Layman’s hate
A decade ago the bottom fell out of Lehman Brothers and the global financial crisis well and truly got going.
The investment bank failure of Monday 15 September 2008 was the largest bankruptcy filing in history. Lehman owned $639bn of assets and owed $619bn of debts. The following month, close to $10tn of market capitalisation was wiped from global equities. Many papers blame Lehman and its former executives and workers for the banking cataclysm it sparked, but that’s simplistic. Lehman didn’t have a monopoly on excessive risk-taking, arrogant bosses and uncritical workers. Virtually every operator was the same. Deutsche Bank is still crippled from its mistakes, Lloyds and RBS are still part-owned by the UK government and Merrill Lynch is just a naming convention. The reason Lehman sunk, by all accounts, was simply that its boss had annoyed too many powerful people too many times. Former staff of the bank shouldn’t all be branded evil or stigmatised unduly – they were the very first of the millions who would lose their jobs in the crisis. Most of them were victims too.
Ten years on, our banking system is now gold plated. Stress tests, capital adequacy requirements that should keep lenders solvent even in a virtual apocalypse, ring fences to prevent banks from using deposits for a spin on the roulette table. Around the world, banks are still despised and distrusted by the everyman. But that is true of any complex system. Banks seem very safe these days.
Of course, these changes have created new issues. The flipside of risky lending is that it is synonymous with wider access to credit. The irresponsible loans by banks allowed more people to borrow; those who thought they’d never be able to buy a home – or start a business – could. Tightening risk budgets at the banks has led many banks to abandon business banking, particularly in the very small business space. If it’s not backed by property, the risk is too great for the bank to bear.
Combined with the emergency low interest rates that most Western nations are yet to throw off, this created a boom in property prices that made it virtually impossible for a couple below the age of 30 to buy a home without a top-tier income and top-up from mum and dad. Incomes stagnated as businesses stopped investing and countries cut into national budgets to pay for the nationalisation of failed finance companies and manufacturers.
Of course, all that money that used to sit with banks had to go somewhere. Lenders weren’t interested in having it on their balance sheets, but they were happy to package it up in bonds for listed companies and sell it to all the investors who could no longer get a reasonable income from typical sources. The knock-on effect sent money pouring into equities as bonds became less attractive. Even people who usually stuck to bank deposits turned to the stock market for a decent return. Investors’ wealth skyrocketed, but they never really could feel happy about it. History’s longest bull run is also its least-loved, probably because much of it was driven by falling yields and higher PEs. It gives a feeling of uncertainty that has lingered even after earnings have leapt higher.
Source: FE Analytics, data sterling total return to 7 September
The good and the bad
A decade ago, much of the world’s financial risks were held by banks and insurers (albeit some had sold dodgy assets to some of their retail customers). Today, the risks seem to be spread among the people to a much greater degree.
Peer to peer lending has expanded swiftly as investors search for the rates of return they used to find at the bank. As of September 2017, €16.8bn of P2P loans had been made in Europe, three quarters of that in the UK. How many of these investors know that P2P isn’t covered by the Government’s bank deposit guarantee is an open question. More people are invested in equities now than in the past due to the chase of yield and poor rates of return in the low-return environment.
And then there’s the short-winded explosion in cryptocurrency and tokens, many of which read like bald-faced frauds. Who knows how many unsophisticated people were burned when prices came crashing back to Earth this year. A good number of people who jumped on the crypto bandwagon seemed to be those people earning poor wages or who have embraced the bit-work offered by companies like Deliveroo, Uber, and TaskRabbit, or entrepreneurial fitness instructors.
They were looking for a quick way to make a buck because they saw no chance of getting any boost from the day job. Most people weren’t. Pay remained depressed, causing ever greater anger among wage earners. This is the anger of Brexit, of Donald Trump, of the AfD, of La Lega. And now Europe’s progressive poster-child, Sweden, has joined the club, giving almost a fifth of the vote to its own newly ascendant hard-right party at the weekend’s election.
