FINANCE—PUBLIC AND PRIVATE.
[To THE EDITOR or THE " SPECTATOR."] SIR,—Complaint is made in some quarters of continued dullness on the Stock Exchange. I am inclined, however, to think that when the many adverse factors are taken into consideration the comparative steadiness of the markets is rather remarkable. During the past week, for example, although almost every influence operating has been of an unfavourable character, the fall in prices has been slight, and when in the gilt-edged market, for example, we find that stocks which previous to the war yielded about 4 per cent. now give a yield of from 6 to 7 per cent. at current prices, that fact is certainly not surprising seeing that the . cost of living has risen about 150 per cent., and that from the yield on securities to-day an Income Tax of 6s. falls to be deducted as compared with only a little over a shilling in the pre-war days.
This is indeed only one of the points which should fairly be taken into consideration when appraising present conditions and prices on the Stock Exchange ; and while I do not propose to express any decided view as to the course of prices in particular markets, it may perhaps be useful to the intending investor to note some of the excep- tional difficulties and uncertainties which beset the Stock Exchangi as a whole. In the first place, we have political conditions in Europe so chaotic as to be just about equally suggestive of renewed warfare, or of actual bankruptcy in some of those quarters which suffered most by the war. In fact, until political conditions in Europe have settled down and something like a real workable peace has been established it is impossible even to take proper stock of the financial position ; if it were, we might perhaps see markets yet more disturbed by a realisation of the losses which have to be faced.
In the United States—ostensibly the country which has prospered by the war—it is clear that not so much willing- ness as the very ability (now) to take an active hand in aiding financial recuperation in Europe is in question. One of America's foremost bankers has, indeed, openly declared that owing to the manner in which America's newly acquired wealth has stimulated internal con- sumption and has ministered to inflation the economic situation is one calling for the utmost anxiety, and that for some time to come all resources must be conserved for use at home. For it must not be forgotten that while the United States has built up an enormous trade balance by • reason of her extraordinary exports during the war, colossal
suing have been spent within the country to provide the necessary plant, &c., to cope with increased production, and the " lock-up " of funds has therefore been great. Coming nearer home and remembering the state of Ireland, it would be difficult to conceive of more disturbed conditions, especially when the moral effect of the complete breakdown of Government control and authority in that country accompanies acute social and labour unrest in England, and when already signs are apparent of a slackening in employment. Nor must the financial con- ditions at home be left out of consideration, the great burden of taxation having. as I pointed out last week, at last aroused the public to the urgent need for economy in the National Expenditure.
These and many other factors which could be enumerated might well daunt the stoutest hearts either of investor or speculator, and when they are borne in mind I repeat that it is the steadiness rather than the dullness of markets which should call for comment, the more so by reason of the fact that at current quotations, and despite the fact that dealings are, nominally at all events, on a cash basis, the volume of business is still fairly large. Without neces- sarily taking a pessimistic view of the situation, I am bound to say that in the opinion of many the tendency at the moment is to underrate rather than overrate the serious character of the influences operating. " After all "—so runs the argument—" we have come through a devastating five years war and have survived it, and therefore the troubles surrounding us to-day, tiresome though they are, are minor affairs compared with those through which we have overcome." But while this of course is true, it may be doubted whether two leading facts are sufficiently realised. The first is that the big war was destined to bring with it a period of inflation, which, while ultimately responsible for many of the economic and social troubles from which we are now suffering, occasioned at first temporary artificial prosperity on a large scale. The second is that we are some few thousand millions poorer than we were before the war, that a large part of our liabilities is to foreign countries, and that the very process of recuperation is handicapped by the inability of the community, and especi- ally of the wage-earners, to perceive the need for economy. and increased production. Instead, the cry is for shorter hours and higher wages, and if this course is persisted in there can be but one end to the journey.
