In the City
Difficult days
Tony Rudd
Times are not easy for anybody in the City these days. It would be wrong to say that people are actually in distress yet but signs of strain are visible. Talking the other day to an acquaintance in one of the City wine merchants, it was evident that those responsible for buying the booze for luncheon tables are definitely taking a modest view of their present requirements. Most have apparently stopped buying altogether. Some have even been sellers. However, anybody who thinks that they are shortly going to be able to pick up at auctions the kind of bargain which became available in 1974 and 1975 are going to be disappointed. What happened then was that the trade itself had got wildly overstocked, having bought, for instance, copious amounts of the rather expensive 1972 vintage in the expectation of boom times continuing. When the big breweries themselves had to offload there was practically no floor to the price. Now the trade has its position well in hand. All that will be offered at the auctions will be the small surplus that cannot have been re-bought by the merchants themselves (who with interest rates at their present levels have a very definite limit to what they can buy).
All of this reflects the simple fact that the City thrives on making money and wilts when it doesn't do so. This summer is turning into one of those periods when it doesn't do so. The volume of business in the stock markets is not particularly good nor is the apparent direction of markets particu larly encouraging. We've had the classic syndrome of a springtime peak in the market into which everybody who didn't do so regrets not having sold. And in the meanwhile interest rates have not performed as they were meant to, namely by sliding down the hill into a winter low.
What makes the outlook particularly difficult is the uncertainty. For instance, nobody seems to have any very clear idea of the true position of the money supply. Time was, a couple of years ago, when each month's figures on the money supply were eagerly snapped up by the leading analysts and examined for their portents, with reams of circulars being issued to operators in the gilt-edged market. There's no real point in any of that happening at the moment because the error in any estimate now could be plus or minus £2 or even £3 billion. Until the huge hold-up in tax-gathering caused by me civil servants' strike has been unravelled the position will not come clear. What is interesting to note in the meanwhile is the apparent unconcern at the loss of these formerly vital monthly signposts. Perhaps the majority of analysts have come to the conclusion that the signposts were no use anyway in telling them where they were in the real world. Or is it just that with no real figures to analyse, they can get home on an earlier train these fine summer evenings?
In fact there may be more to it than this. It could be that even if the monetary figures were coming out as before, and there hadn't been a civil servants' strike to distort the whole thing, analysts would still be attaching much less importance to them than they used to. For as this Government's apparent hold on economic events has weakened during the past year so has the conviction that its monetarist policy is really relevant. Perhaps this is unfair, but certainly — judging by what the financial journalists write about — attention seems to have switched from monetary events to output and employment and particularly the latter.
In the meanwhile the authorities here have taken a further step towards dismantling interest rate policy. Instead of trying to determine the level of the money supply and the state of markets by manipulating interest rates, which ultimately called for the use of Bank Rate, the process has been reversed. The idea now is that the authorities will try to influence the volume of money more directly (though not as yet by establishing exact lending ratios for the banks) and that interest rates will become, as it were, a residual item which will move in response to the market conditions that result from the official efforts. What we pay for money therefore will be the result of other events combining rather than the other way round.
It is freely admitted that leaving interest rates to market forces, as this policy is called, will produce a more volatile situation than was previously the case. Interest rates will shoot about the place even more than they have. The experience of American markets, where the movements have been frighteningly violent, gives us some clue as to what we can expect. And this forthcoming development is viewed with favour in some quarters. We'll have to see how they like it after a year or so's experience. In America it has led to the market in interest rate futures becoming the most rewarding for entrepreneurs who can stand the risk-taking. It's always the case with markets that when new and more extreme risks are created either by natural causes or by official policy markets immediately grow up in which these risks can be 'laid off. In a sense this is very healthy because the kind of volatility which we have already seen in New York and are now likely to see in London will wipe quite a few operators off the map unless they can hedge these enormous risks effectively.
It's all grist for the mill so far as the new risk-takers are concerned. But one wonders whether it's all that good for the basic business at the bottom of the pyramid. Solomon Brothers of New York, the world's largest bond dealers and the house whose opinions are listened to with the greatest respect both in New York and London, have just agreed to sell out to a larger company. One of the reasons that they have given as being behind the decision is their concern at the viability of the bond market in America in the long term. When people like that begin to have doubts, it's time for us all to take stock and ask whether in fact the whole thing is moving in the right direction.
Previous page
