Bull or Bear
Nicholas Davenport
This is the season of the year when there is a lot of to-ing and fro-ing in the financial world with very little to notch up at end of it — except, of course, in the security markets which I will discuss in a moment. This week Mr Barber, accompanied by the Governor of the Bank, attends the meetings of the Finance Ministers of the enlarged EEC in Rome and on the 25th they fly off to Washington for the annual meeting of the IMF. The latter is bound to be a big waste of time and money.
The report of the IMF published on Monday is the dreary economic symposium one would expect from an international body of financial experts. It points out that inflation in Europe and Japan is much higher than in the United States and by calling attention to the fact that an increasing number of countries in the past year have supplemented their fiscal and monetary policies by adopting a national incomes policy it implies that Britain should do the same. It does not refer specifically to the floating of the £; indeed, it pretends that the exchange rates fixed in the Smithsonian Agreement are adequate to restore world payments to an equilibrium provided they are not upset by " inappropriate national policies." These platitudes are harmless enough but unfortunately it is not content to let them lie; it goes on to make a concrete suggestion — that the United States should adopt a tighter monetary policy, raise the shortterm interest rate and encourage the speculative capital flow to return to New York. I find this recourse to outdated Monetary techniques both absurd and depressing.
The IMF must wake up to the fact that the international monetary system which it is supposed to manage has broken down for good and that the world is trying to bring a new common sense into its trading relationships. It does not appear willing to admit that the old IMF rules for the correction of surpluses and deficits in international trade never worked and will have to be replaced for a time by more direct action, such as import quotas and bilateral agreements until the new GATT discussions take place in 1973. Neither Europe nor America will be content to allow the Japanese to flood their markets With manufactures which are much Cheaper than their own because the Jap
panese are a neurotic race producing workers capable of mad exertions. Talks are going on with the Japanese here and in America in an endeavour to make them see that they must curb their exports. Whether the Japanese can be persuaded to imitate the British habit of paying workers more to produce less is very doubtful but the point is that the old IMF system under which countries were supposed to correct their surpluses or deficits is finished. Both the United States and the enlarged EEC are likely for the time being to have recourse to protective measures.
The IMF conservatives might also begin to realise that dearer money anywhere makes the inflationary pressures worse, not better. Does it imagine that dearer money in America will have no effect over here? The short-term rates in our giltedged market have already been driven up to over 7 per cent flat and nearly 9 per cent to gross redemption. Treasury bill rate last week rose sharply to 6.3 per cent—exceeding Bank rate for the second time in three months. What is the result? The building societies have had to put up the rates to attract new money to 51 per cent free of tax and so they have had to raise their mortgage rates by 4 per cent to 84 per cent. And what is the result of that? Wage and salary claims will have to be raised to meet the extra cost of house mortgages. Dearer money always adds to the inflationary pressures. It is perverse that the Bank of England should call in its new Bulletin for a halt to the expansionary fiscal and monetary policies of the Government seeing that it allowed an excessive pouring out of bank money for speculative property and share speculation, which added to the inflation. It should have rationed and directed the flow, so that the loan rates could have been lowered for the industrial borrower' who is anxious to expand and improve iis productivity.
The meeting of the Finance Ministers of the enlarged EEC this week in Rome is im
mediately more important than that of the IMF. If they are going to discuss economici and monetary union they might well con-. sider setting up a Central European clearing bank on the lines originally proposed by Keynes at Bretton Woods for the whole world, which the Americans rejected. In that event the sterling balances could be taken over, a lower rate of interest fo0 Europe could be operated and an expan.-1 sionary economic policy followed. This would leave the United States out in the cold but they are well able to look after themselves. As Mr Barber put out a con1-1, munique after his private meeting with Herr Helmut Schmidt on September
saying that both governments supporte/ the creation of a new European Fund Monetary Co-operation, my suggestion.i-isl by no means irrelevant. od
Finally I come to the important questibh of the security markets. In the to-ing arid fro-ing which is going on in the financial world the most important event is the return to work after their expenarlj holidays abroad of the boards of directprs of the great investment institutions — the life and pension funds. Last year these gentlemen disposed of £1,038 million ne* money for the insurance companies antt.4 £443 million for the private pension funds — a total of £1,481 million which this year will probably swell to over £1,700 millio41 or close on £33 million a week. When thei, scan the cautionary Bank of England new Bulletin, the report of our new rulers, the TUC Congress, which repudiated wage restraint, the IMF report which warned' against world inflation, they will not like what they read. They will probably feel ex-' tremely nervous, if not bearish. And when they look at the security charts they will also not like what they see. The FT '30' chart seems to point to a "double top" with the current index falling down through the line of ascent. You may still call this a secondary reaction in a longterm bull market. So it may be, for the economy is definitely turning upwards and its growth is only impeded by strikes and hold-ups and bad industrial relations. But after a rise of close on 80 per cent — from 305 in March 1971 to 543 in May 1972 — the bull market could lose a third of its advance which would bring the FT '30' index back to 464. The optimists can, however, advance two counter points. First, the fall has come on a comparatively small volume of selling. There has been no climacteric flood of selling which usually marks the end of a great bull market. Second, while the boom may be lop-sided — consumer spending not being balanced by investment expenditures except in private housing -the economy is definitely moving up. So it is not exactly a fit economic time to plunge into a bear market. But be prepared for a prolonged correction.
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