Little by little we are all growing indignant
The tent city that has sprung up in Lower Manhattan deserves notice. Every day the protesters denounce the misdeeds inflicted on the real economy by a hypertrophic financial industry. The movement has spread to a number of financial centres, swollen with students who cannot find a job after borrowing to go to university and who now rail against the sizeable bonuses paid by firms that were largely to blame for the present crisis.
About the incompetence of the bureaucrats in Brussels
Indignant about the bewildering recklessness of some that threatens the health of our entire economies. Social strife cannot be far away in a situation where many young people have no future while a few others enjoy privilege. We are indignant about the squabbling and lack of vision of Europe’s leaders, who only seem to care about getting re-elected. They refuse to do anything that might rub voters the wrong way, however reasonable the required decisions may be. A 27-headed hydra like the EU can have its whims, as illustrated entertainingly by Finland and Slovakia. But mostly it is just an absurd, hulking, hollow beast that balks when it has to make a move. We are indignant, too, about the incompetence of the bureaucrats in Brussels who failed to lift a finger while graft took hold in Greece and who continued instead to pay fat subsidies for non-existent farms.
About the stand-off in the US
Between a president equally bent on re-election, who advocates additional spending to create jobs with a budget deficit near 10% of GDP, and a majority Republican opposition that opposes any rise in taxes. God has spoken to the Republicans, forbidding them from reforming America’s indulgent tax regime. The Grand Old Party is so dogmatic that it has called for Bernanke’s head after the Fed chairman dared to point out the need to raise taxes to reduce the deficit. The choice for a Republican candidate to run against President Obama next year currently pits a Mormon against an Evangelist, rather than focusing on pragmatic ways to rein in the US Treasury’s galloping debt.
About the new Kerviel story
We are indignant at seeing how, two or three years after the Kerviel story, a young trader with four years’ experience was able to create over CHF 10 billion of fictitious ETF positions and end up losing more than two and a half billion for UBS, a bank that prides itself on its risk control system. Watch out for ETFs.
About Greek bonds
Finally, we are indignant at seeing how incompetent and rabid management turned Dexia, a combination of two fine banks, Crédit local de France and Crédit communal de Belgique, into a monstrosity with €20 billion of Greek bonds in its portfolio. Why would anyone, starting with two institutions that specialised in lending to local governments, pile into all kinds of new segments with no customers? And as if that weren’t enough, why would anyone create derivatives for municipalities that end up bringing them to ruin by costing them 20% interest? Unfathomable.
With as many spills as thrills on this financial roller-coaster, confidence is gradually evaporating. Meanwhile the developed economies are barely moving and the emerging ones are flagging owing to weakness in their main export markets and tight credit conditions designed to fight inflation at home.
Until a solution to the banking crisis is found, confidence will remain shaky at best
Yet it is difficult to foresee a run-of-the-mill recession taking hold in the US. Almost no-one in the economy is going overboard. Consumers, playing it safe, are saving more. Construction now accounts for a tiny (and incompressible) 3% of GDP, compared with a historical average of 10%. Capital investment has slowed sharply. The same pattern can be observed in Europe where governments play a greater role. So on the face of it severe slumps on either side of the Atlantic are unlikely, unless confidence collapses. We are tuned to rumours and to the conflicting statements of ministers, government leaders, bank managers and moguls of finance and economics like George Soros and Nouriel Roubini. Until a solution to the banking crisis is found, confidence will remain shaky at best.
In early September we advised staying focused on gold and shares in large multinational companies that pay high dividends. Those recommendations are still valid as ways to weather the storm. For those who want yield, the discounted bonds of Europe’s best insurance companies now offer a comfortable return.
Wthat about Canada?
PS: We have just come back from a trip to Canada and were pleasantly surprised to find a country in such fine financial shape, with full employment (incidentally requiring more immigration), low inflation, a strong currency, a healthy property market and what have you. An isle of prosperity in a sea of troubles. Why, you ask? For a simple reason: Canada’s banking charter, like Australia’s (both modelled on the British one), bars off-balance sheet liabilities and financing vehicles. The big Canadian banks have kept their AA ratings and the country is thriving—an ideal situation.
Patrick Segal, a former member of our Executive Committee