Looking back and forward (1)
Nicholas Davenport
When Skinflint and I had a small bet about the timing of the end of the last bull market — we both won as the market made a double top in 1972, namely, 543 and 538 — 1 never expected that it would lose nearly three-quarters of its gains. I looked for a loss of about 50 per cent. There has been nothing like it since the Wall Street collapse in the great depression. In fact, it has been worse because it has been more violent in its time-scale. Something like $40,000 million was wiped off share values in Wall Street in the autumn of 1929 but thereafter there was a sizeable recovery and the big decline took place gradually from the spring of 1930 until the end of 1932. Here something like £50,000 million has been wiped off our share values between May 1972 and the end of 1974. The FT 'thirty' index has dropped from 543 to 150 — 72 per cent — and if you add to this the slump in house property millions of the upper-middle class will feel that most of their life savings have been wiped out. For Mr Healey tp choose this moment to introduce a wealth tax and confiscate what is left in the top brackets of the wealthy shows up the real malice in the politics of envy. There has, of course, been forced and panicky selling. The greedy get-rich-quick financiers who Played dangerously with the excessive credit created by the Tory government got into trouble with their plethora of mergers and take-overs and many went bust as they deserved to do. The greedy but not so mad property developers got caught out when the Tory government introduced its rent freeze in November 1972 and were finally knocked out by the Development Gains Tax of March 1974. This will be worsened by the nationalisation of development land, for a new development land tax will start at 80 per cent and rise to 100 per cent. The rent freeze and soaring interest rates left some property companies with cash flows falling below borrowing costs, especially if they borrowed short for quick capital gains. When banks pressed for repayment some of them were forced into liquidation, for example, the Lyon Group, the Stern Group and Guardian Properties. This also forced some of the fringe banks into liquidation. As property Is the main collateral for all bank loans it will be realised that the Whole banking system — one-might
say the whole capitalist system — will be in difficulty unless the property market is quickly restored to life and rents are unfrozen. There is said to be some £3,000 million of money frozen in the property market. It has put clearing banks, merchant banks and life assurance companies — the life blood of the capitalist system — all in serious trouble.
This prompts me to think that the first of the down-and-out markets to recover may be the property market. It reached its peak, according to the FT Actuaries index, at 357 in November 1973 and it has since fallen by 75 per cent. We know that the Bank of England has been leading the rescue operation for the banks which have got into trouble over property loans and the Governor must have advised the Government to unfreeze commercial rents in order to reactivate the property market and unlock banking funds. As I write, the news has just reached me that the Government has changed its mind and has agreed to unfreeze commercial rents in February next _.. thirteen months earlier than had been proposed. Property shares had already advanced about 10 per cent on the mere rumour of this miracle. The leaders should now go
further ahead and carry with them the shares in the financial sector which had been pulled down by the property disasters. Of the
clearing banks Lloyds and National Westminster have actually fallen below their par value. In the first case the shares were as high as 361 in 1973 and as low as 92 this year and in the second case the corresponding prices were 473 and 90. The dividend yields are currently 9.6 per cent and 11.6 per cent. On Barclays you can obtain 9.7 per cent and on Midland 11.8 Per cent and the dividends are about 6
times covered. On current estimates of i earnings the shares of the big four
clearing banks are selling on a price-earnings basig, of around 2, which is an extraordinary situation. Historically they are extremely cheap.
But I have never liked the equity shares of our leading moneylenders. The clearing banks are inevitably subject to constant government interference and control. And no wonder. Since complete freedom to lend or to compete for deposits by the issue of negotiable certificates of deposit was given to them by the Tory document 'Competition and Credit Control' (which laid down the new 121/2 per cent reserve requirement) the growth of their deposits has reflected the growth of the money supply brought about by the steep rise in the government borrowing requirement, not to mention the huge remissions of taxation allowed by the Tories. In other words, their profits soar whenever the Government boosts the money supply and raises Bank rate, which governs the rate of interest which
they charge on advances. (Remember they pay no interest on their current accounts — only on their deposit accounts.) Yet no special 'excess profits' tax is levied on these bonanza profits. Instead, the Bank of England can call for 'special deposits, can give directions about the quality and direction of their advances and can exact supplementary special deposits if their interest-bearing 'eligible liabilities' grow by more than a certain amount (9 per cent in the past six months). Any further control would probably mean virtual 'nationalisation' which is what the left wing of the Labour party is demanding. So I would leave the clearing banks to the specialist investor who understands the money maze in which they operate, Their profit outlook in any case is not encouraging. Sometime interest rates must fall. Sometime the money supply expansion must be curtailed. And with Socialism a banker is becoming a dirty word like profits.
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