A fool and his money
Tax accountant on record
Not so long ago, in January of this year to be precise, the pundits were saying that equities offered no hedge against inflation. That was when the FT Index sagged to 150 and blue chips were being given away like trading stamps.
There would be no recovery, said the experts, because the myth of the equity had finally been exploded. For years yields had been ridiculously low, and companies, even those showing good profit figures, were disinclined to increase dividends.
Theoretically, the ploughing back of profits should improve a company's future profitability and therefore the market value of its shares, but if company policy decrees that profits are to be ploughed back indefinitely, with no hope of higher dividends, then the shares provide no hedge against inflation and are certain to fall in value as retail prices rise.
Well, we have now moved into a period of hyperinflation and, miraculously, equities are recovering. The pundits have changed their tune and are now chanting that equities are the only reliable hedge.
Baffled, I consulted my accountant.
"Have share values improved because interest rates are coming down?" I asked.
"Partly," he said. "But the revised interest in equities is chiefly due to popular distrust of all other forms of investment."
"And this has happened in less than four months?" I said. "The same shares that were a drug on the market in January have doubled in value and are now very much in demand. Does this mean that investors have lost interest in Krugerrands, silver, works of art, stamps, commodities, first editions and so on?"
"Not at all," he said. "It's just that there arean't enough of such tangible investments to blot up the amount of money available. If the worst comes to the worst and inflation gets completely out of hand, as it did in Germany more than fifty years ago, money will be useless whatever the rate of interest. The safest investment then Will be in land, bricks and mortar, plant and machinery. In other words, in equities."
"I don't follow you," I said. "If there's financial chaos we're almost certain to have a political revolu: tion and a move to the left. That will mean wholesale nationalisation and the liquidation of inves-: tors, who'll be compensated for: their shares in useless money. Nor
much of a hedge against inflation there, eh?"
"You're looking on the black side," he said. "Some of us believe that hyperinflation and financial chaos will mean a turn to the right politically. A move towards a really tough, totalitarian right. And this new government would seek to rescue the economy by succouring industry. There'd probably be cuts in corporation tax and cuts in taxation of unearned income. So equities could be a lifebelt."
"But if money is worthless what's the point of retaining a little more of one's unearned income?" I said.
"Ah, but by this time we shall have a new currency. The pound will be written off and we'll have a new monetary unit backed by the National Enterprise Board, by industry. By equities."
"You seem to be taking an awful lot for granted," I said.
"We have to emerge from hyperinflation some time," he said. "We can't go on as we are, and whatever happens there's bound to be a future for industry."
"Provided it's not all nationa, lised."
"That's a risk the investor has to take. But I can't see any government nationalising the multinationals, and a very large part of industry is now multinational in character."
"D'you mean that we couldn't nationalise North Sea oil, Ford, Chrysler, Heinz and so on?" I said.
"Not without risking war with America. Remember Chile."
"But there was no war between Chile and America," I said.
"No, but the Chileans got rid of their government and toed the line."
"But we're a member of the EEC," I said, "and I can't see the USA wanting to take on all ten countries of the Common Market."
"Perhaps not, but we may not be in the Market by 1976," he said.
"Then surely, there's every reason for voting 'yes,' in the referendum?"
He was silent for a full twenty seconds.
"Let's get back to your personal problems," he said. "Are you seeking my advice about the Common Market or your investments? I've got your portfolio here and it seems to me that you've got a reasonable spread. £250 with the Halifax Building Society, silver candlesticks" valued at £8.50, one Krugerrand, 4,500 Green Shield stamps, Co-op dividend estimated at £9.70, ten Premium Bond certificates, £5 in old pence and ha'pence, 50 ICI ordinaries, 32 Rio Tinto Zinc, 72 Rugby Portland Cement, a painting in the style of Picasso, five complete sets of cigarette cards including 'Famous British Railway Engines' and a house (valued at £18,000) which is 75 per cent mortgaged. I take it that you want my advice about the equities?"
"Well, yes," I said.
"May I remind you that you owe me £75 for three years' professional service?" he said.
"You'll get your money," I said. "If you remember, you advised me to delay settlements for as long as possible. The longer the delay, you said, the lighter the burden. Pay up in depreciated currency, you said. Do you deny that?"
"No but tax accountants aren't ordinary creditors."
"So what do I do? I can't touch the building society deposit: that's earmarked for mortgage repayment. And you won't accept the Picasso, so ..."
"It isn't a Picasso." • "If you say so, but what about the equities? Do I hang on to them as a hedge against hyperinflation or what?"
"I strongly advise you," he said, "To sell the ICI ordinaries and settle your fee for accountancy. I have decided that my charges are to be index-linked."
"Retrospectively?" I said.
"Retrospectively," he said. Bernard Hollowood, formerly editor of Punch, writes this column weekly in The Spectator.