Cop­ing with

Financial Mirror (Cyprus) - - FRONT PAGE -

Among all the dif­fer­ent ques­tions in­vestors have had to con­front in the past five days, only one re­ally mat­ters: have we just wit­nessed a “Lehman mo­ment”? At the risk of sound­ing like a Je­suit priest, I will an­swer this vi­tal ques­tion with a bunch more ques­tions. The first is: have the fi­nan­cial mar­ket’s core be­liefs now been shat­tered?

Be­fore Lehman, al­most ev­ery­one in the fi­nan­cial mar­kets bought into the be­lief that cut­ting up risk into small pieces and reag­gre­gat­ing the risk into struc­tured prod­ucts was a wise idea which re­duced the over­all risk for the fi­nan­cial sys­tem, and thus al­lowed for more lever­age. A fur­ther be­lief back then was that in­vest­ment banks, hedge funds and other fi­nan­cial in­ter­me­di­aries were run by re­ally smart guys who man­aged their risk care­fully. But when Bear Stearns and Lehman Brothers failed, this be­lief was shat­tered and the mass of ex­cess lever­age in the sys­tem (which rested on the be­lief that risk syn­di­ca­tion made sense) had to be un­wound pre­cip­i­tously in a mar­ket with no mar­ket-maker. The world found out that most fi­nan­cial mar­ket in­ter­me­di­aries had not made for­tunes by be­ing ex­cep­tion­ally smart; in­stead, they had made for­tunes by be­ing ex­ces­sively lever­aged… for­tunes that were then abruptly taken away.

So, as a re­sult of last Thurs­day’s vote, have any core be­liefs amongst mar­ket par­tic­i­pants been bro­ken? That seems un­likely. Did any­one re­ally be­lieve, mas­sively lever­age up, and in­vest on the premise that the “one size fits all” poli­cies dished out by the Brus­sels boffins were a great and sus­tain­able idea? Frankly, the writ­ing on the wall has been as vis­i­ble as a Banksy tag for a while. In­stead, the ques­tion for most in­vestors has not been “whether” we would see Brexit (or Spain­o­yara, or Italeave, or Depar­tu­gal, leav­ing us in the end with Ger­malonely) but “when” one of these events would hap­pen.

In­ter­est­ingly, by the day of the vote, the mar­kets seemed to have con­vinced them­selves that Brexit would not hap­pen and that the EU show would stay on the road just a lit­tle while longer. When that turned out to be un­true, mar­kets promptly took out the “no Brexit/post-Jo Cox mur­der” rally of the pre­ced­ing days. In a mat­ter of seven hours, the pound went from its highs for the year, to a 30 year low!

But this sud­den move raises the pos­si­bil­ity that an­other of the mar­ket’s “core be­liefs” was shat­tered on Fri­day, namely the be­lief that pol­i­cy­mak­ers will al­ways be there to dish out cash and prop up as­set prices. After all, to some ex­tent, the Brexit vote could be in­ter­preted as the re­bel­lion of the “don’t have so many as­sets” against the “own lots of ex­pen­sive as­sets” classes (look how, for ex­am­ple, Sh­effield, Wales, and Sun­der­land voted against how Lon­don voted). What is amaz­ing is both how peace­ful this re­bel­lion has been, and how long it took. At the risk of sound­ing down­right Marx­ist, the Western world’s lead­er­ship de­cided that the right re­sponse to the shat­ter­ing of the “2008 core be­lief” was to fur­ther prop up as­set prices with lots of bor­rowed cash, thereby mak­ing the own­ers of over­priced as­sets even richer, and dra­mat­i­cally ex­ac­er­bat­ing the wealth dif­fer­ences within their coun­tries (what else do zero in­ter­est rate poli­cies and quan­ti­ta­tive eas­ing do but en­sure that young peo­ple are un­able to af­ford real es­tate?).

Now im­por­tantly, the idea that pre­vailed over re­cent years, that pol­i­cy­mak­ers knew best and could al­ways prop up as­set prices, has been a “core be­lief” that rubbed a large num­ber of in­vestors up the wrong way, so few would have lever­aged up mas­sively on the premise that the “new par­a­digm” that was un­fold­ing was sus­tain­able. This is a very im­por­tant dif­fer­ence be­tween to­day and 2008. Sim­ply put, the lever­age in the sys­tem is not as great in the pri­vate sec­tor (ex­cept per­haps on US cor­po­rates’ bal­ance sheets, as CFOs have spent the past few years buy­ing back stock) as in the pub­lic sec­tor. It is un­likely that a ma­jor­ity of in­vestors would have bought in to this “new par­a­digm”. Take our own mi­cro­scopic shop as an ex­am­ple: the be­lief that the tech­no­cratic classes knew best and would un­der­write growth and as­set prices from here on out (a core tenet of

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.