Prophets and prophecies MONEY
NICHOLAS DAVENPORT
It is not my intention to make but to review some prophecies. The Stock Exchange tipsters had a field day in the Sunday press and on Monday the jobbers were caught so short of stock that the Financial Times index of indus- trial shares went through the magic 500 barrier. (From its September high point of 522 the index fell to 474 and had been hovering around 490 before Christmas.) This prompted every 'bull' to prophesy 600-plus as the 1969 peak. Having said farewell to the 'bull' market three weeks ago I was not unduly perturbed by this techni- cal reaction to the tipsters' boost, but in my post I received a letter from a constant reader (who should be nameless but was in fact Lord Boothby) with this startling sentence : 'I make two predictions for 1969: (1) The price of monetary gold will sharply rise and (2) Equity shares, and particularly international shares, will rise to unprecedented heights.' That is the sort of no-nonsense prophesying which needs careful thought.
To take the second half of the prophecy first, the reason why I was paying farewell to the 'bull' market in equities was simply because at home we have a Chancellor who is tough and deflationary and will not allow much growth until we have 4 £500 million surplus on the bal- ance of payments, and because abroad we are facing—according to most economic experts— a slowing down in the rate of growth of world trade. None of this can be regarded as bullish for company profits. In 1968 company profits increased on the average by 20 per cent, but in 1969 the growth might well be halved. The Economist goes so far as to say: 'In Britain we expect 1969 to be a year of internal stagnation and probably of rising unemployment.' As for world trade, the total imports and exports of the industrial countries rose by about 12 per cent in 1968—double the rise in 1967—but in 1969 the OECD estimates a rise of around 8 per cent and the Economist of around 5 per cent. France has already turned protectionist and America under Nixon might well follow suit. Certainly if the Vietnam war is to be pulled back, we cannot expect American imports to show anything like the 1968 increase in value of 22 per cent. The us accounts for a seventh of the free world's trade. All this makes me feel cautious about average company profits, including those of the international groups.
What seems to lie bebind Lord Boothby's prophecy is the expectation that there will be another international monetary crisis which will cause the price of gold on the free market to rise sharply and somehow induce the central banks to raise the monetary price of gold (which has been fixed at $35 an ounce since 1934). All this is highly controversial. Undoubtedly we still face a potential monetary crisis. There are still large imbalances in international payments and `very-little has been done to correct them. There is a large discount on the forward franc and a premium on the forward Deutschemark. If the French austerity works and causes serious in- dustrial unrest and strikes, or if it does not work at all, the franc could be upset and, if devalued too severely, upset sterling as well. All this is
possible. And if any crisis of this sort occurred there would no doubt be a sharp temporary rise in the price of gold on the free market and a flurry in gold shares. But what Lord Boothby does not seem to appreciate is that this would not necessarily cause the central banks to raise the monetary price of gold.
A new gold price cannot be arranged without a world monetary conference and it is utterly useless to call one while the views of the 'gold bloc' and the American Treasury are poles apart. The last Secretary of the American Treasury, Mr Henry Fowler, was prepared to demonetise gold rather than be forced to raise the official price and when his successor, Mr David Kennedy, made an ass of himself at his first press conference by pretending that he was not committed to a fixed gold price he was promptly corrected by the President-elect. I can- not see any American businessman at the White House agreeing to write up the price of gold to $70 an ounce after he had sold $10,000 million of the stuff in recent years at $35. It would make him look such a damned fool.
I agree that it may become impossible to fin- ance a fast-expanding world trade with an in- adequate gold stock at a fixed gold price, but world trade can be equally well financed by the 'paper gold' of the SDRS and, if need be, by the dollar and the pound going off gold and floating against the gold bloc currencies. As the bulk of world trade is contracted in dollars and pounds these paper currencies would soon command world acceptance—provided always their gov- ernments pursued anti-inflationary policies. In view of the strong political objections to writing- up the monetary price of gold and in view of the general 'de-bunking' of gold in current well- informed discussion—gold is no longer revered except by Arab sheiks and French hoarders and at No 1 Eaton Square—I cannot see the world powers taking any action to cope with the franc- mark imbalance other than by agreeing to sen- sible new parities for these out-of-line cur- rencies.
While a renewal of crisis in the world mone- tary system may be a 'bull' pointer for certain mining shares the rise in interest rates which it usually brings is the reverse of helpful for in- dustrial shares. At the moment the trend is already upward because the Federal Reserve, scared of its current domestic inflation, has raised its discount rate and has allowed the Treasury bill rate to move to an all-time 'high' of 6.7 per cent. The international money mar- vets have felt the pinch and the Euro-dollar rate for three months' money is now around 7 per cent. If Wall Street decides to give President Nixon a good send-off by stating a further market boom the Federal Reserve would soon be forced to cut the money supply, raise the dis- count rate again and bring on a market slump.
I am not making any prophecy, but it seems to me that equity shares are not going to have an easy ride. There may be an early uplift but it may well be followed by a quick recession— especially if the budget brings a rise in corpora- tion tax. On economic grounds there is a stronger case for a fall than for a rise at home. But it may be foolish to talk of 'bull' or 'bear' markets. There is plenty of scope for further takeovers in the reconstruction of British in- dustry—last year takeovers and mergers touched £3,000 million—and every active in- vestor will rightly be busy trying to find the takeover winners of 1969. We will all agree with Lord Boothby that these will rise to 'un- precedented heights.'
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