaders all is well because the Arab I aders are friendly and the dollar weak.
Before I resume my analysis of the market behaviour it is perhaps worthwhile to recapitulate the wealth confiscatory measures of the CTT which would destroy the private sector and drive the whole economy more sharply into the decline of an off-shore island which the Little Englanders desire. Mr Patrick Hutber in the Sunday Telegraph cleverly enlisted the help of a lawyer and accountant to give some horrific examples. Case 1 — a man builds up a private business worth £100,000 which on retirement he wants to 'leave to his son.. The wretched man would have to pay at least £61,875 in CTT not to mention capital gains tax; also the CTT is "grossed up" and added to the value for it is presumed to be ,part of the gift. One presumes that the father does a bunk like John Stonehouse . . . Case 2 — a hardworking farmer wants to leave a farm worth £250,000 to his son. He would have to pay £84,750 in CTT. How? Presumably by slaughtering all the livestock and selling the machinery, so that the son goes mad. Case 3 — a man leaves private woodlands which take a generation qr two to mature. By the time they mature for, say, his grandson the taxes paid will 'probably have 'exceeded the value of the trees. All the capital sums so confiscated would go down the drains of the welfare state. There is no guarantee they would go into new investment. All this is calculated to destroy the private enterprise system of the private sector.
Some weeks go I said that a market recovery was due because Mr Healey had come to the rescue of cash-starved ■companies in his budget. But! doubt whether he will succeed in reducing the rate of inflation. According to the Department of Employment basic weekly wage rates rose last year by 281/2 per cent while retail prices rose by 19 per cent. So, in spite of the 'social contract' understanding that living standards should merely be maintained, the settlements made have actually allowed living standards to be raised: This was due, it is said, to the combination of the threshold agreements and "special settle
ments". ;The same conditions are to continue — in the view of all the trade union' leaders, which must mean that the inflation goes on. Sir Arthur Cockfield, chairman of. the
Price Commission, said that wage increases were now the only factor influencing rising prices. A man voting for a 25 per cent wage or
salary increase is voting for a 25 per cent increase in prices.
It seems doubtful if the market boom can be long sustained when there is no prospect of any up-turn in the economy thi: year. The latest Department of Trade survey indicates that investment in manufacturing industry will be from 7 per cent to 10 per cent lower in real terms than in 1974. There is also no sign of any recovery in house building. Private sector "starts" last year were only 110,000, half the 1973 total. There are brick stocks to build 40,000 houses but no builder wants to risk a start when costs are rising rapidly, profit margins falling and there is an over-load of partly completed high-priced houses of the order of £800 million. And a Bill for the nationalisation of development land is coming along to deter or prohibit private development.
The stock market boom seems, then, almost balmy but there are technical market conditions which made, as I have said, some recovery inevitable. Mr Healey had come to the rescue of the company world caught up in a liquidity crisis by his relief of tax on price-inflated stock in trade. Mr Crosland also came to the rescue of the property companies by unfreezing commercial rents. Here was good reason for the institutions to start buying shares and this they did in a market which was heavily over-sold. The jobbers were caught short and up went some prices as fast as they had come down.
In addition there is a fall in interest rates which is responsible. for a boom in the, gilt-edged market—and this always gives a lead to equity shares. Rates were first cut in America and then, after our "bank rate" had been reduced, now 1/2 per cent lower at 11 per cent, the clearing banks lower their base rates by V2 per cent to 111/2 /ler cent.' A firm of brokers has made an analysis of the flow of funds in the two sectors, private and public, and has shown that the banks have experienced a rise in their funds much earlier than usual — largely through the budget tax concessions. They suggest that the socalled "revenue season" will not impose its usual annual squeeze on the financial markets. In fact the corporate demand for loans' is low because of the slump while the personal 'sector has been repaying loans. So the banks, in fact, may have started the gilt-edged boom. Prices have risen, as 1 write, by around 10 per cent and some stocks by 11 per cent. After such a sharp rise the equity share market should cool off but I see no reason why government stocks should not hold firm. Money rates have changed even if Mr Healey has not.
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