Supply and demand 60 years on…
Posted on July 4, 2007 by Richard Beddard
Filed Under Markets, Reading list |
This is true of private equity buyouts now. It’s one of the factors driving the market upwards:
…a positive reinvestment effect occurs when companies are taken over for cash or near cash and the proceeds are reinvested. This affect may apply to the market as a whole or shares in a particular sector when one company has been taken over and cash is reinvested in the same sector. This is the simple equation of a reduced supply leading to higher prices in the face of new demand.
But those words don’t describe 2007, it’s 1947, during the Government of Clement Attlee and his Chancellors Hugh Dalton, Sir Stafford Cripps and Hugh Gaitskell:
This Labour Government nationalised nearly 20% of the ordinary share market in its first three years in office. A substantial reinvestment demand was created in a shrunken market and prices rose to all-time high levels in early 1947.
And a warning, from John Littlewood who wrote ‘The Stock Market: 50 years of capitalism at work’*<sup>1</sup>, from which I’ve taken these quotes:
However, takeovers are sometimes prompted by the euphoria of a bull market when the reinvestment attraction becomes a trap. In buoyant markets, it can be difficult to resist selling one expensive stock to a bidder and reinvesting the proceeds in another.
Today, financed by cheap debt*<sup>2</sup>, Private equity companies are buying out companies, removing them from the stock market, shrinking the supply of stock, and pushing prices higher*<sup>3</sup>. It’s not hard to imagine, as interest rates and asking prices rise, those deals becoming a trap for investors too.
Footnotes:
- A wonderful book, published in 1998. You’re going to be reading more from it!
- The same way the Labour government financed nationalisation in the 1940s
- Described in more detail in The boom must go on.
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