The Sunday Times May 29, 2022 9
BUSINESS
O
n Friday, May 20, share prices
dipped into what is called bear
territory — 20 per cent below
the previous peak. This was a
very short, intraday dip that
missed the 20 per cent by a bit,
but it still rattled investors.
Wall Street zoologists say a
bear market is driven by investors who
expect share prices to fall and who
believe that just when you think things
can’t get worse, they do.
There have been 14 bear markets
since 1945, lasting an average of 9.5
months. The most recent occurred in
March 2020, when the pandemic began.
It lasted only 33 days. Before that there
had not been a sustained bear market
since 2009, at the tail end of the financial
crisis.
By May 20, more than $7 trillion in
wealth had been wiped out by the
plunge in blue-chip stocks. Some
144.6 million American adults own
shares, but the wealthiest 10 per cent
own about 80 per cent of them. Which
might explain why the emergence of a
bear market ranks far down most
Americans’ list of concerns, well below
inflation, which affects the day-to-day
living standards of almost everyone,
with the possible exception of those
shielded by great wealth.
In the middle of that week, on May 17,
customers of two leading companies,
Walmart and Target, told their bosses to
eat the increases in their business costs
so that customers would have enough
inflation-riddled dollars with which to
feed their families. That meant the good
old days in which companies could pass
on cost increases were over. Profit
margins would be squeezed. Sell, sell,
sell. Shares of Walmart and Target fell
17 per cent and 25 per cent, respectively.
By Friday, May 20, shares were testing
bear territory, give or take a couple of
percentage points. Many chief
executives predicted a recession, setting
up a feedback loop in which chief
executives depress investors, who
unload shares, depressing investors still
more. A nightmare that produced many
sleepless nights over the following
weekend. However, before scribblers
had a chance to write about another
Black Friday to mimic the day in 1929
that preceded what would be an 89 per
cent decline in share prices, which did
not return recover until November 1954,
a week passed.
By the time the markets closed on May
27 for the holiday weekend (Monday is
Memorial Day here), shares were seven
points short of a bear market. The S&P
500 index of big-company share prices
had jumped 6.6 per cent. The Nasdaq
100 index of high-tech stocks, in bear
territory after a 28.6 decline, rose 7 per
cent during the week, leaving them less
deep in dreaded bear land. Not bad for
one week’s work.
Investors, equity “guys” and traders
are now ensconced in their weekend
retreats, some in posh Southampton
where houses rent for as much as
$300,000 a week. They are socialising,
to use a variant of a word not heard in
that company, and replacing last
weekend’s nightmares with dreams of
toys they do not yet own. All thanks to
the bulls that went on last week’sPamplonian run. Refreshed, they will try
to figure out whether the bull run will
continue or instead is a bear trap, a false
signal of a reversal of the downtrend, or
slightly worse, a dead-cat bounce, a
temporary increase in prices preceding
a new plunge. Forget the long-standing
advice, “Sell in May and go away” before
traditional summer weakness bites in.
Only those strong of heart will pack up
their troubles in an old Prada bag and go
away.
It is always dangerous to hunt for the
reasons for short-time big reversals in
share prices, but candour compels
reporting even what I deem as unlikely.
Some investors and analysts believe the
data-driven Fed might stay its hand, and
hold off on or, at least moderate, future
interest rate increases.
After all, sales of new houses wereIrwin Stelzer American Account
down 26.9 per cent in April compared
with a year earlier. Prices of used cars,
one of the drivers of the inflation rate,
fell 27 per cent in March versus a year
earlier. Consumer confidence dropped
10 per cent in May to a record low,
perhaps foretelling a cutback in
spending, especially by low-income
families. There are signs that what
Powell calls a labour market “tight to an
unhealthy level” might be loosening, as
companies announce no new-hires
policies and some announce lay-offs.
And the Fed’s preferred measure of
inflation, a construct that excludes food
and energy prices and therefore is of
minimal interest to anyone who eats or
drives, eased a bit, rising at an annual
rate of 4.9 per cent in April after
increasing 5.2 per cent in March. That is
still double the Fed’s target, but inflation
fuelled by trillions of dollars of federal
government cheques to families —
including the unneedy who continued to
receive paycheques by working from
home — and a long period of reality
denial by the Fed, can’t be unbuilt in a
day. More likely, the Fed continues
raising rates through next year, and in
addition sells off the asset-backed bonds
it has acquired, turning QE into QT,
Quantitative Tightening. The bears have
not yet hibernated.
