The private investor: I'm not crying wolf - he's at my door
Saturday 12 January 2002
All this talk about industrial militancy and Trots running trade unions puts me in mind of a Trotskyist economics tutor I once had, a very pleasant, not to say brilliant, man and one of the best teachers any of us had come across.
All this talk about industrial militancy and Trots running trade unions puts me in mind of a Trotskyist economics tutor I once had, a very pleasant, not to say brilliant, man and one of the best teachers any of us had come across. One of his most endearing qualities was the limitless patience he displayed when trying to explain to the more obtuse students aspects of economic theory.
The author of books with titles such as British Capitalism, Workers and the Profits Squeeze, he didn't think much of capitalism and what's more, didn't rate its chance of survival very much. Twenty or thirty years ago, he told us that "the wolf is at the door" of capitalism.
I suppose he might have been right at the time, but Margaret Thatcher scared the wolf off and I sometimes wonder what my old tutor made of the subsequent longest boom in economic history. Anyway, one of the economic tools he lent us could be called the "hammer and anvil" theory.
The anvil is workers' resistance to pay cuts and the general downward resistance in the economy to actual price/cost reductions: the hammer is the increasingly global economy that means increasing competition for companies which slowly but surely robs them of their pricing power. Between the heavy hammer and the iron anvil lies corporate profitability, being relentlessly squeezed between these two formidable forces.
Of course, when "workers resistance" was smashed in the Eighties the anvil suddenly cracked and gave way, profits were restored and we witnessed the long stock market bull run. This, it might be argued, was a one-off because the step change in labour markets and the general liberalisation of western economies were one-offs.
Once these effects have worked their way through the older story may reassert itself. The hammer – globalisation – is still hammering at those profits.
As Hamish McRae wrote in his column in the business pages yesterday, recent surveys in the United States show that profits in America are falling faster than at any time since 1960. This means that even though interest rates are low, a lot of money is still swilling around looking for a suitable place to call home, but not finding that home in the equity markets be-cause shares are still (relatively) expensive.
All this suggests that the long-term investor should perhaps avoid those companies most exposed to these chill winds, and take refuge in those enterprises which are not about to be undercut by the Americans or the Chinese or the Brazilians. Which doesn't leave that much.
Of course, it may all never come true, but it is an interesting bit of theorising and it looms at the back of my mind because I may well need to sell some shares to deal with a threatened tax bill by 31 January, rapidly approaching.
So on what basis should I choose which to dispose of? The ones that I have made a decent profit on, such as Diageo? Those where I should have cut my losses long ago, including Marconi? Or the the Marks & Spencer types where I should feel jolly lucky to be able to get out in one tattered piece?
Or should I heed the decades-old words of the old Trotskyist economics tutor also lurking in my memory and drop the shares most likely to have their profits squeezed betwixt the hammer and the anvil? I have to confess I have only just started to come to terms with having to think about this, and have yet to self-assess the awful size of my liability for the hungry maw of the Inland Revenue.
But right now I have an awful inkling that the wolf is at my door, and I just might be the one to do the howling.
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