The banking system is supposed to be a fast flowing river of financial liquidity, capable of providing enough resources for all to draw their water from, whether for direct investment or just day to day financing and cash flow it uses are various and vital. Now this river has changed. It hasn’t dried up, as there is still lots of money and finance around, but it has been jammed and dammed by the detritus of financial losses and loans acting just as much as a barrier as any real log jam.
So as the river can’t flow, its users cannot draw from it and function properly and when that happens, all will suffer. By the start of last week, there were already real fears of banks running out of cash even for such mundane requirements as salary payments and other short term requirements. So action to try to bust the log jam moved from being a necessary action to a vital need. Hence then our dear Chancellor’s package being presented, with no doubt the more knowledgeable and experienced hand of Mervyn King being involved. T
he measure of this log jam can be seen with the LIBOR (London Interbank Offered Rate) which is set each day and gives an indication of what a group of bankers think that the prevailing lending rates are. Normally, this rate hovers around the base rate, but more recently it has been over 1.25% higher which is an indication that in effect, the interbank lending market has become stagnant. The mission thus for Darling and King was clear – blow the log jam with “whatever it takes” (Darling’s and Brown’s phrase) with some financial dynamite to get it moving again.
In effect the dynamite consisted of three bundles of explosives the first of which is to inject new capital into the banks; the second is to allow banks to swap poor quality assets for cash and finally, guaranteeing all bank liabilities. Certainly a bold plan, with some considerable strength behind it – and certainly a welcome action after the ineptitude of the European authorities at being unable to proffer any form of co-ordinated response to Hank Paulson’s request following his own proposals. Frankly we saw all the co-ordinated behaviour by the European central bankers of fighting cats in a sack. Political naivety and parochialism of the worst kind – and especially at such a potentially dangerous and sensitive moment.
So now it has been announced, the fuse has been lit and we can hear it fizzing as it burns towards the explosives; however, only time will tell whether it will go off like a damp squib, or blast the logs apart. Personally, I think it might be more British to behave like a Barnes Wallis dam busting bouncing bomb and slowly weaken the dam such that it breaks under its own weight.
The co-ordinated action on interest rates was also welcome, but the fixation with a half percent around the globe seems a little too simple to me. After all half a percent off the US rate at 2% is proportionately a lot more than half a percent of our 5% equivalent. Frankly a whole 1% would have had a more dramatic impact not just on markets, but on hard pressed consumers and the business world. It would not have recreated a boom, but could at least have provided a more tangible benefit for all suffering the rising costs of utility bills, especially as we move into winter.
Perhaps they could revisit that one please. So why after all these efforts did the markets just “blow a raspberry and wave two fingers” at all this initiative and endeavour? Well firstly the markets will believe it when it sees it – in a bear market, remember the worst is believed until the opposite is finally proven.
Also, there is the other key matter of the slowing global economy, and the dark and depressing report from the IMF about the threat of a global recession was enough to dampen any limp enthusiasm. So the markets fell away – not unknown in October. Friday has seen a further lurch down as investors seem to get closer to that somewhat overused term of “capitulation”.
However, with the US Dow down some 40% from its all time high last year, you can understand their attitude. So this year we won’t have to hunt for Red October – it found us. Perhaps I can hold out a glimmer of light, the sooner we get through the falls then the sooner we can find a base and maybe start a recovery. On a five year view there will be a good time to buy back in – in fact good discipline means that we should all carry on our “pound cost averaging” – but across all key asset classes and not just on a shivering equity market.
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And finally...you may recall that a clever individual invented a clock to count the total US debt in order to highlight its level and to hopefully embarrass the political leaders into forcing them to reduce it and have the clock count it down. It started in 1989 and showed the outstanding debt at being $2.7 trillion. Unfortunately, they have had a slight technical hitch. As the debt has not reduced but in fact increased, the clock now doesn’t have enough digits so that it has had to be rebuilt in order to reach such an appallingly high level of number and debt. What could the number be now ? How about $11 trillion. Never did like digital clocks.
Have a good week,
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited This article represents a personal and lighthearted view from Director, Justin Urquhart Stewart of Seven Investment Management Limited, and is based on current financial news and events around the world. Its content should not be used for investment purposes and you should contact an independent financial adviser before making any investment or financial decision. Seven Investment Management Limited is authorised and regulated by the Financial Services Authority. Member of the London Stock Exchange. Head office: 23 Austin Friars, London EC2N 2QP. Telephone 020 7760 8777. Registered in England and Wales number 4092911. Registered office: 3 More London Riverside, London SE1 2AQ.
