I know that the media has run out of exaggerated adjectives to describe these events and the hyperbole is becoming tired, but we need to maintain some objective views as to how this is progressing.
The US bailout is of course to be welcomed, but probably marks the end of the first stage of this crisis. In itself, the TARP (Troubled Asset Relief Programme) will only serve to hopefully start the cleaning process of the US banking industry’s wounds. Whilst vital in itself, this does not actually heal the wounds; by which I mean start the banks’ lending and getting the life blood of the capitalist system flowing again. The erratic and volatile measure of LIBOR will be the best measure to see the progress being made here.
The call from Hank Paulson for an international response has been met, as expected, with a rather disjointed reply. The ECB thinks it’s a good idea, the French said they had a plan then denied it nine hours later and the Irish decided to guarantee the entire banking system. If this is co-ordination, then the jigsaw is a few pieces short of a picture.
The combination of the banking crisis and the economic slowdown is of course an evil brew worthy of the vilest cauldron.
At a time like this, you can often hear those who may not have been through recessions and pain before beginning to panic and lose faith in the investment world altogether. Actually, I regard this as a rather encouraging sign as it means that we are getting close to that point of final capitulation when fair weather investors finally give up. It is only at such tipping points that the careful investors will be looking for areas of value as they arise. The key issue will be for investors to recall their investment disciplines of broad asset allocation and seeing through the investment cycle. Therefore, we must keep drip feeding money in these times of weakness and nervousness – and putting money under the mattress (as publicly stated by one bank’s leading economist) is not just stupid, but frankly irresponsible in my view.
One point to recall is that stocks often show signs of recovery even as a recession starts to have an impact. If we look back at the last three UK recessions:
However, before we get too carried away, previous recessions could be seen as being followed by a period of a recovery in corporate earnings as growth returned. This time around, it may not be quite so straightforward, as earnings over the next few years are going to be less certain and reliable as a damaged US economy slowly recovers.
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Shipped out? Could life be apparently much duller than watching the Baltic Exchange Dry Index? Well, in fact this could be a crucial measure to take account of for any further indications in the slowing global demand. This index measures dry bulk shipping costs and includes the largest ocean carriers of raw materials. A fortnight ago, it dropped by a quarter with a 10% drop in one day. The key reason though for interest in this index is because it has proved itself to be a rather useful forward indicator of the future demand for commodities. In fact, upon closer examination, you will find that it is more volatile than the underlying commodity prices themselves – owing mostly to availability of shipping capacity. As an indication, it has fallen back by 70% from its peak in May this year.
Although this volatility clouds the picture, the trend seems to be pointing towards lower demand especially from China. Some of this would have related to the temporary shutdown of polluting plants during the Olympics, but this also points to lower demand overall; the flip side of this coin is the transportation of completed goods back to the West and especially the US – the growth here is also falling from some 15% per annum back to something nearer 5%. The Global economy is definitely slowing.
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And finally....... following on from the story of lifejackets being removed, time for some more worrying airline safety news. Two airplanes due to land on the Greek island of Lesbos had to circle above the Aegean Sea for more than half an hour because an air traffic controller overslept, police said on Monday.
An Olympic Airlines aircraft, arriving from the Greek capital Athens, and a Slovakian Airlines plane made several failed attempts to contact control tower personnel."They were calling the tower to get directions, but no one would answer," a police official, told Reuters. "The woman later said she overslept."
The airport's secondary control service assisted the pilots to land after they had circled for 40 minutes. Police said the controller, who was not named, would be suspended for a few days. So encouraging! As the newspapers would say “time for a wakeup call”.
Have a good weekend,
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited