CITY AND SUBURBAN
The markets wake with a headache from inflated expectations
CHRISTOPHER FILDES
The New Year's hangover has got through, after an extended binge in which the market-makers came to believe their own salesmen. Their pitch was one last heard in London two decades ago, when an ill-fated bull market was carried forward on the story that good news was good for shares, while bad news was inflationary which meant that you should protect your- self against inflation by getting out of money and bonds and into shares. Life was and is not like that. Inflation hits com- panies as it hits the rest of us, by raising their costs while diminishing their capacity to meet them. They, like us, are taxed on their nominal incomes but must live by their true and smaller or non-existent incomes. They have to finance their plant and stock out of their retained earnings in effect, their savings. That is how British Leyland went to the wall without ever recording a loss or cutting a dividend. A clause in Murphy's Law provides that now that even the auditors have got tired of Inflation-adjusted accounts (the taxman never read them) they suddenly matter again. These pennies (and cents) have begun to drop, and share prices with them.
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