However, this spread of risk means equity and bond markets are insulated from some systemic shocks that would otherwise have caused massive ructions. The crypto crash has crushed $600bn of investors’ wealth year to date, yet other markets haven’t as much as blinked.
Today the risks appear to be political, much more so than 10 years ago. But more money in the pockets of ordinary people usually smooths the edges of extreme politics. So it’s comforting that wage growth appears to be finally flowing through in the US: it hit a nine-year high of 2.9% on Friday. In Europe, salaries are rising at 2.7% a year, higher than at any point since the financial crisis. UK wages (excluding bonuses) are also up 2.7%, it’s mostly heightened inflation that’s putting the squeeze on households.
What is encouraging to us is that most of the populists who have taken control have turned pragmatic extremely quickly when faced with reality. Added to that, companies are enjoying strong earnings growth and are investing again – but wisely. They seem able to deal with any curve balls thrown either by markets or unpredictable politicians.
There is always risk in investments, because there is risk in the world. Life is uncertain. However, humans have a knack for adapting to adversity and solving problems. In 2008 global commerce seemed irreparably shattered and people were worried about descending into a new stone age.
Ten years later the world is richer and wiser. Everyone in the West and a good portion of the developing world carries a supercomputer in their pocket. Despite the distorting effects of a 24-hour news cycle, war and disease is trending down worldwide. We have problems, sure – there will always be problems. But we are creating electric cars for the masses, designing artificial intelligence to make our lives easier and generally living happier lives. Companies are the driving force behind much of this, so we think there’s plenty of reasons to invest with them for decades to come.
Bonds
UK 10-Year yield @ 1.46%
US 10-Year yield @ 2.94%
Germany 10-Year yield @ 0.39%
Italy 10-Year yield @ 3.03%
Spain 10-Year yield @ 1.46%
Economic data and companies reporting for week commencing 10 September
Monday 10 September
UK: Trade Balance, Industrial Production, Manufacturing Production, Construction Output, GDP, Index of Services
US: Consumer Credit
EU: Sentix Investor Confidence
Final results: Abcam
Interim results: Brady, Gulf Keystone Petroleum, HGCapital Trust, Luceco, Maintel Holdings, NB Private Equity Partners
Trading update: Associated British Foods, Victoria
Tuesday 11 September
UK: Claimant Count, Jobless Claims Change, Unemployment Rate, Average Weekly Earnings
US: NFIB Small Business Optimism, JOLTS Job Openings, Wholesale Trade Sales, Wholesale Inventories
EU: ZEW Survey; GER: ZEW Survey
Interim results: Cairn Energy, Hilton Food Group, Harworth Group, JD Sports Fashion, Nucleus Financial Group, The Simplybiz Group, Sanne Group, STM Group, Surgical Innovations Group, Team17 Group
Quarterly results: Ashtead Group
Wednesday 12 September
UK: RICS House Price Survey
US: MBA Mortgage Applications, Producer Price Index, Crude Oil Inventories
EU: Industrial Production, Employment
Final results: Dunelm Group, Galliford Try
Interim results: Advanced Medical Solutions Group, Charles Taylor, Diversified Gas & Oil, Epwin Group, Forbidden Technologies, Goals Soccer Centres
Trading update: Safestore Holdings
Thursday 13 September
UK: BoE Rate Decision and Summary of Business Conditions
US: CPI, Initial Jobless Claims, Real Average Weekly Earnings, Monthly Federal Budget Statement
EU: ECB Rate Decision; GER: CPI
Final results: Ricardo
Interim results: GVC Holdings, Morrison (Wm) Supermarkets
Friday 14 September
US: Retail Sales, Import Price Index, Export Price Index, Industrial Production, Capacity Utilisation, Manufacturing Production, Business Inventories, University of Michigan Sentiment, University of Michigan Inflation Expectations
EU: Trade Balance, Labour Costs
Final results: Wetherspoon (JD)
Trading update: Avon Rubber, Investec, SThree