Wall Street

Sun (Auckland), Volume III, Issue 805, 28 October 1929, Page 8

Wall Street

INFLUENCE OF SPECULATOR

By

“NOON CALL”

WHEN reports started to come through from New York early last week about a decline in share values the world took little notice ; spectacular rises and falls on the New York market over the past year or so have been so frequent that they threaten to become commonplace. When it was announced on Friday, however, that sustained and frenzied selling pressure had resulted in the wiping out of approximately £1,000,000,000 in paper values, with a reaction in Canada and London, financial circles were compelled to recognise that the movement was as serious as it was spectacular.

The underlying cause of any sustained move in the general level of share prices is fundamentally economic. There are contributing factors, but, although their influence may be disturbing while it lasts, they are seldom far-reaching. The New York market cannot be judged by ordinary standards. Although it is governed by the same economic principles as any other stock markets, it deals with a far wider range of investors on terms entirely different from any other Exchange and, as a result, is liable to psychological influences more or less kept under control in other parts of the world.

MANY INVESTORS A recent commission found that little short of 20 per cent, of the American populace was directly interested in the investment market. Brokers, there are not hampered by any false sense of dignity, and they push legitimate business by advertising and other recognised sales methods. A big part of the business is done “on margins,” the balance being financed by brokers’ loans from the banks. Turnover for a profit is the main objective, and business, for the most part, is mainly inspired by indications of future gains.

Whereas, for instance, the average rate of immediate return on investments in sound industrials made in New Zealand would be somewhere in the vicinity of 5 per cent., on the New York market the average level for similar securities is under 3 per cent. It has been to invest in this class of security that the average American lias been working on borrowed capital for which he has paid anything up to 9 and 10 per cent. For some time now economists have urged that this tendency to gamble for future profits must end as prices had been forced well above their true level. No market is more temperamental than that dominated by the speculative element, and it can be seen that, when economic factors combine to bring about a decline in price level, the fall is liable to be accentuated and more spectacular than would otherwise be the case as a result of marginal operators rushing to cut losses; not only to save what little they can from the wreckage; but also to prevent themselves from getting into debt with their brokers.

It would not be wise with the paucity of information given by cable messages to make any definite statement as to the reason for last week’s spectacular debacle on the New York market. There is no doubt that however much the psychological element may have entered into the situation after the first movement to lower levels had set in, the real cause was economic. LONDON BANK RATE Firstly, prices in the greatest number of groups were well above true levels and these could not be held indefinitely by a range of investors working on capital borrowed at a comparatively high rate of interest. Secondly, New York, despite its heavy resources of gold, could not remain for ever unaffected by the world-wide financial stringency: there Is no doubt that the recent rise, in the Bank of England rate would have an effect in New York. Touching on this phase of the question, the “New York Times” on Seotember 27 said: “The effect of the higher London bank rate on the Wall Street situation is a matter for conjecture. It remains to be determined whether the 6J per cent, official bank rate will call home enough British money, now on loan in New York, to relieve effectively the London situation or embarrass Wall Street.” Whatever may be said to the contrary, it must be admitted that the New York market has not been in a healthy condition for some time; loans on stocks and bonds have been attracting up to 9 per cent., while ordinary industrials, which a speculative market considers have possibilities from the point of view of price appreciations, have been selling at prices promising an immediate return of under 3 per cent. The end had to come, and it only needed slight economic pressure to start the crash. However strong the conservative section might be, its influence would prove futile in any attempt to support a market forced to unsound levels by a buying pressure based on speculative greed rather than sound judgment. Last week’s debacle was more severe than any other in recent months, simply because the market refused to heed repeated warnings which were plain to anyone prepared to forget the craze for speculation and view facts conservatively.