This is what the end of capitalism is like…
Posted on August 10, 2007 by Richard Beddard
Filed Under Markets |
When you woke up this morning it may have felt as if the end of capitalism was nigh. That’s unlikely, when you consider what the end of capitalism would really feel like.
Listening to Bloomberg Radio, the headlines seem mildly apocalyptic. Fears that defaulting US mortgage holders will lead to global debt contagion re-emerged as BNP Paribas, the French Bank, announced it was preventing investors from redeeming funds worth over a billion euros because it can’t place a value on them. Nobody wants to buy whole tranches of debt securities. World Stockmarkets fell by up to 4% yesterday, and opened lower today. The Chicago Board Options Exchange volatility index (VIX) is at four-year highs. Investors are rushing to government bonds and other safe havens. Debt-backed take-overs, spin-offs and other deals are on hold or unraveling.
To be fair the dominant opinion is uncertainty not calamity. Against fears that the sub-prime mortgage defaults could turn into a major problem for banks, commentators put forward all sorts of reasons to be cheerful from the strength of the banks to the strength of the global economy. Meanwhile George Bush reassures jittery markets, and Wal-Mart has entered a list of the top 100 US exporters partly because it’s selling chicken wings to China. I’m not sure which is funnier.
None of this will convince the bears, although I hope the chicken wings might bring a smile to their miserable faces, but rather than weighing into that argument again*1, I want to do something different today, and remember a time when it really did look like the end of capitalism was nigh. As usual*2, my ally is John Littlewood’s excellent stock market history. The place is London, and the date is 1974.
Then the Government was battling 16% inflation and escalating commodity prices following on from war in the Middle East and the oil price shock in 1973. Pay talks with miners and train drivers became a national obsession and industrial action, petrol rationing, and the three-day week showed that although the government was exercising more and more control over the economy, it had in fact lost control. The most pernicious control, as far as the stockmarket was concerned, was incomes policy. The idea was to cap prices and wages by negotiation or legislation, to bring inflation under control. In practice the Government was much more successful at capping prices than wages because of the power of the unions, putting industry in a tricky situation. While costs were rising across the board, inflation pushed Sterling down and the cost of imported raw materials up, companies couldn’t pass the rises on to their customers. Profits sank to post-war lows, and for many of those companies that were profitable, profitability was an illusion when reinvested at vastly inflated prices. To cap it all, if you’ll forgive the pun, even those companies that could reward investors found themselves limited by Government restrictions on the dividends they could pay. Joe Bloggs, didn’t mind (unless he was a pensioner) - his pay was rising even faster than inflation.
In elections in February 1974 voters returned a hung parliament and the Labour government of Harold Wilson replaced Edward Heath’s Conservatives. The new Chancellor, Denis Healey immediately raised taxes, having promised to squeeze the wealthy until “the pips squeak“. Tony Benn, a prominent left-winger, became minister of industry. By the end of July the FT Index had fallen below 200, a level last seen 19 years earlier…:
The fall below 200 had a devastating psychological effect, and a paralysing pessimism took hold of a significant number of stock market practitioners, fund managers and company directors. Some genuinely believed the capitalist system faced collapse. Stockbrokers had been cutting costs to the bone and reducing staff for months on end, but with revenues still well below expenses, many partners began to contemplate the horror of unlimited liability and its stripping of their houses and furniture. Fund managers accustomed to big and growing surpluses in the market value of their investments now looked in shock as the capital profits accumulated on investments over a generation were wiped out. Alarming shortfalls were appearing in assets held against liabilities to guarantee life polices and pensions. Institutions dared not invest ever-larger cash balances for fear of further losses. Companies were running out of cash and forced to borrow at record rates of interest. Many faced bankruptcy.
There were fears about the financial sector then too. The big banks were bailing out smaller lenders and a deeply discounted rights issue kept Commercial Union solvent. National Westminster Bank reassured investors after its shares fell below par value, meaning it couldn’t do the same. The Government paid £50m to bail out British Leyland, coalminers claimed a 60-90% rise in basic pay and the market lurched into a final sell-off as Christmas approached.
Mr Littlewood calculated that in two years, a private investor with a £20,000 portfolio of blue chip companies like Courtaulds, General Electric, Marks & Spencer, Shell and Slater Walker, had seen it shrink in value to £6,000. In 1974 alone, the market had suffered five collapses of 10% or more. The FT Index fell 2% or more on fifty occasions. The FT Index fell by 73.1% from its peak of 543.6 in 1972 to 146, worse even than the 53% fall between 1929 and 1931 and the 61% fall culminating during the Battle of Britain.
A stockmarket report by James D’Albiac of Rowe & Pitman declared:
This bear market is the financial equivalent of the Great War. Lamps going out, end of an era, casualties numbered in millions, will it ever end?
That is what the end of capitalism feels like. I was in primary school and a solar eclipse, the long hot summer of ‘76, the Queen’s Silver Jubilee and hitting a rounders ball over the classroom are pretty much all I remember. But I’d venture that, if the events of the last few weeks are the beginning of a bear market of those proportions, things are going to get an awful lot worse for the economy.
But let’s say bear markets like the 1974 market are, like the floods in Tewkesbury, once in a generation events. How would you react? In many ways the lessons of the recovery in 1975 are even more instructive, but that’s a blog for another day.
Footnotes:
- See: Wobble or World’s end? Falling house prices wouldn’t trouble markets, The Great Crash of 2009, The boom must go on.
- For more insights from the past, see: So you think Glaxo’s cheap, Supply and demand 60 years on, The sixty-year bull market.
- Another bad day for the markets, courtesy of Howard Lindzon.
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6 Responses to “This is what the end of capitalism is like…”
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“But let’s say bear markets like the 1974 market are, like the floods in Tewkesbury, once in a generation events. How would you react?”
I would “react”, as many have from 1974 to the present:
I would form producer, consumer, and banking cooperatives (world-wide) and support monetary reform ((world-wide) [abolish the Federal Reserve [[and the Internal Revenue Service]], and install a National Dividend, based on Social Credit) in favor of Economic Democracy, thereby dropping the bottom out of corporate imperialism (monopoly capitalism) and exclusive “entitlement” — forever.
Any more questions? Come get some. You know where to find me.
Sadly I am old enough to know about the collapse of Slater Walker and so I can say it does not deserve a place next to Courtaulds, Marks & Spence, Royal Dutch Shell or GEC. In fact many people thought in those days that if Slater Walker was capitalism then they had had enough of it.
i remember my economics teacher at school telling me to buy south african gold shares in 1972.
i remember 2weeks before xmas 1974 being urged by a country broker to buy the market.
i remember GEC selling at less than the cash on its balance sheet.
i remember THOMSON ORG at 15pence, SAVOY GROUP about the same and BRITISH LAND at 2pence.
What led to this massive loss of confidence around the world. the, rising oil prices and unstable middle east, the cost of the vietnam war, global financial smoke and mirrors.
Much the same as we are seeing today.hubris and greed the world over.
some catalyst is going to end this party !! ?
why not this ?
How would I react?
Well, because my only experience of a crisis of that order is the 70’s, I would turn to the investments that survived that era well. I would buy land, because they are not making any more of it, and it remains a strong hedge against economic troubles.
For the long term I would buy oil, rare metals, food related stocks, and alternative energy.
I would not retire just yet.
Beyond that, who knows. The consequence nobody expects is the one that will bite
Hi Angela, thanks for your reply. I think I’d keep on trading - easy to say though. More to follow on that