[email protected]Irwin Stelzer is a business adviserInvestors will try
to figure out if last
week’s bull run
was a bear trap
T
here is a war on, and inflation is
at uncomfortably high levels,
having gone from under 2 per
cent to more than 10 per cent in
the space of a couple of years.
Households feel badly squeezed
and are having to penny-pinch
to make ends meet. People
were looking forward to the sunlit
uplands, but times are very tough.
This is not, though it could easily be, a
description of where we are now — but of
the economy at the start of the Queen’s
reign, in 1952. The war was in Korea and
60,000 British troops were involved,
1,100 of whom lost their lives, alongside
37,000 US troop losses and 227,000
South Korean deaths.
As we mark the Queen’s Platinum
Jubilee — a length of reign that will surely
never be repeated — the economics of
this 70-year period are fascinating. In
1952, according to modelled estimates of
the current consumer prices index (CPI)
by official statisticians, inflation peaked
at just over 12 per cent, though ended
the year below 7 per cent and during
1954, after the end of the Korean War,
dropped below 1 per cent. The Treasury
and Bank of England would love a repeat
performance now.
The Queen’s reign has been
bookended by high inflation, and
inflation has also in many ways been the
story of her reign. For a long time, the
UK was thought to be the most inflation-
prone of the big economies. Today, with
the highest inflation rate in the G7, that
label is back — though this time, it is to be
hoped, only temporarily.
Over the 70 years, prices overall are
more than 18 times what they were in- For inflation, it has been roughly a
game of two halves: from 1952 to 1988,
consumer prices inflation averaged
6.4 per cent; since 1989, the average has
been 2.5 per cent. That includes the
period since the Bank of England’s
independence in 1997, in which the
average, despite the current surge, is still
clinging on to 2 per cent.
The difference between the two
periods shows the power of
compounding. A 6.4 per cent inflation
rate, over about 35 years, would leave
prices at the end roughly nine times
where they were at the start. If inflation
after the current episode were to settle
at 3 or 4 per cent, rather than 2 per cent,
the implications would be significant.
In the 1950s, people really could enjoy
a night out with a ten-shilling note; to
remind younger readers, that was the
pre-decimal half of £1. But ten shillings
then is equivalent, in real terms, to
about 2.5p now, and even I would
struggle for a night out on that.
You will ask, as you should, what has
happened to earnings over this long
period when inflation has eroded the
purchasing power of money so much.
The answer required some statistical
detective work, since the official series
for average earnings goes back only to - But piecing it together using the
Bank of England’s millennium of data, I
estimate that average weekly earnings
were £6.04 in 1952, compared with £605
in the second quarter of this year. In
cash terms, total average pay, admittedly
boosted this year by exceptional
bonuses, is 100 times what it was. If
Once, we didn’t
need huge pay to
live in style. Homes
then pulled away
regular pay, excluding bonuses, is used
for the comparison, earnings are more
than 90 times what they were. The
precise magnitudes can be debated but
the broad conclusion is clear: wages
have risen a lot faster than prices.
This is a game of not quite two halves.
Until the financial crisis struck in 2008,
real wage increases, alongside rising
productivity, were guaranteed. Since
then, neither has been. Real wages are
falling quite sharply now on the back of
more than decade of stagnation. Wage
growth in cash terms, incidentally, was
more than 8 per cent in 1952, 29 per cent
in 1975 — the peak inflation year —and
22 per cent in 1980, Margaret Thatcher’s
first full year in office.
Pay has not, it should be said at this
point, kept up with all prices. The
Nationwide Building Society’s house
price index dates back, thankfully, to- Then, the average UK house price
was just £1,891. Prices had to be pulled
up by earnings, otherwise people would
the great surges in inflation — may not
notice that much. Despite the current
squeeze, living standards are much
higher than they were. The UK’s gross
domestic product, adjusted for inflation,
is more than five times what it was in- It has increased by 430 per cent.
Population has also increased, but by
a smaller amount. In 1952, it was
50.6 million — against the latest official
estimate of 67.1 million, up 33 per cent.
That is consistent with GDP per capita
rising by nearly 300 per cent over the
Queen’s reign and being almost four
times where it was. John Major once
promised to double living standards,
measured by GDP per capita, over 25
years. That has never quite been
achieved, though has sometimes come
close. Quadrupling in 70 years is not bad.
There have been other big economic
changes. The female employment rate,
35 per cent in 1952, is now 72 per cent —
though the male employment rate,
79 per cent, is lower than it was, partly
due to young people spending longer in
education. But that is probably enough
for now, and maybe the changing labour
market is a topic to return to.
