The economy
Ripeness is all
Jock Bruce-Gardyne
According to Mr Alastair Cooke, as I discovered in my bath last Sunday morning (the repeat of his weekly `letter' Provides the ideal background for a hair- wash), the only VIP in America with good grounds to enter into the spirit of Thanks- giving this autumn is Mr Walter Mondale. This is because he spent the election campaign warning his fellow-countrymen that as soon as it was over the transient nature of President Reagan's boom would stand exposed for all to see: and now it seemed that he was right. Well, what was it that Winston Churchill was supposed to have said to the comforter who tried to suggest that there were compensations for his similarly crushing rejection by the British electorate in 1945? 'They are not Immediately apparent': something like that, and Mondale would presumably say the same to Alastair Cooke.
In any case the talk of Ronald Reagan undergoing metamorphosis `before into very eyes' in the space of three weeks Into a second Herbert Hoover smacks of over- kill. As the sharp-eyed Mrs Sarah Hogg has reminded us, according to our own statistical practice the US growth rate in the third quarter would have worked out, not at a stuttering 1.9 per cent, but at a bustling 6.9. So let's wait and see before we all sign on for `the slump of '85'. What does seem worthy of note, though, is a little- noticed footnote to the Federal Reserve's ex Planation for its half-point cut in its discount rate last week.
After all the obligatory references to low Monetary growth, low inflation, 'distinct Moderation in the pace of business expan- sl°n' and suchlike, the final consideration dollar was `the continued strength of the unllar internationally'. The scale of import Penetration has grown dramatically in the 98°s; and if the US economy is indeed coming off the boil too fast for the comfort oh' the Fed, then the almighty dollar must have a lot to do with it. So perhaps we might be well advised to take that footnote seriously. It certainly does not follow that the Fed Itias
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bring LI y to set its heart on a cheaper dollar it about. If the half-pt cut in the discount rate presages a sustained cam- At to lower interest rates across the tlantic it does not take much courage to 1133reiet what the response from Europe will colleagues Chancellor Lawson and his continental Americans will be itching to match the `eriericans point for point. So something .,;e will have to give as well. That could be wall Street: if market sentiment about the turns for the US domestic economy ouvrns really sour then no doubt a lot of the erseas investors will pack up their tents and go. but the timing of such a move remains highly unpredictable. Of course if the Fed and the administration are really in earnest about a cheaper dollar there is one thing they could do which might do the trick. They could replace Mr Paul Volcker with Mr Donald Regan. That would be a signal nobody could miss.
Indeed it might be as good a signal as any that `the time was ripe' for us to sign on with the Euromoney grid. Monday saw the publication of yet another star-studded appeal to HMG to stop dithering and take the plunge. This one came from a study group organised by the Federal Trust (an up-market Euro lobbyist), headed by David Howell, the former Energy Minis- ter, and including such diverse pundits as Geoffrey Maynard of Chase Manhattan, Geoffrey Wood of the City University Business School and Anatole Kaltesky of the Financial Times, with David Lomax of NatWest as its guiding light. `The Time' they assert resoundingly, 'Is Ripe'.
Now as a congenital ditherer about the desirability of British participation in the Deutschemark currency bloc (for that is what it is) I find that most of the diatribes against participation make a good case for joining, whereas most of the eulogies of membership only reinforce one's doubts. And this one is no exception. 'The oil market', Dr Lomax and his colleagues tell us, 'is expected to be reasonably stable, showing neither a collapse in prices nor any oil shock for years to come' (my italics). Is it, indeed? And by whom? By the authors, it seems. I wonder if they'd care to take a bet on it. And while the distinguished authors acknowledge that `convergence' between the performances of the existing participant-countries 'was by no means complete', they claim there has been `a partial convergence of inflation rates'. Well, partial's the word: as their own figures demonstrate, the gap between Ger- man and Italian inflation rates actually widened, from less than 1:3 in 1981 to more than 1:4 in 1983, and the same was true, to a greater or lesser extent, of the gap between German inflation and that experienced by all her neighbours apart from Holland (and the UK, incidentally).
Where I think they are on firmer ground is when they turn their attention to the ECU, the European currency unit. There is no doubt that this is beginning to emerge as a counter of real significance in the bond and money markets. If a time were to come when the Opec countries started to de- nominate oil sales in ecu then one major obstacle to British membership would dis- appear. And they might — if and when the dollar falls out of bed. Meanwhile, like it or not, the argument is somewhat academic since Chancellor Lawson is — for the present at least — in no mood to join: and if he wants to retain his freedom to.push down interest rates he must be right.
Perhaps, as an enthusiastic campaigner for personal share-ownership, he will have been paying rather closer attention to the row that has blown up in the City over `vendor placings'. This is a newly fashion- able device by which companies keen to swallow up their friends and neighbours, and needing extra equity for the purpose, arrange a whip-round of the City institu- tions instead of making a rights issue in which all their shareholders, great and small, could participate. That doughty and articulate champion of the small sharehol- der, Mr David Hopkinson of M & G, has leapt to their defence with a call to his fellow fund managers to boycott such offerings in the future when they would lead to `dilution' of the total equity on issue by more than ten per cent.
In theory his argument is irrefutable. `Vendor placings' do breach the spirit, if not precisely the letter, of the Companies Act, which says that rights issues must be made available to all existing shareholders. But in this wicked world is that what Aunt Edna really loses sleep about? Is Mr Hopkinson really sure that she would prefer things to be done properly, with a good old-fashioned rights issue in every case, when rights issues can be counted on, more often than not, to depress the price of her shares, whereas 'vendor placings' can be counted on, hitherto invariably, to enhance it? Maybe she should. But I can't see her doing so.
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