We’re now there and no-one knows what to do next.
The first of my explorations into the world of banking and finance ran with the title Are we there yet? It was taken from a rather bad analogy provided by the Treasurer of Australia when he tried to ‘reach out’ to the wider population and explain the need for a longer-term perspective on the much-needed repair of Australia’s budget. Of course, the cartoonists had a field day and the essence of his messages was lost.
The message was, essentially, that the party is over: there’s a ‘trip/holiday’ that the country has to go on, and it’s a long one…everyone in the car has to buy into the fun that’s going to be had once the destination in reached.
The analogy fell flat on the wider public. I on the other hand, am driving it for all it’s worth in terms of where I see the world’s bankers and financiers are at.
We’re now ‘there’, and the destination that we were promised would be so great turns out to be like Rusty Griswold’s trip of a lifetime to Walley World. Actually, the global financial and banking system really is Walley World. If you think I am being abit harsh review the following.
1. Mervyn King, former head of the Bank of England states in his book, The End of Alchemy that ‘something us wrong with our banking system’. More specifically he states in page 8 of his book that:
‘I will explain the fundamental causes of the crisis and how the world economy lost its balance….why central banks need to change the way they respond to crises; why politics and money go hand in hand; why the world will probably face another crisis unless nations pursue different policies; and, most important of all, how we can end the alchemy of our present system of money and banking.’
This was followed up by an article in the AFR on 5 August about his book the title of which was ‘Something has to give.’ The article focuses on the muddling through by the leaders of Europe
2. Former deputy managing director of the IMF, John Lipsky commented in Perth this week that:
‘…it is clear at the given moment there is no sense of emergency, so no one feels like in the absence of more cooperative focus to policy that a very negative outcome would follow. It is a vey unusual time and one of great uncertainty.’
OK so we have an unusual time and one of great uncertainty, but it’s not an emergency? Sounds a bit like ‘being alert but not alarmed.
3. Monte dei Paschi di Siena is about to implode…its trying to convince investors, governments, anyone that it really is a bank and not an old boys club of arrogant, delusional, well-dressed but incompetent men. Would you invest in a company (opps bank) that was seeking €5.6 billion in cash for a bank that was worth less than €1 billion on the market and one that has burned though €8 billion from share issues since 2014. I don’t think so. Unless, of course you are the Italian government or the EU where Italy is the third largest economy.
But, hang on. Italy’s banks shares have tanked this year as they are weighed down by €360 billion of ‘problematic loans’ more than a third of the euro zone’s total.
4. And, just to spread the love around…let’s look at the USA where we’ve been entertained or appalled by the recent Presidential nomination campaigns.
Neither candidate uttered much of any significance about America’s debt, deficit and budget. To quote John Kehoe:
‘ . . . expense pressures …have put debt on an unstainable track. Breathtakingly, the federal government will be spending
more on interest payments then defence by around 2020.
Without corrective action, debt is projected to jump to 86% of GDP by 2026 and soar to 141 % in 2046- exceeding the previous record of 106% just after World War II. The figures are eye-watering considering the maximum amount of debt for counties to join the spendthrift EU is 60% of GDP.’
5. Money manager, Bill Gross has got the vibe. Channelling Dr Seuss he commented this week that:
‘I don’t like bonds; I don’t like most stocks; I don’t like private equity.’
So what does he like and why?
‘Real assets such as land, gold and tangible plant and equipment at a discount.’
OK, so that’s clear, but the real kicker is this comment:
‘The financial system won’t break down immediately. The time will come ‘when investible assets pose too much risk for too little return.’
6. The Brexit vote just added to the chaos. More than $2 trillion was wiped off global share markets on the Friday after the vote and the British pound fell to its lowest level since 1985 (we here in Australia were actually cheering about this).
As Geoff Wilson, chairman of Wilson Asset Management so eloquently put on 27 June: ‘An independent UK’s first export to the world could be a second financial crisis.’
So, we have the former head of the Reserve Bank of England saying the current financial and banking system is US (in flying terms US mean un-serviceable and as I have a light-plane pilot’s license that I don’t use any more this in one of the few ways I get to use it); the former deputy managing director of the IMF saying governments aren’t working together and a crash hot money manager telling us to sell up, cash up, gold up; the world’s central banks have run out of ideas and options and as director of JP Consulting Jonahtan Pain comments: ‘Policymakers need to show they are in charge.’ The Brexit vote combined with plummeting Japanese and European shares, debt in China, protectionist, nationalist and anti-globalisation trends, ‘looks like it will usher in a new dawn in the history of modern monetary policy and the arrival of helicopter money.’ Maybe I should upgrade my pilot’s licence after all?
As a novice in the world of global finance, I am intrigued about the world of finance, well ‘debt actually’. I arrived in Australia at the age of 25 in April 1987 to research and write a book about Australian entrepreneurs. What a journey that was. I had 6 months of entrepreneurial effervescence and the October stock market crash happened. I was on the floor of the Brisbane stock exchange that day…my interview with one of Australia’s leading entrepreneurs being cut short as he watched his share price tank.
Here I am, almost 30 years later, watching the world’s central bankers, Presidents, Prime Ministers, Finance Ministers, Treasurers, IMF representatives and so on, throw money (QE) into their economies, lower interest rates, bond rates, any rate to try and re-start their economies. Now money from helicopters.
Money or a defibrillator are of no use when the patient’s heart has run its course.
The global economy is the dead patient. It’s run it’s course, it’s natural life-cycle. No amount of external intervention can resuscitate it. Just like the death of a loved one, we have to, as Mervyn King and others are now saying, accept and appreciate the end of a life… and focus on what’s next.
This is where those who are in the position and have the capacity and capability to effect change need to focus their attention. There are people around the world planning for and working on ‘What’s next’.
We’re there. To paraphrase Dr Seuss . . . ‘so all the world’s central banks do is sit, sit, sit, sit and we do not like it, not one little bit.’