MONEY AND THE CITY
Bear points
Nicholas Davenport
I have never returned from a holiday to find the City more gloomy and defeatist than I found it last week. The Stock Exchange was more dead than alive. The turnover had dropped to such a tnclde that many firms have been tempted to close down. The same thing is happening in Wall Street where I read that Bache and Company, one of its largest bro kers, has had to cut 12 per cent from the salaries of its top 300 men to make ends meet.
With turnover so small it is dangerous to read too much into the share charts. But it is signifi cant that in spite of a rise , in Company profits last year ranging from 20 per cent to 50 per cent the FT index of 30 industrial shares should have fallen this year from 510 to 415 — a drop of nearly 20 Per cent. It looks as if it will break through the 400 level, which has
been regarded as a ' resistance ' level, and if it does so, it will fulfill a forecast I made here on April 21. The top of Mr Heath's boom was 543 in May 1972 and again 537 in August 1972. It was this double top Which convinced me that a real bear market had begun. There is
'average' length to a bear market. This one has already lasted a year and it could go on for another year if Mr Heath decides to hang-on to office until the last moment. There are several reasons Why it should, in any case, go on for some months more. , In the first place, the TUC holds its conference next month and we may see it vote to break off talks With Mr Heath at No 10. This would mark the end of the consensus which the Prime Minister .haS been desperately trying to bring about but it would not be the end of the capitalist world. The Government would 'simply have to fix its own guide lines for wage increases and hope that no union would force a confrontation by strike action. But the Price Commission would then be stricter than ever on price increases and the stock market would at once fear that company profitability and investment would he adversely affected. That is another bear Point not yet taken into account. , So far the City has been pretty indifferent to the efforts made by Mr Heath to keep inflation within bounds. By the end of June retail prices had risen by 91 percent since June 1972 and basic hourly wage rates by just under 16 per cent. This does not compare too badly with the rates of inflation in some European countries. The present increase in wages reflects the rises which have been granted under Phase 2 and it is now allimportant that under Phase 3 the guide line should be half that increase, say around 9 per cent. As the TUC now appears to be unwilling to accept Mr Heath's proposal for threshold wage agreements it will not be likely to welcome a guide line of 9 per cent. But everything depends upon the militant reactions. Clearly there has been some decline in militancy, for the unions know that, if they force a confrontation, Mr Heath would have to retaliate either with Mr Powell's cure of higher taxation, which would be an end to growth, or with a general election which might bring a Tory return with a bigger majority. These are risks which the militant trade unions might not be prepared to run. However, the fearful uncertainty which these political moves must generate is the first reason why the bear market is likely to continue.
The second is the inordinate and world-wide rise in money rates. In our case the excuse has been the fall in the floating £. The Bank of England is trying to attract foreign money here with a 'bank rate' of 111 per cent. In other countries the excuse is anti-inflationary. France has a bank rate of 91 per cent, Germany 7 per cent and the US 7 per cent. Our joint stock banks have just raised their base lending rates to 11 per cent which means not only that most people would have to pay 13 per cent to 15 per cent for an overdraft but that most investors will sell their securities rather than pay such exorbitant rates to their bank. What has made this monetary madness worse — I repeat 'madness' because higher interest rates add to the price inflation — is the raging speculation in commodities, like wheat, and in metals like copper, lead, zinc, etc, whose prices have been soaring. I have heard of 30 per cent being paid over-night for bank money because some foreign speculator is in trouble. If only ways and means could be found for taxing the 100 per cent profits of these anti-social speculators who gamble in world commodities and raise our cost of living! Our balance of payments deficit has been largely worsened by these two factors —the enormous rise of the order of 40 per cent in the cost of raw materials and by the fall of around 17 per cent in the value of the floating E. An additional factor is, of course, the consumer boom and the present high growth rate in industrial production and investment which have been sucking in imports. An economist friend who loves to work out these scarifying figures tells me that since the second quarter of 1972 the extra costs on the balance of payments due to devaluation of the £ and the higher prices of raw materials amount to over 050 million a month. So we must anticipate ,a deficit for the year on our balance of payments of over £1,000 million at least, which was what the 'London and Cambridge Economic Bulletin' forecast last January. July's deficit of £159 million might well have been worse.
On the whole it is reasonable for the Government not to become rattled by our appalling overseas trade figures. The 40 per cent rise in world raw material prices has been quite exceptional for a period of so-called peace and a fall must come before long. With the excellent harvests now being reaped in Europe and the US the price of wheat should be the first to fall. Our super-optimist Secretary of State for Industry, Mr Peter Walker, keeps pointing out that
the volume increase in our exports in the first half of 1973 over the last half of 1972 has been 13 per cent while the increase in the volume of imports has been only 8 per cent, The Government is determined to maintain economic growth, which explains why in the last quarter imports of fuel, industrial materials and machinery have been running at £277 million more a month in the last quarter. The official reserves of over £2,600 million are no doubt strong enough to meet these extra bills.
The first sign of any improvement in sterling or the balance of payments or the money squeeze will be reflected in the gilt-edged market which at the moment is quite demoralised. You can secure yields of 111 per cent on undated stocks and 11.2 per cent on the dated longs.' There is a delightful 'short '-Exchequer 5 per cent 1976/78 which at 78f gives you 10.4 per cent to gross redemption and a running yield of 6.3 per cnet. What equity share can guarantee you a tax free capital profit of 27 per cent in just over five years? (Equivalent to a capital profit of 38 per cent on an equity subject to tax.) It tempts the disgruntled equity investor to sell out and take refuge in a short bond. These moments of despair are often the time when markets are near their bottom, but we have not yet seen a selling climax.
Previous page
