So, just how bad is this financial crisis going to get? Well according to Bob Junjuah of the Royal Bank of Scotland: “A very nasty period is soon to be upon us. Be prepared”. It’s not like the RBS to go around making alarmist statements but it has warned of a “global equity and credit crash” this autumn. Morgan Stanley bank has forecast a “catastrophic event”. The hedge fund guru John Paulson says global losses from the credit crisis, currently $300bn, may reach $1.3 trillion.
Yet only a few weeks ago, everyone in the City and Wall St. seemed to be saying that “the worst was over”; that the fundamentals were sound; and that once the banks had owned up to the full extent of their losses, then things would begin to get back to normal. Clearly, they haven’t, as anyone who has tried to get a mortgage recently will have discovered. And with the oil price spike - which Gordon Brown is trying to flatten at the Oil summit in Jeddah - there has been a switch of sentiment back to deepest gloom.
You think I’m exaggerating, don’t you? Well, let me quote an email I received at the weekend from Moneyweek Magazine. Under the heading “Bloodbath Britain” the magazine screams in bold type that “The UK is about to be battered by the biggest financial storm of our lifetimes”. It goes on to predict five forthcoming disasters. “Disaster one: the housing market crashes wiping up to 40% off the value of your property. Disaster 2: 1000s of businesses go bust as the credit crunch hammers consumer spending. Disaster 3: Unemployment leaps by 30-50% as a 1980’s style crisis devastates the job market. Disaster 4: Sterling collapses by 10% and the price of everything from petrol to food skyrockets. Disaster 5: shares investments and cash all lose value destroying wealth and crushing retiral dreams”
At first I thought this might be a spoof, or perhaps a posting from the Socialist Workers Party. But this is no leftist doom-monger warning of the collapse of capitalism but a hard-headed and practical share and property buying guide. Moneyweek goes on to advise on what stocks you should buy to hedge the stock market collapse, mainly commodities. It would be as well handing them a razor and some hemlock.
Now, we do not want to ‘talk ourselves into a recession” to use the current political cliche in Westminster. But it’s important to know what the financial world is thinking. It’s not just prophets like the billionaire George Soros, who has been warning that this is a crisis comparable to the Great Depression. Look at the work of Nouriel Roubini, the prolific New York University economics professor, whose “12 steps to financial Armageddon” is essential reading. Even Martin Wolf of the Financial Times said last week that “on the supply side of the world economy, almost every piece of news has been bad.”
Or try looking at website, The Market Oracle, which has been running increasingly apocalyptic posts from highly informed US financial commentators many of them on the political right. It’s UK editor, Nadeem Walayat correctly forecast the British housing slump, almost to the month, and continues to chart its decline, which he now believes will lead to a 50-60% drop in British property prices, peak to trough.
I’m almost tempted to say: lighten up guys, it can’t be as bad as all that. Warren Buffett, the “sage of Omaha” is said to be buying shares again. Employment is still high and retail sales actually jumped last month - to everyone’s surprise. Maybe all this hysteria is a temporary blip. But I think the warnings should be listened to precisely because they are not coming from the usual suspects, but from people who know the financial system from the inside.
What has spooked them is a complex of factors, of which the doubling of the price of oil is only the most obvious. The oil spike being seen as a consequence of low interest rates and the decline of the dollar, which has ignited a speculative boom in commodity prices, similar to the dot.com bubble which burst in 2000 and the real estate bubble which has been imploding since 2006. This is a highly unstable situation. It has arisen just as inflation has returned with a vengeance to Asian countries like China and India, the countries which manufacture most of what we buy. Inflation in Vietnam is 25%.
This inflation is feeding back into the West through import prices just at the moment when central banks are trying to head off recession by lowering interest rates. The fall in the value of the dollar and sterling (down 14% this year) has turbocharged imported inflation in the two most indebted countries in the developed world: Britain and America blitzing household budgets. Cash-strapped British consumers are sitting in houses which are dropping in value just as they are coming under pressure from the banks to repay some of their £1.4trillion debts.
As the British property market follows America into default and repossession, there is expected to be a collapse of consumer spending. The next wave of bank losses is expected to be credit cards, car loans and student loans, which are already defaulting in America, and corporate bonds which are looking highly vulnerable. This has caused further shock waves through the derivatives market - the collateralised debt obligations and such like - which are being marked down once again.
Despite hundreds of billions of dollars worth of “liquidity” being pumped into the system by central banks, the credit crisis actually getting worse. The mortgage market is flat lined. Hedge funds are collapsing as their leveraged bets go sour. Libor - the rate at which banks lend to each other - is almost back to levels it reached last summer. Everyone is looking for the next big bank failure and wondering how long central banks can continue to bail out dud institutions.
Meanwhile, the world’s stock markets are falling: 50% in China, 30% here if you strip out unstable oil, mining and commodities. The commodities boom is due for a sharp correction and many banks are in deep trouble. Which is why analysts are warning of a further stock market and credit shocks this autumn. They believe we haven’t begun to recognise the scale and ramifications of this crisis. Until we do we, and the politicians, will remain passive victims, unable to recognise the need for concerted global action.
Sorry to ruin your breakfast - but there it is.