MONEY The end of the equity cult?

NICHOLAS DAVENPORT

'It is good to know from you,' a reader of this column writes to me, 'that this is not the end of capitalism but it would be more useful to me to know whether this is the end of the bear market.' He may have been having a dig at me because at the end of last year, during a secondary recovery, I said it was the end of the 1969 bear market; but I was careful to point out that it was certainly not the start of a bull market, as many brokers thought at the time. After the Budget I felt certain that Mr Jenkins had left the market without any support and that it was bound to fall. Then came the los crisis (a technical factor) and the American crisis (a psychological factor). Together they

brought disaster. According to the equity indices Wall Street is back to where it was

seven years ago and Throgmorton Street to where it was six years ago. I suppose my correspondent is wondering whether this is not the end of the equity cult.

The cult of the equity grew out of the Keynesian economic policies to which all

the western capitalist governments commit-

ted themselves after the war—full employ- ment and growth. Full employment was en-

dorsed by both political parties in Britain, put on the statute book by the American Congress and written into the charter of the

European Common Market. Growth, of course, varied from country to country, de- pending largely on what proportion of the national income was set aside for investment,

but in general growth meant an annual in- crease in the national product and therefore in the turnover and gross trading profits of the nation's companies. This gave to the equity market, it was said, a secular upward trend, for it was assumed that dividends would rise more or less proportionately to the rise in turnover and profits. Thus the equity share became the basic medium for long-term investment for all those who wanted to secure income as well as capital growth. If the long-term investor went out of the equity market at any time he was considered to be playing against the market trend and, if he mistimed his exit, he was likely to be worse off than the investor who stayed in. That briefly sums up the cult of the equity.

The cult ran into trouble because full em- ployment and growth could not be main- tained simultaneously with price stability. Under the system of free collective bargain- ing between employers and trade unions the tendency in periods of over-full employment 'as for wages to rise faster than output and Productivity, so that an accelerating wage- cost inflation followed. The Tories believed that wages would rise less fast in periods of non-full employment, so they instituted the Policy of `stop-go'. At first the stops seemed to be having some effect, particularly when Mr Selwyn Lloyd applied the first 'pay Pause' of 1961, but when the Labour gov- ernment was forced by exchange crisis after exchange crisis to apply stops in even stronger doses of deflation, ending with a core severe pay pause than Mr Selwyn oyd,s, wages went on rising as if the economic policies of governments at West- minster meant nothing at all. Power, as

Mrs Barbara Castle said, had passed to the shop-floor of the factories. Even if a few conservative trade union officials felt that they ought to conform to the Westminster play-acting of moderation in bargaining while unemployment was high, they were soon denounced and disowned by strikers of immoderate or revolutionary views, as the crisis at the Pilkington glass works proved. The final breakdown of Labour's prices and incomes policy led to the biggest wage-ex- plosion of all time, the expected rise in wage incomes being of the order of over 10 per cent.

The equity cult followers have therefore had to admit what had always been feared —that equity shares are not a perfect hedge against the fall in the value of money. Since October 1964 the has fallen in value by 21 per cent; but the Financial Times index of industrial equities has not risen but fallen, the present figure being 335 against 378 on I October 1964. Not only have equity shares failed to be a hedge against inflation: they have failed to reflect the restrained amount of annual growth in the national economy. The best that can be said about them is that despite an unsatisfactory capital perform- ance their dividend income has grown, that is, since 1964, by about 12-} per cent, but it has not been enough to offset money de- preciation. The automatic growth of equity earnings and market prices, which was guaranteed for a time by the shortages of the post-war period, has gone for good. The cult of the equity is dead. It has been killed by the growing power of the shop-floor workers and the growing powerlessness of governments and employers. There will, of

course, always be some managements clever enough to maintain profit margins in spite of a wage explosion but they will be too few to justify an equity cult.

From a study I have made of the 'bull' and 'bear' markets over the twenty-five years since the war 1 have come to the conclusion

that there is no secular upward trend for equity shares; there is simply a game of snakes and ladders. You climb up steadily for twenty months—and bang! you lose it all in two!

The grand bull markets are a unique phenomena : they only happen when the political and economic climates are in fav- ourable conjunction. The two outstanding ones were 1952-55 and 1958-59 under the Tories—the first lasting three years and a month and the second one year and eleven months—when prices more than doubled on each Occasion. A third was 1962-64 when Mr Maudling tried out his expansion plus payments, deficit and prices rose by 50 per cent. It was cut short by the Labour victory. The index is now below where it ended the 1958-9 bull market.

I have taken a long time to answer my correspondent's question as to whether this is the end of the bear market. It is clearly not. A favourable conjunction of the economic and political climate is not in sight. Here we have the prospect of another Labour victory at the polls and a rise in wage incomes of over £2,500 million with prices lagging behind. (One recalls the wage- cost inflation of 1965 when wages and salaries increased by £1,300, and output by £600 million, giving the political victory to Labour in 1966.) In the us we see a business recession during an inflation and a politi- cally unpopular government. But my cor- respondent can look for a strong rally in both markets when the running sore of the los debacle has been stopped and the Ameri- can forces have withdrawn from Cambodia. Technical and psychological factors would then be in favourable conjunction for a period. But who wants to look further ahead at such a dangerous time?

ffolkes's taxpayers' alphabet Violation