Sad Investing
By DEREK FORBES THE spectacle of too much money chasing too few shares came to a summary end on Janu- ary 4 when the Financial Times index clocked 342.9, a peak that has never looked like being reached since.
This game of markets, which now has more players than ever before—one ex-City Editor reckons on two million—has now fairly well- defined rules. The Government—the banker in the game who never loses—starts the ball rolling with some nicely timed inflationary gestures. Budget-time is as good a time as any, but with all the controls on hire purchase, on whether we can get that loan from the bank, and so on, it is not necessary to wait for April to set things in motion. Some of the players sit in on the game the whole time, but as they are permanent investors and don't play the markets their influence on prices is small. It is the others, looking for some tax-free prizes, a haven for their capital secure from the raids of inflation or just some good clean fun, who make markets sizzle. Last year we saw share inflation get under way; hundreds of thousands of new investors (many through the auspices of the unit trusts) put down their money and the game got into full swing.
It is useless to pretend that the result of the last election (the index was then 268.6) did not speed up the process. Without the bogeys of nationalisa- tion, capital gains taxes and dividend limita- tion, to say nothing of the possibilities of the crisis of confidence in sterling if the Boys had got in, the City was entitled to its moment of triumph. What happened, in effect, was that equities at long last managed to catch up—almost—with inflation, becoming just three times what they were priced at before the war—though nowadays that 'three times' yardstick understates the situ- ation if anything.
But I am here concerned to chart the course this year of investors' moneys. The pace of markets grew hot; politicians hotter still, under the collar; and finally one of the City oracles— Mr. Cameron Cobbold, Governor of the Bank of England, no less—issued a warning last Novem- ber (Index, 305) that Big Brother was watching markets closely. This and similar warnings finally began to sink in, and the market had fallen back to 325 before the authorities finally struck by pushing up the Bank rate to 5 per cent. late in January. Strangely enough the BBC had just previously given the market its worst attack of the vapours since the fearsome 7 per cent. Bank rate of 1957.
A Panorama programme, following up news- paper talk of over-speculation and unwise in- vesting, gave a fairly innocuous resume of what was happening, in the course of which a banker in the quorum of experts made some facetious remark about tall buildings being useful for un- lucky speculators to jump from. The panic the following day resulted in the index falling 7 points (to 324) (surely an answer to the BBC's argument that public interest in what it had to say on stock markets was so little that it could not justify a daily short market commentary).
The decision to wield the big stick of the Bank rate so early in the game was not popular. The Mail's new, young and promising City Editor found export figures good enough to contradict the Bank's pessimism. Sir Roy Harrod advocated rigging the exchange rates in the market, as the German authorities were then doing, rather than using the Bank rate. But meanwhile Wall Street was not helping matters. The dream of a golden 1960 to start a platinum decade was already fading; American share prices were slipping fast, with repercussions over here.
Towards the end of February (Index, 320) the Guardian gave the market its next chill with, talk of calling for special deposits from the banks—the first sign that the Old Gentlemen agreements reached in banking parlours with the Old Lady of Threadneedle Street were at a discount. The editor of the Banker sprang to the defence of the banks against this new credit weapon—without avail. His argument was that it would impair the foundations of the capital market. We shall soon see, with the rate now 2 per cent.
Already the Budget was casting gloom upon the markets. It could hardly be other than a stand- still affair, though the News Chronicle stoutly affirmed that devaluation, not inflation, was still the danger. To add to the market's woes, the followers of the Dow Jones theory of market behaviour in the US detected the unmistakable end of the long bull market there—a fact which would have been much more frightening if only the theorists had not been wrong fifteen out of the previous twenty-four times they had attempted to call the turn (Index, 311).
The Budget imposed an extra £70 million in taxation, was called bad by the Express, good by the Ilerald and dreary by the Times—which, with remarkable perspicacity, then went on to wonder out loud whether it would be enough. The index was then 330. At the end of the month (Index 304) the axe fell on the hire-purchase business, bank and HP shares (synonymous, these days, since the banking world's bloodless coup) slumped and the far-sighted sold their Hoover and consumer goods shares. Of course there are always the comforters. The Sunday Dispatch affected to see some possible benefit to UDT in the new set-up (it would wipe out some of the mushrooming small companies which had sprung up to garner the crumbs from the rich companies tables). The Sunday Express line the same day was that this was the time to speculate.
By May 5 even the Tunes, which is usually lofty over market affairs, remarked that the share index had broken through its resistance level-- it was then 299. The gallant but dwindling band of chartists hailed the beginning of a bear market, sold their clients out and sat back sucking their slide rules hoping they were right this time. (The I index reached bottom at 295.8 within the week.) The Sunday Dispatch—which likes to put a figure in its columns—plumped for the index falling to 260, quickly worked out the costs of selling and buying and came to the conclusion, fortunately (Index, 296) that its readers should see this bear market through. A 6 per cent. Bank rate and doubled special deposits (a device which banking regards sourly) almost administered the coup de grace, putting the index down 8.7 points (13 more than the Panorama setback) to 306.3.
To confuse the picture the Continent was stag' ing an impressive recovery in share prices. Ger- man equities went up 9 per cent. while British shares fell the same amount. Dutch shares rose 70 per cent. in a month. The US Bank rate fell while ours went up—the US Treasury bill rate plummeted. And the Germans put up their Bank rate from 4 per cent. to 5 per cent. (The News Chronicle has just pointed out that some German equities actually show their proud owners a nega- tive return as the income they yield is less than the 1 per cent. property tax they attract.) The British market's problems are really quite simple. It wants to know what kind of animal it is, bull or bear. Is it to go up or down? Are the credit measures enough, too much, or insufficient? Will the small investor come back to these markets without the lure of quick appreciation? (The unit trusts were still net buyers until April and at least three further offers of new units are being made but with only moderate success.) A friend who adorns the backroom of a big firm of stockbrokers summed up the outlook. This is a bear market, he said, and produced charts and figures to show that the economy and the stock market must keep in step, though the market may well be ahead, sometimes, anticipat- ing events. But this is the new kind of bear market as it arises from a 5 per cent. excess of demand in the country rather than a 5 per cent. deficiency. It is being governed as carefully as a testy young colt in the hands of an experienced rider. Each time the rider is gaining experience; and he is not above using a new technique—as the special deposits show. There is nothing here to stamp out the country's prosperity. Last year's profits, which are being announced now, would have been handsomely beaten if the curbs had not been applied. The loss is largely of these 'might-have-been' profits which might well have made labour's demands for more wages impos- sible to refuse. Inflation, thanks to the squeeze, is no immediate danger. Share prices? Perhaps down beyond 280: hardly enough, anyway, to warrant selling good stocks.
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