PSYCHOLOGY . AND MARKETS
. FINANC
IF at the present moment the investor were to turn back to the forecasts written some six months ago of the probable conditions in 1937, I am afraid he would fail to find any anticipations of so severe a setback in public securities as that which has taken place during the past six months. In many of the reviews, a cautious tone was adopted, and the warning was given, that the upward movement in securities could not be expected to continue indefinitely, but there were probably few who expected the setback to be so early and so pronounced as it has been. . Now, according to some market experts, including repre- sentatives of leading Stock Exchange firms, much of this depreciation is to be attributed to causes of a psychological character,, and a circular issued by one leading firm, asserts that a powerful influence has been what is described as "the slump obsession." The writer of this says :
The restored confidence which carried us forward through five years of growing activity has lately been shaken, first by a gold scare which is now nearly dead, next by an ill-conceived National Defence Contribution which is happily succeeded by a greatly improved and simplified substitute and now by a boom and slump mentality, which is in urgent need of extermination.
"According to the popular fallacy as usually expounded (1) there was boom before 1929, (2) then a disastrous slump, (3) there is a trade boom now, (4) consequently this also must end sooner or later in an equally devastating collapse."
I cannot help thinking that this statement expresses the position somewhat crudely, though the writer is no doubt referring to the many articles which have been written by economists, suggesting that the way to prevent the usual severe reaction from excessive financial and commercial activity being followed by an actual slump is to prepare for that event by preventing, as far as may be possible, anything like an unhealthy boom whether in trade or finance. The writer of the circular to Which I have referred then devotes some space to showing that so far there has been nothing in the nature of an unhealthy boom, either in stocks or in commodities and that it is this perpetual talk about a possible slump which is affecting the minds of the investors, and is bringing business on the Stock Exchange to a standstill and occasioning unnecessary loss to investors.
CAUSES OF DEPRESSION.
.While, however, fully appreciating the force of these arguments, and especially of the effect which can be produced at any time by psychological influences of a depressing character, I venture -to think that the writer has scarcely made a sufficient allowance for such hard facts as the following : (I) That many of the, influences responsible for trade activity and for the prolonged rise in securities have been either artificial or temporary. The ease in money responsible for the great rise some two years ago in gilt-edged securities was largely the result of monetary policy on the part of this country and the United States, while the operations of Exchange Equalisation Accounts have done much to expand credit. These Government measures may, or may not, have been justified by the requirements of the situation, and they may, or may not, be proved to have been wisely ordained. The point is, however, that because they were not of a purely natural character and depend for their continuance upon Government policies rather than upon natural condi- tions, there has been the underlying tendency to mistrust somewhat their enduring influence.
(2) The market for gilt-edged securities in particular has been adversely affected by the 'great groWth in the national expenditure just" as the. original rise was helped by the economy programme of six years ago. Here again, I know that much of the increase in expenditure, especially in later years, has been due to unpreventable causes, such as the need for rearmament outlays. Unfortunately, the Govern- ment in its desire to keep up prices of gilt-edged securities has issued its -recent loans on terms wholly unacceptable to the investor; with the result that it has been a case of constant re-sales by Government departments of blocks of stock which should have been at the first instance placed in the hands of the investor. The fall thus brought about in Government and kindred stocks was bound to have its effect in bringing down prices of almost every form of investment security.
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FINANCE (C3ntinued from page 1210.) (3) One of the outstanding features of the Stock Markets when prices were rising _extensively and generally was the great advance in the price of gold shares, sympathetic with the rise in the price of gold itself. For the past month, however, apprehensions -originally stimulated by reports from Washington have been entertained that, owing to the great increase in gold production and the huge stores of the metal in the United States, a cut in the price of gold was probable. The reports have been denied repeatedly, hitt their effect has been to produce a great fall in all South' African gold shares and the effect of losses in that direction has naturally exercised its influence upon other markets. (4). Some months ago, a great deal of British money was placed in American securities in the belief that prices in Wall Street were likely to rise substantially In the -United States, however, this great influx of foreign capital and the advance in prices both of shares and commodities has excited apprehensions in Washington and something like a campaign against the movement has taken place. This has resulted in a general fall in American securities _and, once again, losses have been sustained calculated to react upon the Stock Markets generally. (5) By way of adding to the adverse influences operating upon markets the past six months have seen a fresh currency and political crisis in France, and although this may have resulted in French balances being sent here, the situation is quite rightly regarded as an undesirable one, both frOm the financial and political standpoint.
(6) At this moment, when a good many adverse influences were affecting the Stock Markets there came some two months ago a bolt from the blue in the shape of the ill- considered original proposals of the N.D.C. impost.' It is true that the proposals have since been withdrawn' and a more reasonable tax has been introduced in its place. Unfortunately, however, the withdrawal did not take place until infinite harm had been done, for the Government itself has now virtually confessed that the markets' view of the original tax as being inequitable and calculated to check business enterprise was thoroughly justified. It is one thing, however, to set in motion influences calculated -to check public confidence and another to restore the feeling of assurance that previously existed, and undoubtedly' some part of the depreciation, at all events in Home Industrial shares, must be attributed to the unfortunate effect of the original N.D.C. impost. (7) And finally, there has of course in the background lurked the apprehensions with regard to the international political outlook. In a sense the expenditure on the rearma- ment programme has given some reassurance, but in another sense the magnitude of the expenditure has also served as a constant reminder of the dangers which have to be faced. Whether the actual situation at the moment is better or worse than a few months ago, only those with inside know- ledge can say, but just as twelve months ago the exuberant cheerfulness of markets was such as to withstand the-effect of any concern with regard to European developments, so today, when the psychology of markets has changed, greater attention is given to political possibilities.
FINAL CONSIDERATIONS.
In view of these very tangible factors and others which might easily be enumerated, it is scarcely surprising that their cumulative effect upon Stock Exchange prices should have been very great. It can of course be admitted that just as a few months ago the tendency was to. ignore all unfavourable points or possibilities in the situation, so the tendency today may be rather in the other direction. Trade undoubtedly remains active, and while much of it is connected with the special rearmament expenditure of the Government, there is also a very real revival of what may be termed ordinary trade, and there are not altogether wanting indications of some expansion in international trade. I think it is probable, too,. that the gold kare has been considerably exaggerated, by which I mean that 'even if there were to be some small cut in the price for the metal the effect might not be anything like as disastrous as has been stated -in some quarters. Not only so, but it is . also probable that accumulated investment resources are very (Continned on page 1214.) FINANCE (Continued from page 1212) considerable, though even in that respect allowance must be made for the losses sustained in the lowering of security values during the past six months.
In view of Government expenditure and further loans which have to be issued, it seems unlikely that there can be any early marked rise in Government securities, and of course the yield from these stocks constitutes a standard for yields from all other securities. Moreover, we are now approaching the summer period of the year when there is usually a pause in both speculative and investment activities, and in view of the political and financial uncertainties of the moment it would not be surprising if the stock markets were to remain sluggish for a while longer. Unless, however, political developments should take some very unfavourable turn, I am inclined to think that later in the year we may see a fresh turn in markets with some recovery of the losses which have been sustained through the fall in securities during the past six months. The present moment, indeed, is not one for realising any securities of a reasonably sound
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