MONEY Gloom in the City
NICHOLAS DAVENPORT
The recession has now hit the City with a bang. With the turnover in equity shares down by 40 per cent or more many stockbrokers are failing to cover their ex- penses. And no wonder! New issue business is dead. For the first seven months of the year the Midland Bank report a drop of 50 per cent in the total—a sign that industry has sharply revised its investment intentions. Ordinary share issues suffered worst, being 70 per cent down. The business of the unit trusts is flat. The July figure for net new investment was the lowest of the year, namely £7 million. The business of the private client is as dead as the dodo. Institu- tional business has been going into the gilt- edged market—in millions—so that the only brokers who look happy are those specialis- ing in government bonds. These are the up- per class chaps who wear top hats. The mid- dle class broker might as well shut up shop and draw the dole—or try his luck on the tables at Deauville where I have lately seen some ex-ministers. Of course, it is August. - What, you may ask, is going to set Stock Exchange business alight again? The House of Commons does not resume till the end of October. Party conferences take place in September, which is usually a depressing fac- tor. One gloomy broker said to me this week : 'I wish they would have a general strike and get it over.' If they do I am afraid it will not be as peaceful or as short as the one in 1926.Niolence is the order of these depressing days. The only cheerful piece of news is that Wall Street has picked up and has decided that its recession is over. In the first half of the year output in the United States had declined—it was 2 per cent lower in the second quarter—but it is expected by most economists that growth will be resumed in the second half of the year. The American recession had no apparent effect upon Western Europe, where industrial pro- duction has been inchasing at the rate of 4 per cent, and it is possible that the influence of the United States on the export trade of the world will in future be less important than it has been, but the reassuring fact for the City is that the Wall Street index, after dipping to 631 in May, has recovered to 760. Even the bearish Mr Eliot Janeway has ad- mitted that while the market may come back to test the strength of its recovery, being over-bought at the moment, Wall Street may be working up for a boom in 1971.
In the meantime, Throgmorton Street is left in a very uncertain and perplexed mood. The Wall Street recovery and the Conservative victory helped the Financial Times index of industrial shares to move up from 315 in June to 342 this week but just when the market was bracing itself up for a further rise Mr Robert Carr, Minister for Employment and Productivity, came out with the alarmist statement that we were heading for economic disaster unless the wage-cost inflation could be quelled. Of course, he was talking his book, having an awkward confrontation on hand with the TUC, but he was followed up by one of the gloomiest forecasts ever made by the Na- tional Institute of Economic and Social Research. The Bulletin declared that there
had been a fall of 1 per cent in the volume of output in the first quarter of the year and that if the Government did not take im- mediate steps to reflate the economy there would be a further sharp rise in unemploy- ment. It expects the growth of total output between the second quarters of 1970 and 1971 to fall to 11 per cent against Mr Jenkins' growth estimate of 31- per cent. This is well below the growth rate of the 'produc- tive potential'.
Economic forecasting is always hazardous and I would not suggest that the Stock Ex- change pays great attention to the forecasts of the National Institute. It expects all economists to contradict one another and to mislead the public because they do not understand either the business or the political mind (Keynes was the sole ex- ception because he was instinctively a gambler). The National Institute has lately been sticking its neck out and making some mistakes. It admits on this occasion that it over-estimated the growth of total output in its May bulletin because of the unexpectedly large fall in investment. But it was right when the Treasury economists were wrong in allowing a very limited boost to the economy from the wage explosion. And it is surely right in arguing that monetary and fiscal measures can no longer control the rate of inflation—wages having risen this year at the rate of £500 million a year ex- tral—unless applied to a degree which would be politically and socially unac- ceptable. We are dealing, as I have said, with a state of mind and one half of the nation is in a bloody state of mind. The only way to mollify it, as I have suggested before, is to knock 9d off the income tax and reduce Bank rate. The psychological effect would be enormous.
Unfortunately this is not the kind of refla- tion which the National Institute is im- mediately recommending. 'Means are available of reflating,' it says, 'which have a direct restraining impact on the price level: cuts in rates of indirect tax would have such an effect'. But this would have the wrong psychological effect. It would be hailed as a victory for the wage grabbers and encourage a consumer spending spree. (The Institute already forecasts a rise of 24- per cent to 21 per cent in consumer expenditure.) While I agree that reflation is likely to moderate price increases through a rise in out- put (which spreads overheads and reduces unit costs) it is vitally important that it should be of the right type—the type which makes the worker feel happier and less bloody-minded, which gives him an incentive to work harder because tax will take less of his earnings and cheaper money will bring down rents and prices in the shops. To start by reducing indirect taxation, as the Institute suggest, would allow the bloody- minded to crow that they have won a victory over the bastards in the boardrooms and 'the pigs' in Whitehall. I am sending a copy of my six year old book The Split Society to the Institute so that they can learn more about industrial psychology.
To return to the sad subject of psychology in Throgmorton Street. With the economy stagnant, with our major engineering industry hit by strikes and watching foreign cars taking an increasing share of the home market, with few com- panies able to maintain their profit margins and with some appallingly bad company results emerging, the stock market can hardly make headway. In fact, without the recovery in Wall Street it would probably have lapsed into another bear market. Yet it is not over-priced on current earnings: price earnings ratios are reasonable. For the time being the gilt-edged market is, however, the only one which can offer 'some attraction. The reverse yield gap between long-dated gilt-edged stocks and the average equity earn- ings yield is still nearly 3 per cent. If the Government would only take sound advice and reduce Bank rate we could have a boom in the gilt-edged market paving the way in classical style for a boom in equities during 1971-72—if only the-Government can heal this split society.
At the moment of writing the split is widening. The cleverly organised strike action in key component firms, which can bring the whole motor industry to a stand- still, suggests that an undercover-subversive movement is going on with the aim of dis- rupting the whole British economy. Mr Vic Feather and Mr Heath should get together to see what official action can be taken to restore peace.
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