2022 Was Not So Bad

In a previous blog post I mentioned the book “The Stock Market” by John Littlewood after reading the first few chapters that covered the years 1945-1960. I have now finished the rest of the book which covers the years 1961 to 1990.

If you think the 1950s were bad for stock market investors, then the 1970s were even worse. Shares lost roughly a third of their value in 1973. In January 1974 the Arab countries announced that oil prices were to be doubled for the second time. Meanwhile the miners went on strike and a “hung” Parliament with no overall control was the result of a general election. Dennis Healey increased both personal and business taxes with the top rate of income tax being set at 83%, or 98% on investment income. The Government tried to impose price controls but that did not stop rising inflation which was over 16% in mid-1974.

To quote Mr Littlewood: “The experience of 1974 is visited on investors perhaps only once in a lifetime, but, when it happens, it leaves behind deep scars that last for many years. Many private investors abandoned the stock market for good”.

The market did recover in the 1970s although in 1979 Russia invaded Afghanistan without warning and there were wars in the Middle East which disturbed markets. There was a long bull market until the crash in October 1987 at the same time as the great storm in southern England. Over two days the UK All Share Index fell by 20%. There were similar falls in other international markets.

The UK was dogged by strikes in the 1970s with businesses often becoming uncompetitive in comparison with other industrialised countries. Nothing much changed until Margaret Thatcher became Prime Minister in 1979. Thereafter she stood up to the miners, changed strike legislation and embarked on a period of privatisation (or de-nationalisation as it could be otherwise called) plus adopted a sound money policy.

The 1970s show strong parallels with the last two years. Rising inflation worldwide due to lax policies on money supply (called QE recently) and wars affecting the supply of basic commodities such as food and oil/gas.

This is what Mr Littlewood had to say about Mrs Thatcher and her policies: “Margaret Thatcher led from the front on privatisation. For the Labour party and the trade unions, she was plunging a knife into the heart of deeply held beliefs. Many in her own party would have left well alone, and many in the City were unable to comprehend the scale of her ambition or recognise the confidence she was placing in the capitalist system, but her analysis was impeccable.

In State-owned businesses, the discipline of the threat of bankruptcy is absent. The threat of takeover is also removed, and there are none of the sanctions of reporting to shareholders or being judged on performance by fund managers and investment analysts. Capital requests for investment are judged more by the political whims of government expenditure targets than by an objective assessment of the merits of the project. In Britain, the nationalised industries had become sheltered havens for the producers and the unions at the expense of customers. It was not until some years after the completion of privatisation, that the extent of over-manning and over-charging became apparent as, at one and the same time, prices fell in real terms and profits rose”.

This is a very good summary of the ills of the UK in the post-war years some of which can still be seen in some sectors of the economy such as the railways and the NHS.

On a personal note, the Lawson household has been disrupted since xmas by medical problems. Both younger grandsons got infections and daughter-in-law ended up in hospital for a few days – after waiting for a vacant bed for more than 24-hours.

The NHS is a nationalised industry that demonstrates all the ills mentioned above. More money gets ploughed into it with little obvious impact while the service level declines. In my opinion it needs to be privatised (and I am a big personal user of it so have seen it first-hand).

To conclude, Mr Littlewood’s book is a great analysis of the economic and political factors that drove the stock market in the years covered. It explains in detail the market changes such as the impact of  “Big Bang” and how investors were affected.

You will realise after reading the book that the 2020s have been a relatively benign period in comparison with the last century and that all stock markets are in essence highly volatile even if equities are still a better long-term bet than bonds. It should be essential reading for all investment managers and politicians.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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