Lino Spiteri
Riding out the financial storm
The sharp bounce in share prices and indices over the weekend does not mean that the international financial crisis is over. The credit crunch that burst the bubble built over recent years in the US and elsewhere has set in motion too many repercussions. These include the agony of financial capitalism as we had come to know it.
Determinedly led by the United States, there had come about a global sector which declared that it would thrive on not being regulated. The free market, driven by instant spread of knowledge and instant dealing, was to be as perfect as can be. In the process too many authorities became delinquent in the way they abandoned enough regulation over those markets.
Sophisticated cowboys prospered in the neglect. New products were developed whose rating and price were far removed from their true value. They found their way into many institutional portfolios and led to a Big Bang when the sub-prime crisis burst in America. The ripple effect has lasted for over a year. It gradually killed the most important ingredient in the financial market - confidence. Banks, used to lending to each other to provide easy liquidity at interest rates which did not really fulfil their function of measuring risk, pulled in their horns until they disappeared.
That, and the realisation that too much economic growth was built on the housing and other property sector, on too much easy lending, brought about a grandmother of credit crunches. With it came also fear and suspicion of what would be revealed next. The shares of major banking conglomerates dropped in value. Until suddenly this late summer, the unthinkable happened and mammoth financial institutions crashed to the ground.
Central banks and governments committed to the free market reversed their philosophies. They intervened to make bail-outs, using taxpayers' money and causing resentment in the process. Where there had been the contagion of greed, the contagions of mistrust and panic came in. The US government had to resort to a form of nationalisation, but still the panic prowled and roared. It was halted, for how long no one knows, on Friday with fresh intervention.
It will pass. There will be restructuring of the international financial system. The Chinese and other wealth funds will be used to bring about new ownerships, new influences, even a new quasi-political balance. The good times will come again, but they will take two or three years to do so. Meanwhile, what is important is that the bad times are not made worse unnecessarily.
That is particularly important in places like ours. Malta could not be an island in this upheaval. Private investors and institutions saw the value of their financial assets hit. Individuals do not dash outside to proclaim the fact to the world. Institutions have to declare their position. It is one brought about by a decline in the value of certain assets, not bad management.
There is nothing fundamental to indicate that our financial institutions are in danger. They are affected by a decline in profitability, since a drop in the "fair value" of their assets has to be passed through their books as though it were a realised loss. In turn they are affected by the lack of depth in our stock exchange, where small buying and selling orders move the market.
But there is nothing to show that they became a party to the greed and madness that has now been exposed and is shaking the world. There will be low dividends or none at all for a while. But there should not be fresh local crises. The contagion of panic has no cause to be among us as well.
There will be bruises, but there should not be the hint of any collapse. We'll have to ride out the storm with the rest of the world but, luckily, not quite like it. Individual investors will have their professional advisers to guide them. But there too the idea would not be amiss that truly sound investments will make their way back in value, though it will take time.
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Joseph vella
Sep 23rd 2008, 16:51
Well said William Flynn, but I do believe the recovery will be sooner than the two decades experienced by Japan. I have nothing scientific to offer by which to justify my optimism, except for my undying faith in the overall American capitalistic system, and its enormous recovery capacity, warts notwithstanding. The problem is that the value of stock is for the most part artificially driven, not necessarily predicated on potential growth, dividends and earnings.
For the past eighty years or so experience shows, that recovery curves usually peak and ebb within a decade or less. At least that has been my observation in playing the market. - and losing:--(((
There is however a caveat. As a minor league investor I am fully aware of the corruption that drives the stock exchange. Knowing the risks, being aware of how defenseless ordinary folks are against inside trading, and the good old boys club that stacks the card deck in their favor, is part of the gamble I and others take in playing their shell game. In a very real way the general public gets to lick left over crumbs, after the big players have had their full pick of the meal.
William P Flynn
Sep 23rd 2008, 03:28
Recovery in "two to three years" Sir; or two or three decades? The Nikkei busted after the Japanese real estate bubble burst.
The Japanese banking system was exposed as a basket case and the Asian banking crisis ensued.
Huge injections of cash into the Japanese system had to be made; sound familiar?
This was eventually pounced upon by the Wall Street cowboys (the Yen Carry Trade); which flooded the USA with cash, which was blown on mortgages with only one lending criterion - the borrower's knuckles didn't touch the floor as he/she walked in.
Cowboys don't like 30year stuff. They spiked a cocktail of securities with billions of dollars' worth of securitized bad mortgages, slipped it under the nose of ratings guys who ticked it and signed off on it. The cowboys yelled yee-hah!, sold off, and the problem became someone else's.
At the time of the Japanese cash injections that economy had huge successive surpluses. How does the US economy look?
After 20 years, the Japanese stock market is still nowhere near recovering soon.
I find the similarities between the Japan then and US now more than a tad disconcerting. Hopefully someone might console me with a few dissimilarities.
William P Flynn
Sep 22nd 2008, 23:41
Happy to oblige Mr Ellul. But, after having been in the financial services game for 40 years, I feel I still know very little myself.
I can tell you however that the first 30 years are the hardest. After that you learn some things:
1.From time to time, go to the classy restaurants close to the financial district at 3pm, if you see stockbrokers still at lunch, sell down your stock holdings in direct proportion to the number of wine bottles on the table. (adjust this for your siesta culture).
2.When stockbrokers start wearing flamboyant bowties, pocket handkerchiefs, and, especially, if they start wearing red braces - sell everything.
3.When Prime Ministers and Presidents come out to "calm" the markets, it's almost certainly too late to sell, but it's a good time to go on a cruise - the ship won't be crowded.
4.It's only money and, in the words of a famous economist, in long term....we'll all be dead.
5.In the future, when your adviser utters the words "new financial" in front of the words "paradigm" or "concept", stand up, turn around and walk out.
Hope I've been of some help.
Joseph Ellul
Sep 22nd 2008, 09:43
For the last month I have been reading and learning about how the stock exchange works. Normally you buy a share and hopefully it will rise in value and also gives you a dividend. What I cannot understand is: A person borrows a share (which belongs to a third party) from a trader and sells it for a price hoping that the value of the share drops and he will buy it back for a cheaper price and give it back to the trader ,after which he will pay the trader a fee.
1. How can somebody sell and buy something if he does not own it? Is this short selling?
2. What happens to the third party who actually owns the share? Will he be left with a lemon which ultimately be worth nothing?
3. Can somebody like Mr.Spiteri explain how these things work in laymen terms without calling people cowboys. What I would call them,I am sure, the editor will not publish.