MINIMUM PRICE PROBLEMS
This week has witnessed another sharp fall in home industrial equities, bank and insurance shares, and gold shares. When average yields on leading home industrials have risen from about 5} to over 6 per cent. one begins to wonder whether the adjustment to new earnings conditions has not been largely completed. I think it probably has, even allowing for such increases in costs as the insurance of stocks, A.R.P. expenditure, &c., and such other inroads on net distributable earnings as result from higher taxation, increases in general production costs, and reduced sales. One of the reasons why home industrials have fallen so precipitately is, of course, that the gilt-edged market has been virtually frozen up. Thus, any selling for liquidity purposes has had to be carried through in the more market- able industrial shares, and prices have given way. Hence the widespread agitation that the minimum prices for gilt-edged should be reduced so as to thaw this important section of the Stock Exchange, which normally takes the brunt of liquidity selling.
I appreciate the force of this contention, but am not vet convinced that the authorities are wrong in holding their hand. After all, there are two major factors in the interest rate equation which cannot yet be assessed. One is the level of Bank Rate, the other the Chancellor of the Exchequer's plan for taxation and borrowing. Only when we know more about these factors will it be possible to take any worth-while view of gilt-edged prices. In the meantime. I must record my feeling that despite the huge expenditure, both present and prospective, with which the country is faced, there need not be any really serious inflation such as would necessitate a sharp rise in interest rates. My advice to gilt-edged holders and investors in sound fixed interest stocks generally is to sit tight. Both directly, through regulation of the principal commodity markets, and, indirectly, through the manipulation of currency and credit, the authorities have the power to prevent any runaway rise in prices. They have enough lessons from Continental ex- perience to compel them to use their powers vigorously in the interests of stability.
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