If that sounds like today's situation for investors, it was the same scenario between mid-1972 and early 1975 when London saw the worst bear market so far - with the index dropping a whopping 73 per cent. While the parallels are alarming, readers could profitably heed the lessons of those dark days.
Easy money to blame...
It stemmed largely from the Conservative policy of ample credit that produced both inflation and speculation, and it was aggravated by the end of fixed-exchange rates after the US, embroiled in Vietnam, had accumulated a deficit of $56bn (£28.5bn). Having suspended the purchase of gold with dollars in 1971, President Nixon then devalued to $38 (and later to $42.22). The London market peaked at 540 just before June 1972 when the pound was floated; it halved against the Swiss franc over the next three years. October 1973 saw war between Israel and Egypt, followed by the quadrupling of oil prices within months.
On 13 November, the Minimum Lending Rate reached 13 per cent, having doubled in a year, exacerbating the secondary banking crisis. Six days later, leading bankers were summoned to the Bank of England, and it was gone midnight before they had agreed to rescue 30 upstarts like Cedar Holdings and London & County Securities. Barclays, for example, bought Mercantile Credit.
Who runs the country?
With the FT30 dipping below 400, the same month saw a wage-freeze, leading to industrial unrest that, in turn, forced the government to introduce a three-day week which lasted three months – with power-cuts continuing after that. The miners struck outright in February 1974, forcing a General Election - and the index was still only halfway through its decline.
The new minority Labour government eventually had to get a loan from the International Monetary Fund, and Denis Healey, as chancellor of the exchequer, was even humiliated at Heathrow when he was forced to cancel a foreign trip and rush to Blackpool where the Labour party conference baulked at spending cuts. At the previous conference, he had threatened punitive taxation being slightly misquoted ("tax the rich till they squeal"). Investor Jim Slater focused on cash and advised everyone to buy a bicycle, a shotgun, baked beans and Krugerrands.
The gold price was doubling to almost $200 an ounce, inflation rose by 7.1 per cent in 1972, another 9.2 per cent in 1973 and then by 16 per cent in 1974. The worst month of 1974 was annualised as 30 per cent and the following year it was still 24.2 per cent. By the summer of 1974, the index was in free fall, going below the psychologically important 200 level in tandem with the Dow Jones, which had now fallen from 1051 to 577, although it then recovered ahead of President Nixon's resignation.
Meanwhile, the building societies had already cut lending from £3,630bn in 1972 to £3,513bn, and by 1974 were getting loans from the government. Desperate for deposits, the Building Societies Association recommended offering 7.5 per cent, double what it was a decade earlier, while the mortgage rate topped 11 per cent and stayed that way for four years.
The nadir
Another election in October gave Labour a majority of three seats, soon cut to one, and the stock market suffered a further big fall. By this time, several companies had merged, and others ceased trading, while the venerable Chapman & Rowe was among six that were hammered. The bear market reduced broking firms from 168 to 129 and recruiters from 31 to 16.
As gross domestic product apparently contracted and one newspaper screamed “Britain is bust”, the last straw was the collapse of Burmah Oil on New Year’s Eve. As a result, on 6 January 1975 the index slumped to 146. Lloyds was down from a high of 61p to 14p, while Nat-West (now part of the beleaguered Royal Bank of Scotland) went below asset value to 90p after Bank of England support.
Minimum Lending Rate, however, then eased from 11.25 to 11 per cent, and we heard rumours of a secret meeting of fund-managers at Prudential to pump money into the market. It is fair to say that the exchange never seriously looked back until 2002.
