Doubting Thomases

Nicholas Davenport

Up goes the price of British bread but travelling abroad makes you realise that the inflationary rise in food costs is a universal, not just a British misfortune. I see that Eliot Janeway is even com plaining that American food prices are being forced upwards by Russian and Japanese purchases of Americancattle feeds, and proposes a tax on exports of agri cultural products (which are paid for in devalued dollars). I suppose he would say that British tourists are forcing up Spanish food pri ces. With pesetas at 145 to the £ I found that two cups of morning coffee were never less than 25p and in the garden of the smart hotel, where lunch for two was never under £10, the morning coffee was 50p. What I could not understand was why in an island surrounded by lobster pots it was impossible to get a lobster in any restaurant under 500 pesetas (say £3.50).

When it comes to the inflationary rise in the cost of living brought about by currency depreciation it is clear that if we have to choose what sort of scandal we must have in public life we must plump for simple call girls rather then fof the complicated burglary, telephone tapping, document stealing, election rigging and cover up of dishonest transactions which destroy public confidence not only in the Government but in the currency. Dr Perre Rinfret, a New York economist who campaigned for President Nixon, was reported in the Sunday press as saying that America was an "international bankrupt," that its economy was out of control and that there could be three more dollar devaluations. It is a pity that a swingeing tax is not imposed on the hyperbolical effusions of economists, which might induce them to talk less and not exaggerate so much. America has just had its first trade surplus on current account in nineteen months and its collosal budget deficit is, in fact, being reduced. In another twelve months the dollar could look a different currency. But it is certainly true to say that the Watergate scandal has destroyed public confidence in the

Nixon government and in its capacity to manage the economy

and curb the inflation'. And this casts a lengthening shadow on the dollar which has lately been extremely weak. In fact, it is at its lowest ever in terms of European currencies. The mark and Swiss franc are now 20 per cent to 25 per cent above their Smithsonian dollar parities. The rush out of dollars is responsible for the sharp rise in the free market price of gold which has now risen to $127 per ounce — a rise of 27 per cent in a matter of weeks. It is a remarkable and saddening fact that at present no one in the world wants to take in the paper of the richest country of the world. It was the loss of internal rather than external confidence in the top management of the United Sates which accounts for the extraordinary conjuction of a declining Wall Street and an accelerating growth in the American economy. Their 1972/73 boom has simply been ignored in the market. Yet the strength of the economy has been fantastic. In the first quarter of the year the growth over a year ago was measured at 8 per cent in real terms and, allowing for the rise in consumer prices, at 17 per cent in money terms. 'Company profits have been soaring. Since the end of 1971 they have jumped from an annual rate of $85,000 million to over $110,000 million before taxes and from under $50,000 million to over $60,000 million after taxes. Wall Street has just treated the boom as a great non-event. It is possible to buy General Motors, the great est company in the world, at just eight times last year's earnings and some of the other giants, which dwarf our own companies, at only five times last year's earnings. Compared with the price-earnings ratios in London, Wall Street is a give-away. It is not reasonable to explain the weakness of Wall Street by

the fact that some leading eco nomists have predicted the ending of the boom in 1974. Housing

donstuction, they saris softening

and the US Commerce Department's composite index of econo

mic indicators turned down in April for the first time in two and a half years. All this merely suggests that a major boom will tail off next year, as it ought to do, into a mini-recession. No, the per

verse depression which brought the Dow Jones index from lobiat the end of January to 89'3 at the

end of May while company profits were soaring points to the fact that the small man has completely lost his faith in the financial elite of Wall Street as well as in the official elite of Washington. He has pulled billions of dollars of his depreciated savings out of the mutual funds whose bad performance has cost him more damage than the great slump of 1929 cost his father. The American mutual fund record has been as appalling as that of Bernie Cornfield's IOS — which the Securities and Exshange Commission happily barred in America — and it does nothing to restore public confidence when the American financier who affected to rescue IOS is alleged to have,robbed the fund of millions of dollars, contributed heavily to Nixon's campaign funds and received White House ' cover' protection when the Swiss Government brought a suit against him in their courts on behalf of their outraged unit holders.

To sorneextentthe small man in this country has also been losing faith in the financial elite in the City. The economic boom which the Heath goverment started with its massive hand-outs did not project the equivalent stock-market boom it should have done. It was on historical standards a shortlived one. Instead of lasting two years it petered out in a little over a year after it had made its double top of 540 in the middle of 1972. The reason in my view was that the small man could not stomach the spate of take-overs and mergers engineered by the financial elite to their own immense profit. The Pergamon affair was not encouraging. Nor the Lonhro latest. The amazing Slater Walker ' growth through skilful financial chess-playing is now running into severe criticism in the Press after the merger with Hill Samuel, partly, I suspect, because Press photographers are not allowed inside the Slater financial cupboards. Then, of course, the favourable conjuncture of economic and political factors, which is the essential ingredient of all bull markets, disappeared when the TUC broke off talks with the Government.

1 have iiia that the bull market is not likely to be restored until

the Government talks over Phase 3 with CBI and the TUC are happily concluded. The encour aging speech of Vic Feather on May 30, indicating that the TUC might be prepared to accept a pay norm as part of an agreement on a voluntary policy for Phase 3, coupled with the bullish FT monthly survey of business opinion which was published this week, will explain why the Stock Exchange started its new account this week with a spurt in the FT index to 480 (the bottom was 426 in March after a fall of 20 per

cent). The weight of money coming into the market from the sav

ings institutions should keep the index trading in the 480's but a break out over 490 would indicate that the small man had recovered his confidence in our financial elite. At the moment I don't believe he has.