News:If you go down to the Woods (Bretton) today ......
This week the meeting of the “G20” in Washington on the 15th has the opportunity to be an extremely important event. Although some have tagged it as the opportunity to create a new “Bretton Woods” international agreement for a new financial world order, the reality is going to be considerably less but nonetheless the meeting is still going to be vital. As we fumble our way through this financial fiasco, at least our leaders have realised just how internationally linked and inter-dependent we all are. Thus a meeting of the 20 including the likes of China, India and Russia, is far more realistic than the older cosy club of post WW2 capitalists.
However, the meeting must not be a waste of time as this crisis has now spread like some hideous cancer to affect even those more stable and well run emerging nations. Now is the time for a clear message of international collaboration and co-ordination to show that a powerful response can be provided. Extreme risk aversion along with a credit seizure is a terrible combination and only a unified approach can start to rebuild confidence – which will assist some stabilisation and consequently rise in value and, so vitally, confidence.
Action taken already to provide support to the likes of Singapore, South Korea, Brazil and Mexico is a good start but more will need to be done both directly by the Fed and the EU, but also via the IMF who, hopefully, may benefit from further support from the likes of Saudi Arabia. The 1944 agreement at the Mount Washington Hotel in Bretton Woods took months to hammer out, and the G20 cannot emulate that – but it can lay down some clear intentions for their acolytes to act on. The alternative should not be contemplated.
You would have thought that the election of Mr Obama (or Mr O’Bama according to one New York Irish columnist) should have resulted in warm and friendly words from leaders around the globe – and certainly most were in that tone. However, the really quite astonishingly aggressive tone from the Russian President Medvedev came as quite a surprise. The content seemed to reference back to the days of the Cold War when another young President came to the White House. Locating missiles in the Kaliningrad enclave, Russian energy traded in Roubles, and US responsibility for the Caucasus violence seems an aggressive menu for a congratulatory moment. Perhaps this is a strategic ploy to test the President Elect and to test his resolve?
A week after the election, as the bunting and banners are now lying forlornly on the floor, the importance and magnitude of the Obama election is only really beginning sink in. This is not just a change of President but a change of generation and, I believe, a vital turning point in both economic and political conditions. The President Elect has the aspirations of millions weighing on his shoulders and a level of disappointment is bound to be inevitable. I can only hope that he is not seen as the new Prince of Camelot, but rather a fresh face with a team aiming to try and tackle the worst economic situation since the Depression. We must watch with interest who he gathers around him, but the potential addition of Paul Volker (nicknamed the Prince of Darkness) the predecessor of Alan Greenspan at the Fed, may well be seen as a astute selection.
Meanwhile back in Blighty, I had mentioned last week that we could see a 1% cut in the Base Rate but a 1.5% was certainly a welcome move. However, this in itself is no miracle salve. The Government and its acolytes must force the situation further and especially by pressuring banks and certainly those that are state owned or part owned, to pass the cuts through to both companies and clients. LIBOR has continued its steady decline as the healing of the monetary system slowly improves but, unless we can get money flowing faster, then the economy will find it even more difficult to turn around. Friday saw 3 month LIBOR down to 4.5% from 5.56% the previous day – thus showing that the reduction is still not being passed through.
So what could this recession look like?
Resetting company expectations is a painful process as we can see from this season’s reporting. Some have certainly been extreme, like Volvo’s European third quarter truck orders dropping by 99.79% from last year’s 42,000 to just 115, but others may show at least a similar if not quite such a disastrous fall off – but be prepared to be surprised. The market is thus trying to establish what this recession is going to look like and to this end the IMF’s World Economic Outlook may be of some help. The key theme that they seem to have identified is that recessions linked to financial, and especially banking crises, seem to last twice as long as those that are not.
Citigroup have written on the earnings issues and expect a potential fall off of some 50% - and that so far we have only seen 10%, and thus the damage could be spread for a longer period than just a year as has been mooted, to something that looks more drawn out over a period of three years. The opportunity therefore for a swift turnaround in confidence and markets would seem to be a tad too optimistic. Although equity markets do tend to recover during recessions, if this is an extended recession then we should prepare for a longer, drawn out and lower level of market recovery.
Well apparently the seaweed is curling up and we should all prepare for an early Winter. Obviously the order of the day is to go out and collect your nuts, bury your stash, fill up the sand bags and prime your hurricane lamps. Early Winter storms and tidal surges are being forecast by long term predictors, Weather Action, and we could be in for two “mega storms” which would normally be a 20 year event. Given our current run of financial news I am in no mood to disbelieve them. Perhaps we should follow the actions of my friend Mr John Whiting – sold his business, got his Freedom Pass and gone on a three month trip of the Antipodes.
And finally... another beauty contest has provided us with another vision of loveliness for us all to admire. A quote about the contestants came through as “They are different in terms of beauty, shape and how eye catching they are.” Apparently also some of their great attractions include “A distinctive high bridge nose, shaggy hair, with a fine silky quality”. Yes in fact these stunners are Saudi Arabian goats from the Najd region. Apparently the winner in the male category had a value of 450,000 Riyals (£76,000). However, there is now some concern as certain Islamic hardliners condemn such beauty contests as evil and say those involved should seek repentance. So I say we should all appreciate our goats while we can.
Oh yes and just one more point that annoyed me... seemingly some local councils, including the enlightened officers in Bournemouth, have announced that they are going to ban the use of Latin terms and words as some poor unfortunate citizens might not understand what they mean. Apparently the term “via” could be confusing – well yes, presumably if you don’t know where you are going. Additionally, the Plain English Campaign feels that banning Latin might stop people confusing the term “e.g.” with the word egg. Brilliant – yes, that has been such a problem. Streuth!
Have a good weekend,
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited
Article last updated: Jan 6, 1986