PS
There were many favourable notices for
last week’s s jokes, particularly the one
about the gym and the ATM, but I have
run into supply-chain problems. I hope
that the bottleneck will ease soon.
Anyway, that gives me space to deal
with something which I don’t think we
have seen over the past 70 years: the
chancellor’s direct cash handouts to
every household in the country. It could
catch on, though if done close to an
election, it would look like bribing voters.
Rishi Sunak’s £15 billion cost-of-living
package, partly funded by a £5 billion
windfall tax on energy firms — or
“energy profits levy” — was in addition to
the £22 billion of support already
announced. The windfall tax will raise
less than was mooted a few days ago, so
most of this support is funded by
additional borrowing.
That is fine as long as the energy shock
is temporary, given that there is room for
manoeuvre on borrowing. The windfall
tax, accompanied by stronger incentives
for energy firms to invest, is a bit of a fig
leaf, though could remain in place for
three years if energy prices stay high. The
Bank of England is tasked with getting
inflation down, using all the tools at its
disposal, which looks like government
approval for further interest rate hikes. It
was good to hear the chancellor’s
support for Bank independence.
This latest package of government
support, which is rightly most generous
to those on the lowest incomes, also
gives something to everybody. Critics
will say that it maintains the pandemic
role of government as provider —
something that will be hard to shake off
when we return to normal.
In the meantime, the squeeze has not
gone away, but is smaller than it once
looked. The Capital Economics
consultancy estimates that the fall in real
incomes over the next 12 months will be
closer to 1 per cent rather than 2 per cent
or so, and thus no longer the biggest fall
since records began in the mid-1950s.
[email protected]now be able to buy a house with a
month’s average pay after tax.
The extent of that pull increased over
time, exacerbated by the greater
availability of mortgages and inadequate
new housing supply. In the 1950s and
1960s, people did not need mega City
salaries to live in style. Teachers, civil
servants and other professionals could
do so. Then housing pulled away.
The highest rate of house price
inflation recorded by the Nationwide
was 42 per cent during the Barber boom
(after then Tory chancellor Anthony
Barber) at the end of 1972 — though
house price inflation reached 32 per cent
in the spring of 1979 and early in 1989.
That last boom, named after Nigel
Lawson, another Tory chancellor, was
followed by six years of falling prices.
Even so, the rise in house prices over
the period as a whole has been
remarkable. The latest average for the
Nationwide index, £260,771, is 139 times
the 1952 level, outstripping other prices
and whichever measure of the growth in
wages and salaries you choose to use.
The Nationwide’s measure of “real”,
inflation-adjusted, house prices goes
back only to 1975, but it estimates that
they are 2.4 times what they were then.
The story of the past 70 years is not
just about inflation. The period is also
bookended by tax, with the tax burden
on course to return to the high levels last
seen in the late 1940s and early 1950s.
It is a story too of economic progress,
something we probably take for granted
and — because it is incremental, unlikeAverage house price index16,000 (1952=100)GDP constant price index125 (2019=100)THE ECONOMY’S MUCH BIGGER ...
...AND HOUSE PRICES HAVE SOARED
Source: ONSSource: Nationwide building society4,00008,00012,0001950 1960 1970 1980 1990 2000 20101950 1960 1970 1980 1990 2000 20105075100250David Smith Economic Outlook
US bears are still
growling away
A different Jubilee story: 70
years of roaring house prices
in the next few years. Investment by
businesses has stalled since the Brexit
vote, a reflection of both the economic
disruption Brexit has caused (less free
movement, the Northern Ireland
protocol) and the political turmoil it
continues to unleash. We have had three
prime ministers, numerous advisory
councils and no strategy for growth.
Public spending, like tax, is heading
towards its highest level in decades. The
pandemic required a massive response,
and ignoring the ravages of inflation on
working families was not an option. On
top of those macro factors, Sunak is
bound to a profligate prime minister
who likes to throw money at problems.
The Treasury was right to produce a
rescue package for the coming winter,
but a windfall tax was the wrong call. It
should be noted that even Johnson
opposed it. The £5 billion could have
been replaced with more borrowing — or
a smaller package could have been
better targeted at the neediest. With his
clumsy raid on the North Sea, Sunak has
shown — not for the first time — that he is
prepared to surrender his principles and
be swept along by the popular tide.More questions than answers at JD
Nobody cares about governance on the
way up. It’s only when a share price
craters that fingers are pointed.
