MONEY Getting in at the bottom
NICHOLAS DAVENPORT
Stockbrokers develop instincts which are rarely to be found outside the animal kingdom. They may employ dozens of clever company analysts with fine mathematical or computerised brains but they would never think of acting on their meticulously argued recommendations to buy or sell; they just follow their own nose, that is, when they have got the smell of a market. I once knew an aristocratic stockbroker who could not even read a company analysis and when I asked him what investment principle he followed he replied : 'Follow the Jews—but make sure they're orthodox'. He had the right instinct and left a lot of money. I recall this incident because I met a member of the 'House' last week who objected to the title of my article 'The Coming Slump'. 'I am sure you are right', he said, 'but I have just gone into the market and helped myself to a few cheap shares.' Instinct again.
The market itself is often said to have a sixth sense. This, of course, is nonsense. The market is merely the end result of thousands of investment decisions which are being made every dealing hour of the day. The decisions of unimportant people do not count for their orders are very small, but when the manager of a huge life or pension fund or a director of a big merchant bank tells his stockbroker to buy or sell a £100,000 worth of shares the 'market' takes note. Brokers assume that some important people are 'in the know' or have access to in- formation denied to the small rrian. What is significant today is that in spite of the worst economic mess we have seen since the war 'important people' are in the market picking up shares from 'weak' sellers because they think that a fundamental national change has taken, or is taking, place. They have in mind the first signs of success in Mr Heath's de-escalation policy, which might be called the re-education of the trade unions.
It began badly with the Scamp inquiry in- to the local council workers but took better shape with the Wilberforce Court of Enquiry into the electrical power dispute. Positive success came with the collapse of the postal workers strike. Escalation has stopped : de- escalation is beginning to work. The Finan- cial Times conducts a monthly survey of business opinion and the last revealed that industrialists were securing lower wage set- tlements than they had been expecting. It may therefore be dawning on the less stupid trade union leaders first, that there is some connection between rising unemployment and rising wage claims, and second, that this Government is a different sort of govern- ment; it will actually stand firm against an unreasonable wage claim in the public sector and will actually allow companies to go bust in the private sector rather than come to their aid in accepting an inflationary wage packet. It was significant that the Rolls- Royce workers, threatened by the receivership, refused to come out on the political strike called last week. The next big test is the Ford Strike. The men have refused a 14 per cent offer and the management is not budging. They have advised the men that Ford will stop investing in Britain. If the car workers, who have been the pace setters in the inflationary wage race, are at last forced to learn their economic lessons, you will find every bear in the stock markets closing his position. But I would feel more confident if managements were also learning their sociology and technology lessons and realising that men cannot be treated like robots in the factories.
It's only the PM and Mr Feather putting their heads together
Now all this may sound reactionary stuff from the City but what would you do if you were running Great Britain Ltd? If you allow the trade unions to get away with wage rises of 20 per cent upwards you will price British goods out of the world markets and in ten years Great Britain will become a second class industrial power with a permanent unemployment army of over two million. Clearly this is not in the best in- terests of the working people. 01 course, if you are an anarchist you will enjoy the chaos and wait for the communist take-over but most of us object to this prospect and have no confidence in Messrs Jones and Scanlon and John Lennon and Yoko running the country better than Mr Heath. Indeed, most of us have got tired of being pushed around by the trade unions and are therefore sup- porting Mr Heath in what is admittedly a harsh policy. It is bad luck if the wrong peo- ple go bust; it is bad luck if the nice postmen get hammered. But what is the alternative? The descent of Great Britain to poverty and mediocrity.
What worries' me is first, whether the managements are up to Mr Heath's revolu- tion and second, whether Mr Heath himself knows when to stop the harshness and reflate. He is seeing the cat and TUC this week and obviously cannot anticipate the budget or agree here and now to what the National Institute of Economic and Social Research proposes as a first budgetary step, namely a reflation of £500 million. But he could have reduced Bank rate last Thursday without endangering his de-escalation policy. Yet, what does the Treasury do but issue another long-date 'tap' loan of £600 million 9 per cent stock 1992-96. This seems to me crazy—an encouragement to the 'hot money' merchants overseas to send their unwanted funds here to grab our over-high rates of interest, worsen our balance of payments and inflate our money supply. A reduction in Bank rate would stop this nonsense. Moreover, it, would start the move towards reducing costs and prices which is the ultimate end of Tory policy. Mr Heath must surely realise that he will not get the workers' co-operation unless he reflates to improve employment and makes a start on reducing prices.
The City is taking a risk in assuming that the success of the de-escalation policy has already been established. It would become inacceptable if wages went on escalating in the private sector while they were being de- escalated in the public sector. The Govern- ment might then be tempted to impose a price and wage freeze. We are not yet out of economic danger. We could even be on the point of a hold-up.
Mr Heath warned his party at their last Conference that the revolution he was attempting in the national way of life would not happen overnight; it would come by degrees. The City gentlemen with a nose for the market may be correct in sensing that this glorious revolution has begun. If so their bear closing will eventually be justified. Since 1951 there has never been a bear market which has lasted more than two years and seven months (1955 to 58 and a fall of 31 per cent). This one began on 16 January 1969, and has now lasted two years and two months. The Fr index has fallen by 40 per cent—from 522 to 305 on 2 March. Of course, the bear market could be prolonged if we run into worse industrial strife, but it may be true to say that it is bumping along its bottom. My own nose smells more trouble.
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