The Friday anti-climax
.Nicholas Davenport
The Wilson anti-inflation package did not set the Stock Exchange alight. In fact, it impressed the foreign holders of sterling more than the domestic holders of equity shares. This was to be expected. It was apparently the threat' ;b1 :,the Nigerian government to wiVfidtw from sterling which made' ' Mr Healey, which made Mr Wilson, introduce immediately the £6 limit on wage increases together with Penalties for 'rogue' employers and cash control of public spenders. If Nigeria had withdrawn, other oil producers would have followed and as sterling has notably Unproved, it is to be assumed that our oil creditors have been satisfied with the anti-inflation 'package. Not so our domestic 'rogue' employers — the guys Which Mr Wilson set up for his Left dissidents to shoot at. The £6 is, of course, a maximum but a £6 rise in wages would ruin quite a number of retail groups. Any sign of firm government is worth a point on the .FT index, as I have said, but it is not goirig to create a new equity share boom. We remain in what is called a "trading market".
The gilt-edged market was disappointed, wanting much firmer action, but is better placed for recovery. In the first place, there is Still a huge amount of institutional money waiting to be invested. The clearing banks are seeing their advances tumble as the trade recession deepens and are making use of the short end of the gilt-edged market for their idle money. The life funds and the pension funds, whose premium income piles up at the rate of £3,000 million a year (or about £2,300 million net) are not yet fully invested in their normal channels. They took over £1,000 million off "the street" at the beginning of the Year and invested it in equities, Which was the cause of the spectacular turn-round in the over-sold market, but their Stock Exchange investments are still below normal — I would guess by about £2,500 million — and are not likely to become normal until they see the economy restored to healthy growth without inflation. So I would expect that about £1,000 million of life and pension fund money is poised for interim investment in the gilt-edged market.
Gilt-edged could offer a boom in Which the public can participate With feelings of virtue and patrio tism. It is absolutely vital for the Government to sell gilt-edged stock to the non-banking public in order to kill the monetary inflation which otherwise would follow on the huge increase in the borrowing requirement — still officially estimated at around £10,000 million. Tiren'the' Prime Minister, who has made so many uncalled-for jibes about making money out of money in the City, would have to admit that the country welcomes and needs the honest saving public to invest and make money out of the gilt-edged market. So far the public has responded magnificently to the issues of stock which the Treasury has had to make. An unprecedented amount of stock was taken up in the first quarter of the year — £1,820 million — bringing the total sales to domestic investors for the financial year 1974/75 up to £2,250 million. As a result the M3 money supply has arisen comparatively slowly — at an annual rate of around 10 per cent. , It is amazing how quickly the recent -long" tap issues were absorbed by the non-banking public. £500 million of Treasury 1234 per cent 1995 stock issued at 881/2 on June 27 was taken up in three and a half days' trading! The like has never been seen before. It showed that when a yield of 141/2 per cent is offered on a "long" stock at the right psychological time — that is, when the government is actually taking steps to limit wage increases and bring down the rate of inflation — it is irresistable. A small businessman or shdpkeeper, Who is finding it hard to make ends meet, could sell out and live happily for the next twenty years on Treasury 123/4 per cent. Or switch into old "Dalton" at 17% and live for ever on the yield of 141/2 per cent.
The sustaining of a gilt-edged boom depends, of course, on two things — first, . on the general success of the government's antiinflation policy, on which it is too 'early to pass judgement, on the trend of interest rates being downward and not upward. I was shocked to read recently in the Economist, which unwisely favours a further depreciation in the sterling exchange rate to maintain the competitiveness of British export goods, this sentence: -If the authorities are fearful of a new run on the £ they should raise interest rates to a still more inviting level". This would, be suicidal. Dearer money adds to the inflation. It puts up rents and rates, it adds to the cost of carrying stocks, it puts up the cost of running everything — from running the nation down to running a small household or business. Everyone knows that industrial investment is still inhibited by the fact that the high cost of borrowing the money often exceeds the potential profit. To get the economy moving up again we must bring down the cost of money and if the foreigner wants a-higher-interest rate to Stay in sterling — which I do not believe, for what he really wants is greater security, that is, a stronger sterling — he must be given a specially higher rate in a two-tier system of interest rates which Keynes first suggested in the nineteen-thirties. , As regards the immediate trend for money rates, the gilt-edged market is in a fairly strong position. The slump in business has brought down money rates -on the street" to 81/2 per cent. Short-term rates abroad have fallen so far in the first half of the year as to allow our "minimum lending rate" to be reduced in the twelve months to April from 12 per cent to 93/4 per cent. It was put up to 10 per cent in May and now might well be reduced to 91/2 per cent. According to the expert Mr Henry Kaufman of Salomon Brothers, -high grade interest rates in the US will decline still further to reach aprobable base point in early 1976," when it is hoped the recession will be over. Prime rates for the top grade of American borrowers are now down to 7 per cent but there is talk of some rise because of the heavy
borrowing programme of the US Treasury. If this forces up rates slightly it will only be a hiatus, I believe, in a long-term downward movement.
The fundamental fact for the -hulls" of the gilt-edged market is that the world is still in deep recession. Money is not in big demand from businessmen because they are still waiting on growth and expansion. The gross national products of the great industrial powers — the US, Germany and Japan — have fallen by 8 per cent to 10 per cent, which is the mark of a severe depression. It takes time to recover from such a shock. Zero growth was probably suffered in the last three months by the great industrial machine of America.
Assuming that the Government will be able to carry out its anti-inflation programme the bulls of the gilt-edged market will be going for the "long" stocks. For high-tax payers the favourite is Transport 3 per cent 78/88 which at 443/4 yields 6.7 per cent flat and 11.2 per cent to gross redemption. A tax-free capital gain of 551/4 points or 123 per cent in thirteen years is not to be despised. Those who want income may be waiting for the new -tap" stock to replace the Treasury 123/4 per cent, which disappeared in three and a half days' hectic trading, but there is the wonderful Funding 31/2 per cent 99/2004 at 283/4 to yield over 12 and 13 per cent to gross redemption. A tax-free capital gain of near 250 per cent in twenty-nine years is a wonderful gift for a grandchild, that is, if money is to retain after this anti-inflation package even its present depreciated buying power.
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