That’s one explanation for the sudden
ousting of JD Sports boss Peter Cowgill.
Since this column highlighted the risks
concentrated in his unique person last
November, the stock has almost halved.
There is another theory, however. The
Competition & Markets Authority (CMA)
has been investigating JD over alleged
price-fixing on Leicester City and
Rangers football kits. Industry twitchers
reckon the watchdog could soon come
out with news on price-fixing that makes
Cowgill spit out his Bacardi and Coke.
If that’s the case, the fact they pushed
him out early is unlikely to insulate the
Rubin family from the fallout. Their
private Pentland Group owns 52 per cent
of JD and heir Andy Rubin was on the
board until last year. Governance has
been a growing problem, as exhibited by
the numerous mini-scandals involving
Cowgill, 69. The Rubins and the board
have waited too long to grasp the nettle
presented by their errant striker.
[email protected]investment being taxed more harshly
and the predictability of the regime
going up in smoke. One industry veteran
says: “In terms of industrial vandalism,
we may have reached a new level.”
The allowance is a trademark Sunak
fudge, though. He did something similar
about the backlash over his hikes to
national insurance, raising the threshold
at which it is paid. That reduced the
amount the move brings in without
really blunting its impact. The same
thinking was at play when Sunak pre-R
ishi Sunak’s voice was at times
drowned out by delighted
jeering from the Labour
benches as he announced a
“temporary, targeted energy
levy” in the Commons on
Thursday. Shadow chancellor
Rachel Reeves said it was a
“policy that dare not speak its name” —
the windfall tax on North Sea oil and gas
producers’ profits the opposition had
been demanding for months to help
address the cost-of-living crisis. But
industry figures bleakly joke that
“revenue tax” would be more accurate.
Companies will not be able to offset
previous years’ investments or losses
against the extra 25 per cent levy, which
will take the headline rate to 65 per cent.
They will not be allowed to deduct the
cost of decommissioning kit or servicing
interest. The tax is designed to capture
more than the standard measure of
profit, maximising its yield.
That is far from the only thing to
dislike. It will run for several years —
until oil and gas prices return to
“normal”, or no later than 2025. Sunak
said he was also looking at targeting“extraordinary” profits in the electricity
sector, which whacked shares in the likes
of Centrica and SSE. Panmure Gordon
chief economist Simon French describes
the Treasury’s inclusion of this line as
“foolish”, pointing out the “chilling
effect” it will have on those companies’
cost of capital and investment plans.
Sunak’s oil and gas windfall tax is
worse than the one proposed by Labour,
both in quantum and structure. It will
raise an estimated £5 billion versus
£2 billion, and it comes with a fiddly add-
on — more of which in a moment. Global
giants such as BP and Shell will shrug it
off, but for minnows specialising in the
North Sea it could be existential. Shares
in EnQuest, which has sunk about
£5 billion into the cold waters north east
of Aberdeen over the past decade, fell by
almost 20 per cent last week.
There was justified muttering in
Downing Street that a windfall tax would
be “unconservative”, so Sunak’s comes
with a twist. There is an allowance that
means for every £1 they invest in the
North Sea from now on, operators will
get a 91p tax saving. It is unlikely to cover
up the bitter taste of all that previousInvestment has stalled since BrexitTracking EU, US trendsPre 2016 extrapolationUK business investment406020£80billionSource: Office for National Statistics, Panmure Gordon201020122014201620182020announced an income tax cut for 2024,
having frozen the bands so more people
are dragged into higher brackets, and
when he told bosses at the CBI dinner he
wanted them to “invest more, train more
and innovate more” while planning to
raise corporation tax to 25 per cent.
The chancellor resembles someone
playing a fiendishly difficult game of
Twister, contorting himself into
impossible positions as he tries to
reconcile his supposed free-marketeer
credentials with Boris Johnson’s brand
of populism. Hanging above his desk is a
photo of Nigel Lawson, the Thatcherite
chancellor who cut the top rate of
income tax to 40 per cent. But as the
Office for Budget Responsibility says, the
tax burden is set to reach 36.3 per cent of
GDP by 2026-27 — its highest since the
late 1940s. A picture of Sir Stafford
Cripps might be more appropriate.
How much this is Sunak’s fault is
debatable. Tax rates drive economic
activity to a degree, but they are
themselves driven by growth and
spending. The former is sputtering
weakly; even if we dodge a recession, it is
barely estimated to get above 2 per centOliver Shah
Sunak is playing Twister with his
contortions on tax and spending