NORTHERN ADVOCATE DAILY FRIDAY, MARCH 15, 1929. THE FINANCIAL OUTLOOK

Northern Advocate, 15 March 1929, Page 6

NORTHERN ADVOCATE DAILY

FRIDAY, MARCH 15, 1929. THE FINANCIAL OUTLOOK

Registered for transmission through the post as a newspaper.

“New York is now the money centre of the world. Wo hold the bulk of the world’s gold supply. We have assumed the role of tho leading Empire of the globe. We have usurped the place of Great Britain in world business, leadership and finance.” This offensively inaccurate paragraph is extracted from an article by the financial editor of “Forbes,” an American business and finance journal published in New York. The statement is made for home consumption, of course. Though it may prejudice the Britisher against the general findings of the writer, there is nevertheless a good deal of argument in the editorial which Now Zealanders may study with advantage. In commencing his ai'ticlc, which is entitled “A forecast of security markets for 1929,” the writer asks; “Has the stock.market entered

a new era, or are the old laws of economic action still sound?” In answering his own question, he expresses the opinion that “fundamentals are not so favourable, and tremendous public speculation, suggests need for caution.” The editor of “Forbes,” who is writing particularly of the American money market, puts this query to people who speak of a new era having been entered: “Are conditions so changed in business, finance and speculation that the old laws, the old rules which have served in the past must bo cast out and discarded?” Again supplying the 1 answer, the writer says that the most important, the most readily discernible and the most reliable of these ancient rules concerns the credit situation. And that rule indicates that when a long “bull”

market for securities has been built up on “easy money,’ ’ good business and general prosperity, the end of such an upward movement is usually preceded fairly .closely by decisive signs of firmness on the anoney market. Inter* est rates, it is pointed out, were at what may ibe termed low levels from the middle of 1924 until the beginning of 1928. Since then they have advanced rapidly until today (January--15, 1029) they stand close to the highest levels witnessed since 1920 and 1921. “The significance of suc'h signals for the long-pull movement of the security markets,’' says the writer, “cannot be over-estimated —if we are not in a new era,”

“And what arc the arguments,” asks the editor, “for believing that wo may bo in such a new era—an era in which the security markets will go churning spectacularly upward without regard for the old established laws of our fathers? There are various arguments and we must admit that many of them are justified. Perhaps the best one is that for the past three years, especially in the past year, the security markets have gone far beyond any performance which

would have been deemed thinkable in previous times. For nearly three years the stock market moved in cycles, and its cycles ■were fairly well behaved as such cycles go. Then the market began to fool the old theorists in 1926, It refused to go down and get back into the range it had occupied for so many years. Instead, it jumped over the old fences, it laughed at the old rules of chart-readers, and ran faster and in its new . freedom until the picture of last year’s record would never be recognised or admitted as an offspring by its forbears of a few short years ago. To that extent, then, we have entered a now era.

And searching - about for something upon which to pin this record-breaking advance and justify it, we find another and correspondingly new era in American financial conditions since the World War. The United States has jumped from a debtor nation to a creditor nation in a decade. New York is now the money .centre of the world. We hold the bulk of the world’s gold supply. We have assumed the role of the loading Empire of the globe. Wo have usurpd the place of Great Britain in world business, leadership and finance. And then, looking back upon

the record of Great Britain when she was at the top of the heap, we find that securities in companies no better than we have here so\d at levels much higher than we were -ased to in previous dispensations: that is, they gave yields much lower than we wore used to. Wo find British stocks of good character still sell for from 15 to 20 times their annual earnings. And here a few .short years ago we thought a reputable Anlerica.n stock ought td> sell at only about ten times its annual earnings. Here, too, is our “new era,” in the basic fundamentals -of world business and finance. And so those professional optimists who are serving this “now era” have considerable justification on their side of the argument. We have stated their case, hut it is not the full case.”

After further reviewing these arguments, the editor of “Forbes” contends that, the factors onnumerated above, fine as they may be, arc not sufficient to prove that the whole economic order has changed. “It is our conviction,” he says, “that the signal of firm money is genuine and that it foretells such an eventuality. We do not allow the argument that the recent credit stringency, with its higher rate,?,

is artificial. Corporations, it is said,

have plenty of money. The public, it is said, has plenty of money. Those things are true. But they were also ! ° ' said, and they were also true, at the peak of nearly every bull market in the past. The fact that corporations and individuals have poured surplus ' funds into credit accommodation for the security markets during the past year, until now they arc lending twice as much to brokers as are New York reporting banks themselves, has served to discount the attempts at credit deflation by responsible financial bodies, but such a situation has not lowered the cost of carrying stocks. Buch .a situation does not make the security market status firmer; it has most certainly weakened it. It does not mean that large corporations find it advisable to continue plans for expansion. Rather, it means that such surplus funds arc constantly being diverted into speculative credit channels because they can earn more there than they could in actual business enterprise. It means that the public is paying the price for speculation. It means that large corporations arc “ re-selling’ ’ their stocks to this profit-mad public. The public is holding the bag twice over. First they paid cash to the corporations for their stocks. Now they are buying those stocks over again at higher prices and borrowing back again the money they originally paid for the security issues. It is a process of lifting oneself by his own boot-* straps. Business has seldom gone on expanding very long after the price of money has advanced beyond its normal levels. 'Commercial paper rules today at 51 per cent., compared with 4 per cent, a year ago. It is the, highest rate seen in over six years for business credit. If the old rules still hold, therefore, high money rates must gradually but surely tend to discourage speculation and put a damper on the advance of business and the expansion of industry. Such forces are gradual. Like the mills of the gods, they grind slow r but exceedingly fine. Little by little, it becomes more difficult for builders to finance now construction, building sags off slowly. Gradually, demand for building material declines, steel operation slow down, men are thrown out of work/ public spending is curtailed, the motor industry suffers. And, 10, we begin to read that the industry of the country has declined into a temporary depression. This is not a prophecy. We do not prophesy all of the above steps. It is merely an enumeration, of the advancing tide of the cycle by which high interest rates can bring eventual reaction into the stock market. ” The editor of “Forbes” does not wish to alarm his readers, for he goes on to qualify the danger signals he has set out by saying that they indicate merely the tendencies for the long pull and do not promise any immediate collapse. “It is true now, as it always has been in the past, ” he concludes, “that theories anent the security market’s future trends are usually correct, but they are often mistaken by the public for being correct too soon. In other words, the security adviser looks so far ahead in detecting future tendencies in order to warn of coming events long before they occur, that his public may accept his warnings, act immediately and find itself also ‘right too soon.’ ”