In the city
Dollars and equities
Nicholas Davenport
Having previously advised readers of this column that a bull market in equity shares had taken hold of Throgmorton Street as long ago as March I said that the bear market had gone I was saved from acute Weather depression while on holiday by looking at the Daily FT index of equity Share prices. It went on going up and up. The climb from the low point of 433 in May has been remarkable. There was a little Pause before it went through the magic line of 500 but after that figure had been passed, there was a rush up to 515 a rise of 17+ per cent in the week. Summer will surely return te the City when the previous all time 'high' which was 549 last September has been left behind. The curious thing about this equity boom is that it is not confined to England but is almost world-wide. Across the Channel the Paris bourse has enjoyed a rise of over 40 Per cent since March (which could be "Planted by the universal feeling of relief over the defeat of the communist-left parties). Germany has seen a modest equity nse in line with the modest inflation measr " ures of its government. Even the Italian ooare,„ th: Has improved by about 15 per cent ?-us year (which can have nothing to do with oinks or Pope). Hong Kong has risen on a ,....tresh influx of foreign investment money. he Australian bourses have responded to government of an anti-labour party. ,veu New York after the disastrous fall in the dollar has staged a recovery of about 10 Per cent on Wall Street. Is there a common cause for this recovery in world equity Ptjees or is it a chance coincidence of varYtag local betterments? Probably a little of both. There is always a asset into equities as the source of real asset values whenever the public gets seared a depreciating paper money. The henomenal slump in the dollar was the e'Poallrakr of this recent move. This year the has fallen by about 20 per cent against the yen and Swiss franc. And no Iv. ander the dollar sinks. The US trade oeficit has come down a little but is still runuing at an annual rate of $32 billion on tiheedesrharing of the first six months, The rrrgovernment and its agencies will purow about $75 billion in the fiscal year to r* 30 1979 only slightly less than in the boe..vieus year The Carter administration is 'r°will,g and printing far too many dollars t make dollar-hold ers anywhere less than J.'c) tt re ery. The dollar being an international oseri.rve currency means that the whole .bv. d becomes jittery about paper money wil.etn. the dollar is allowed to slide. _01 is Within the power of the American g verninent to stop the slide in the dollar
but when you look at the benign but weak face of President Carter, when you sense the arrogant American attitude towards their 'almighty dollar', you will not be surprised that no firm action has been taken beyond raising their official discount rate from 4.6 per cent to 71 per cent. The recent recovery on Wall Street was even based on the idea that interest rates had moved up sufficiently and would now come down. Central bankers are always congenitally conservative and often stupid men, Stupidity stands out today in Washington because they will not listen to the idea that I and a few others have put forward that they should issue $50 billion five-year dollar bonds convertible into gold at under $200 an ounce. The present over-supply of unwanted dollars would then vanish in a week.
If the flight from the paper dollar has prompted an almost world-wide move into non-dollar equity shares with real asset values it must be assumed that the buyers cannot be fearful of the collapse of the western capitalist system. Of course the wild men of the Labour Party wish to destroy the capitalist system and the City is indeed fearful that Mr Callaghan will give them encouragement by allowing his election manifesto to contain such anti-capitalist threats as a wealth tax and some form of direction over the investment of the private life and pension funds. But I think that investors here are looking beyond the transient political scene. They seem to be convinced that there is a majority of workers in this country who realise that they are better off as free bargaining partners in a mixed capitalist economy than as slaves in a communist centrally directed state where they will have no choice of workplace or wage. Of course, there are groups of stupid trade unionists who will resist managers to the death the death of the Fleet Street 'chapels' is surely not far distant but where managements and workers can co-operate, and share in the profits of free enterprise, that will be where real assets and real wealth will be created.
It is strange that some old social reformers still believe in the collapse of capitalism and not its transformation. Dame Barbara Wootton is such an example. I feel that she must have been cheated in the past by some private crook to believe that all who work for private gain are not to be trusted and must be kept in a state straitjacket. But if she were to read Solzhenitsyn's A World Split Apart she would realise that socialism is the more corrupting force. Solzhenitsyn quotes from a book by a famous Soviet mathematician, a member of the Soviet Academy of Science, who writes: 'Socialism of any type and shade leads to a total destruction of the human spirit and to a levelling of mankind into death.' Liberalism, he adds, has been displaced by radicalism, radicals had to surrender to socialism (not City radical me!) and socialism can never resist communism. One wonders whether the working man in this country is not beginning to realise that socialism with its vast network of bureaucratic public boards must lead to an excessive PSBR (public sector borrowing requirement) and so to an inbuilt inflation and to inbuilt unemployment. Surely where workers agree to work with managers to create more wealth and share in its profit, there will be an equity asset much more worth buying than a piece of government paper.
Of course, there is no going back to an equity cult. That investment craze was killed long ago by inflation. Equity shares on Wall Street are today in real terms only 48 per cent of what they were priced in 1964. If the Washington government would stop printing paper money like a madman dollar equities would be the best buy in the world.
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