Finally, in our survey of market prospects we have to bear in mind that the demands for capital, actual and perspective, seem to be wellnigh endless, housing schemes alone—not a directly productive form of expenditure— promising to absorb some hundreds of millions, while already the fresh capital issues for the first five months of this year, quite apart from Government issues, total about £214,000,000; as compared with £63,000000 for the corresponding period of the previous year. Only during the past few days investment stocks have been adversely affected, first by the fact that underwriters of the Bradford, Cardiff and Croydon loans for £4,500,000 had been called upon to take 75 per cent. of the amount, and then by the fact that within a day or two, and before the stocks could possibly be absorbed, a New South Wales Loan was announced for £2,500,000, while it is known that many other Colonial loans are on the tapir, and that before the holiday season begins in earnest a flood of industrial issues is expected. It is not in any sense of decrying these issues, most of which are probably necessary and advisable, and many of which are likely to be issued on attractive terms, that I am compelled, nevertheless, to refer to the matter as yet another factor militating against any early recovery in existing securities. Hope, however (fortunately), springs eternal, and it is not in any spirit of ultra-pessimism that I have outlined the many handicaps with which purchasers of securities to day must expect to contend for some time to come. Indeed, there is, of course, a sense in which it would be equally true to say that the position is likely to present the greatest opportunities to the investor which have ever been known, but it is very necessary that the position should be very clearly comprehended so that certain dangers may be avoided. For one thing, it will be well to go slow in the matter of fully investing resources, because while neither the income on our investments nor the ultimate safety of the same may be in question, market values may nevertheless decline because of the influences I have enumerated, and therefore it may be well not to rely upon replenishing current needs out of sales of securi- ties. And yet again, while those " in the know " may derive profit from the acquirement of industrial and even speculative descriptions, the grave danger of mere specu- lative transactions has been pretty clearly demonstrated during the past three months, during which period industrial securities have fallen nearly 40 per cent., and the depression of markets at the present moment is accentuated by the losses which have been sustained through this decline. Therefore to these—andhow great must be their number ! —who are desirous of discovering signs of the long overdue recovery in capital values of securities, and especially of investment stocks, it is difficult at the present time to say much that is reassuring. A sudden and great set-back in trade activity might conceivably occasion ease in money and a rise in stocks as the result of a transfer of funds from trade to stock activity, but the movement seems unlikely at the moment, and is certainly not to be desired, for the social disorganisation might be fraught with far more serious consequences than would be occasioned by con- tinued low prices of securities. Moreover, such an event would-have a disastrous effect upon the National Revenues, and therefore upon Goverment Securities. If, on the other hand, we take a hopeful view and believe that production will proceed on an increased scale, and that with the restoration of peace, international trade, including our own exports, will steadily expand, we then shall have con- ditions which, while satisfactory, will make such demands upon capital for trade as to leave little over for securities, other than that what will be required to absorb new issues of stocks. The fact is that we have to recognise how entirely abnormal are the conditions now prevailing. Had all the activities of the past six years been of a pro- ductive and not of a destructive character, we should to-day have been justified in looking forward to a trade re-action as likely to bring vast sums into securities, and that without any serious 'mini to the situation, because it would simply have been a case of gathering in our profits and checking over-production. To-day, despite our activities of recent years, we are in the position of requiring to con- centrate energy upon the one task of increased production, and it seems likely to be many a long day before a rise in stocks and a fall in trade activities will be a really welcome event.
Nevertheless, and if only economy and increased pro- duction can be secured ere it is too late, there is no reason whatever why the intervening period should not bring many opportunities to the investor of highly profitable yields upon his securities, even if market values may not appreci- ate; and some crumbs of comfort may perhaps be obtained from the remembrance that in the event of low market values the Estate Duties will also share in the loss. Moreover, if prudence is exercised by the investor in.the selection of securities, not only will' capital losses be avoided in many instances, because the investments have been short-dated ones, but ultimately and when (I am sorry to belabour the point, but it is necessary) economy and increased industry have taken the place of extravagance and slacking on the part of the wage-earners there will come ultimately an improvement in capital values themselves. Before that time arrives it is even possible that the " virtues " of capital may have so come to be recognised that its possessors may be allowed, without a feeling of shame, to reap the full rewards of prudence, foresight and industry.—
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