The banking sector is in for some big changes, today we will consider some of ‘what may be’, this article is taken with a view of looking at some of the results that could come out of the current financial market.
One brief mention is deserved for out all time low-popularity bankers. I am not banker, but I do have some understanding of the financial systems which is what forms my opinion… There are people calling for the government to cap the wages of bankers. We should not have government officials decide their wages, as bankers never decided government wages despite pay rolling the state for years during the upturn. Banks and credit flow are the basis of modern society, lack of which is one of the hallmarks of second and third world countries.
If politicians want to make a true difference they should cut their own wages, its seems ludicrous that our Taoiseach earns more than the President of the USA. And if they want to challenge them on the grounds that financial institutions ‘brought the country down’ it is equally relevant that it happened on their watch, while they were at the helm. If they want to sit on bank boards then they should get reliable and experienced business people to do so, we also need to promote business and not over regulate the financial industry into a corner where profitability is eroded by an overburden of compliance.
As a trend forecast I believe the property downturn will be long and protracted, and that any short term recovery will be inflation lead rather than value lead. This could cause a jump which might be viewed as a recovery which could then lead into a second fall off shortly after it, this will be a unique feature of debt deflation/de-leveraging, and is something we would not have seen before, the reason for this forecast is as follows.
In the Great Depression the supply of money was low because of the Breton Woods system (everything was gold backed), The solution was to increase the money supply, devalue the dollar and get the system moving again. This is the basic footprint of what we are seeing today with stimulative government moves. The debt unwind of the 20’s took a long time to play out, the freeze and eventual thaw was harsh, having said that it meant that when the New Deal arrived that things got going, having said that real returns on the stock market from peak to peak took about twenty years. The issue now is that we are not getting to the trough, instead we are seeing stimulus hit when the bottom has not been reached and yet the assets behind the current downturn have not gone away. T
hat means that there are limited routes available, the first is a strong period of inflation that will last the course of almost a decade as money supply is ramped up to cover exposed positions. The other is for an instantly positive market reaction that will mean funds are not called on but when the de-leverage (which occurs because the assets upon which they are based will eventually have to be valued and margin calls met) continues as it must that we will see that drop-recovery-drop pattern mentioned earlier. The time frame for the latter would occur within the next 36 months.
We will also see banking become much more conservative, this will restrict lending and give a further downward push to property prices, it will affect more than just Ireland, any investment in property should be either with distressed sellers or in alternative markets, we are fortunate in one respect that our downturn is under way and we are looking for a way out, other nations will enter and exit recession at a slower rate – watch the remainder of 08′ and Q1/2 of 09′.
In lending the rate margins will remain high in the long term and likely more Governments will step into banking sector in one country after the next because money will flow to the safe haven in a downturn, the only way to protect a nations banks will therefore be to put them on an equal footing with other countries and that means that the Government backing will spread. The cost of their guarantee will be priced into cost of funds, we might even see some degree of nationalisation of the interbank market where the state will stand over credit ratings as a ‘guarantor’ in order to keep their cost of funds prices down. I don’t know how ratings agencies will adopt this standard but in any case this could happen.
European banks are even more leveraged than American ones, when the deleverage plays out here it will be ugly, frankly I ponder why more banks have not become distressed but that is perhaps down to structures or investments that differ fundamentally from that of American banks.
A question that we have asked ourselves recently is ‘What is the Euro?’. What might hold it in place? Gold and Oil are ‘Dollar’ commodities, in fact, most commodities are, Euro is not the basis for anything other than what we say it is, so it is a pure fiat currency – it is growing as a reserve currency but dollar hegemony is not over yet. Yen is the ‘safe haven’ as is the Swiss Franc, Singapore Dollars are tied to the US dollar, Yuan is falsely undervalued and controlled, Sterling is a currency twin and the City runs on it, so where does a currency like the Euro fit in? I am not about to pretend I have the answer, these are merely the questions, we’ll see the answers in the coming months and years.
This outlook means that now more than ever, people need a trusted advisor, one that can help them create a recession protected portfolio and to take steps