Wednesday, 5 August 2009

Bubbles

While I was in Barcelona visiting friends and family, one of my friends asked me (as if I had a clue about anything…) what was the likely outcome of the current financial crisis and what can be done.

I did not venture to suggest any investment strategy or anything like that, apart from avoiding investing in equities unless you had already saved about 1 year of salary. Maybe hedging against long-term inflation by buying gold (via ETF), if you have lots of money spare. In general, my advise for people wondering whether to invest in the stock-market is “don’t”.

But I did try to make the point that in my view we are in so much trouble that the politicians are scared of telling the public. I, like many other people, think that there are no asset bubbles left to burst:

1997-1997: Russian rubble
1999-2001: dot.com
2003-2006: equity
2004-2007: corporate debt
2005-2008: property
2007-2008: commodities
2008-?: government debt

In my view, there are no other assets whose value can be inflated so as to give the general public the illusion of wealth and thus keep consumption going. Every bubble in the last decade has been punctured but as one bubble was burst, another was created and so forth until there is only one bubble standing: sovereign debt.

In order to prevent a banking collapse of unknown consequences, our governments have beefed up the financial system with fiat currency, a posh term for paper money. That is, money that is not secured on any other asset, but on the ability of the issuing central bank to repay the creditor.

In the past, currencies were linked to the gold standard. This system stopped operating in the ‘70s and since then, we have just been in a massive super-bull market lasting over a quarter of a century, navigating our way from bubble to bubble. This is the view of people like Soros in his latest book. From the small perspective that only 34 years of age and some cultured reading can give me, I fully agree with the man. You might think that Gold could be the next asset whose value will be inflated beyond any measure of fundamental value, and you might be right. The problem is that it is not possible to generate the illusion of wealth amongst the wider public by propping up the value of Gold or even Gold derivatives.

As someone said during dinner, if that is true, we are all fucked. Aye big man.

But a few days ago, I read this article in my Bloomberg terminal. I was wrong. There is another bubble left to burst: banking bonuses and salaries.
The author is spot on.

If anybody thought that the current crisis would serve to change the investment banks business model, they are showing that they have never been in a trading&sales floor, or in the bars around Canary Wharf, or have never met anybody working in M&A, or a trader, or a junior Vice-President in an investment bank, etc.

The politicians do not have the balls to let any bank, investment bank or market maker go under so the party will continue for a while.

“Too big to fail”, “systemic importance”, “market confidence and stability”, empty words used by those who would not hesitate sell their mother in a reverse auction if their Excel models told them to do so.

The government has an easy solution to the banker’s bonuses corporate fraud: any employee in a taxpayer supported institution (either by government guarantees of their debt, TARP, etc) should be taxed at 60% on any remuneration exceeding £200k, including pension contributions, and be ineligible for any tax relief over this amount. I think ten times the UK’s average wage should be enough for anybody and if it is not, then they should not be employees of government-funded organisations, but proper business-people and set up their own business without government support.

The usual suspects will bark about “talent”, “highly educated” and the usual protectionist bull. I have not meet more uneducated and uncultured people in my life as when I was working in Canary Wharf a few years ago.

The industry is so powerful and politicians are so weak and spineless that nothing will happen of course. But the industry is rotten to the core, devoid of any ethics or morality, self-focused and detached from the wider society. And you and everybody who does not work in a financial institution are paying for all this.

1 comment:

trabizonspor said...

As 9/11 came through on the screens our grossly overweight CIO came panting down the corridor crying, "Gold! buy gold," and everyone was like, "Fuck off man, who gives a shit about gold?" My impression of my most successful banking friend is that he keeps his money in houses and National Savings and steers well clear of his colleagues.