Full Flood
The flood is at its highest! While that does not mean that there will be no more floodwaters, the level should slowly subside. But even when it gets back to normal levels, most of the houses will have been washed away or are uninhabitable. The mopping up operations will take a considerable amount of time. Rebuilding will take even longer.
No, we are not describing hurricane Katrina - we are describing the current US financial system.
But will we go back to where we were? No. The world will enter a period of austerity while the excesses of the past are reduced, eliminated and regulated out. Bankers will go back to banking. Caution will be the order of the day. Risk committees will have new formulae and the system will get new regulations. Wall Street's greatest days in terms of investment banks - or what's left of them? - are over.
All of this will take time. There is no quick-fix.
Merger and Acquisition activity has slowed to a trickle. The high fees for Structured Investment Vehicles are being replaced with claims for the banks to make good on misrepresentation. Additional capital is needed to meet regulatory requirements and that will water down any future earnings. That is not a good outlook for financial stocks.
Meanwhile the US consumer, who has been financing his or her standard of living by refinancing mortgages based on increasing house prices, has to bite the bullet. Economic growth must slow. The debate is now only between Recession and a full blown Depression. That affects demand for goods and commodities - whether made or used in the USA, China or India.
So how does this affect investors and savers in South Africa? If you are in a regular savings process, like a pension fund and are still some way from the maturity date, be happy that your contributions, premiums or monthly investments are getting more shares now per rand than they did previously. But if you are concerned about an immediate or current investment amount then, clearly, if you are still holding the same portfolio now as you did a year ago, it will most probably be worth less. That is the nature of markets - they do not go up in a straight line. If you or your advisers / managers did not take avoiding action, you have to ask, "Why not?" Most of the warning signs have been there for some time. But given where we are now, the value offered by shares - in particular - is now better than for many years, so throwing the baby out with the bath water is probably not a good idea.
More importantly is the effect on the SA economy. Here the news is not all that good. Lower commodity prices will help reduce imported inflation but a weaker rand will off-set that.
High interest rates have already seriously damaged the ability of most consumers to meet their commitments as evidenced by large numbers of vehicle repossessions and falling retail sales. Fortunately, construction - not just the stadia for 2010 - is booming. But lower commodity prices will put further pressure on a large current account deficit and lower tax receipts are already whittling away the budget surplus.
We have been spared the problems of bad bank lending that goes under the name of ‘sub-prime' and the spillover to the financial crisis as dubious investments were found to have almost no price in a credit squeeze. Our banks are still lending to customers and each other. But the outlook for earnings, especially for resources companies, has reduced sharply in the recent past - although this is not a surprise for those correctly anticipating a world slowdown.
So, sorry, but the party is over and making money is going to be a lot tougher going forward than it was over the three years to the end of 2007.
So to summarize: this is the worst event in financial markets in living memory. It will take time to get through, no matter what the authorities do. It means that great returns will be few and far between and those who lose the least are likely to be the winners.
But situations like this create opportunities. "Buy when there is blood flowing in the streets!" as Rothschild said or, as Shakespeare said, "There is a tide which, taken at the flood, leads on to fortune."