All change?
Leonard Munt
It's been an interesting week for the markets, where short-term remedies have again been used to avoid dealing with the bigger, structural issues - but there is hope for the long-term
In one of the most extraordinary weeks in financial history we’ve watched the American people bail out Fannie Mae and Freddie Mac, and then looked on as shares in the troubled US bank - Lehman Brothers – tumbled by 76 percent. But, do you know what? I don’t accept for one minute the situation is as bad as others might think. And I’ll tell you why.
I spent almost 40 years in one of Europe’s largest investment banks, long enough to discover that no one - and I mean no one – ever tells it how it really is.
When trade appeared to be magnificent, I often discovered business was damn near as disastrous as it could possibly get. If the consensus surrounded a major downturn, things quickly picked up. Heck – even the recessions of 1990-1993 and 2001-2002 seemed shocking at the time, but were never as bad when scrutinised with the benefit of hindsight.
Study the news, and the clues to what’s really happening today are out there. The defining factor for 2008 is the rescue offered up by the central banks. Nobody truly believes tax payers’ cash is being used for anything more than guaranteed short-term credit.
The Fannie Mae and Freddie Mac salvage is a necessary measure to prop up confidence with liquidity. Belief will return just as soon as the market’s cash-rich players are convinced that starving the global economy of credit - akin to denying a dying patient of oxygen - has lost appeal as a strategy for long term gain because the central banks can, and will, bluff it out.
Claims that the world's largest economies are facing terminal and long term illness look insightful only as long as uncertainty rules. By Christmas, I predict we will be wondering what the fuss was about. But prepare for change.
After unprecedented profits and growth within the financial industry, it was inevitable that mergers and cut backs were required. The same goes for the over inflated housing markets, which still have some way to fall. There will be more victims, more mergers and more job losses. But this is Darwin’s law: survival of the fittest. We are experiencing an unprecedented moment of cartoon evolution where the players are jockeying positions for dominance – a contest on which the market thrives. There will be winners too, because as the weak fall the strong will emerge to herald in the new era.
Lehman Brothers were part of a new ere once. The firm survived the Great Depression of the 1930s by investing in venture capital while the equities market faltered. There has been no rescue package offered up by the US government yet (although as I write I suspect the firm will survive without it). Politicians remain nervous because they know that bucking the evolutionary dynamic will simply exacerbate the problem by undermining their economies rather than strengthening them.
There is a future. It is a global finance industry that is stronger, faster, smaller, better regulated, and more accountable than ever before.
It is a change worth waiting for.
