Inside Investment: Crisis aftershocks July 2009
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| The July article: Crisis aftershocks |
People who wander around carrying placards declaring "The End is Nigh" are generally regarded as bonkers. This time last year, however, the stock of eschatologists hit an all-time high. The collapse of Lehman Brothers really did seem to signal the end of the world as we had known it, at least for those working in finance. These are calmer times and a more reflective tone seems fitting. The world has changed. It would be strange if it had not after an unprecedented financial crisis and the worst global recession since the 1930s. But the new world order is not as radically different as some would have us believe. The shrill voices of the doom mongers are now being paid too much heed.
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The death of the consumer has been greatly exaggerated. Having had the time of their lives over the past few years the nattering nabobs of negativism are not about to leave quietly now that growth looks set to return to most of the G7 this quarter. We are told by the glass-half-empty brigade that this is an inventory-fuelled recovery and that weak final demand will mean that the V-shaped trajectory of global growth will ultimately end in a W-shaped double-dip recession.
Key to whether they are right or wrong is the behaviour of consumers, particularly in the US. At first blush the double dippers have a respectable case. The US savings rate has risen sharply and currently stands at 4.2%. These are levels last seen in the mid-1990s. The combination of negative wealth effects from the falling stock market and house prices, deleveraging and a lack of available credit have prompted some economists to predict that the savings rate is heading back to the double-digit levels of the early 1980s. This argument does not stack up. Interest rates are at all-time lows. In the early 1980s rates ranged between 10% and 20%. Although lending surveys show that the credit crunch still has teeth, conditions are slowly improving as banks rebuild their balance sheets. Most important of all, and generally neglected by economists, is the question of national psyche.
Mad magazine summed it up thus: "The only reason a great many American families don’t own an elephant is that they have never been offered an elephant for a dollar down and easy weekly payments." If you are of an intellectual bent, or believe consumerism is a modern disease, Alexis de Tocqueville made a similar observation almost 200 years ago.
He wrote in Democracy in America that the typical US citizen "clutches at everything" yet "he holds nothing fast, but soon loosens his grasp to pursue fresh gratifications". This is good news for Chinese factory workers, German auto manufacturers and the global economy. It is bad news for the double-dip doomsters.
2. Some banks (and bankers) are needed more than ever. Across the developed world the fiscal position of governments is parlous. Spending can be cut and taxes raised but budgetary shortfalls will largely be met by tapping capital markets. Borrowing requirements are at record levels. Governments need banks and bankers. This is true of more than the debt markets. As a result of the crisis the state has intervened in industries far and wide. This is most conspicuously true of the banking sector. But the US government, once regarded as presiding over the most free-market economy in the world, now also owns car makers, insurers and mortgage providers. In Europe the state still has large stakes in industry as a hangover from the dirigiste policies of the 1970s.
Privatization is coming back big style. The US and UK governments have no interest in holding big stakes in the economy. In Europe, cash-strapped states are likely to see privatization as more politically palatable than higher taxes or slashing public spending. The next few years will be a boom time for institutions, teams and individual bankers with close ties to governments and knowledge of the public sector.
Cash-strapped treasuries will also be looking hard at where they can trim welfare budgets. Unfunded state pensions are an obvious target. Even before the crisis the burden of retirement provision was shifting to the individual. That process is likely to accelerate. Those retirement savings need to be invested and those assets administered and accounted for. M&A is also back, as Kraft Foods’ $16.7 billion hostile bid for Cadbury shows.
As Joseph Schumpeter reminds us, capitalism "is by nature a form or method of economic change and not only never is but never can be stationary". The "perennial gale of creative destruction" has shaken the foundations of finance. But the entire edifice has not been blown away. One year on from the bankruptcy of Lehman we should be thankful for these small mercies.
Andrew Capon is editor-in-chief at State Street Global Markets, the research and trading business of State Street Corp. He was formerly senior editor at Institutional Investor and has won numerous awards for journalism on fund management and investment issues. The views expressed are the author’s own