Was Lehman just a taste of the turmoil?
WAS the collapse of Lehman Brothers in 2008 just a warm-up for the wave of financial turmoil that crashes through the financial markets when the Euro experiment collapses?
That is the question occupying the minds of investors, journalists and ministers around the world, and the sad reality is that, in my humble opinion, any action that may be taken –such as the printing of trillions of euro’s –will just be delaying the inevitable.
As a good, opinionated friend mentioned over a beer last week, “one big problem in terms of finding a really comprehensive solution is that there is no one great leader, whether a Churchill or Thatcher, Roosevelt or Kennedy, Mandela or Ghandi, to show the way. Instead there are just lots of selfish medium-size states looking to save their own skin, and exemplified by France.”
He went on: “It is not helped that neither is there one country globally pre-eminent. “The US is giving up that mantle (unlike in 1945 when they took it on in spades with the Marshall Plan and the UN, etc) and the Chinese aren’t ready to take on that role.” I couldn’t argue with any of those sentiments. There are many debates, summits and telephone calls, but who’s going to go down in history by making a few decisions
that could lead to at best, civil unrest and quite a few banks going under, or at worst, a war?
The reality is that when the world encounters its next proper war –one that doesn’t involve overthrowing a tinpot dictator or invading a poppy-growing Al’Qaeda safe haven –the last thing we’ll be worried about is the £85,000 compensation limit for bank deposits.
Deep down I hope that the world’s population and the ruling classes are not stupid enough not to have a long-term solution to what is a man-made disaster. Those readers who have served on boards, be they charities or commercial entities, will know that the composition is never equal, and you will always have characters who are dominant (Germany) and those who would like to aspire to be dominant (France).The next layer down, normally the HR director, will never be up there, but tries hard and normally gets left alone. But every board needs a ‘whipping boy’to blame and it may be the sales director, who is a nice bloke, knows where the best golf clubs are (Portugal), can take you to the best pubs (Ireland), knows the best holiday islands to visit (Greece) and unfortunately has a villa that he refers to as “his pension”(Spain), but ends up bringing the company down with his over-optimistic forecasts of growth. As an adviser with quite a diverse range of clients, the question that I’m asked is: “How can I protect myself and respective pensions from not dropping 10% in a month?”
In prospect is a form of quantitative easing from the European Central Bank that makes the exercise that the Bank of England recently announced look like spare change. What should happen in this instance is that bond prices go up, closely followed by share prices, with the biggest beneficiaries being the ones listed in Europe –but the ripple effect and the global nature of most companies will cause an across-the-board reaction.
The other reason to hold equities is that they should be a good hedge against inflation, although I would advise that only those companies with a sound business model are considered, with a good dividend yield, and that produce goods which we all use (Vodafone, Astrazeneca, Aviva), although for most people an equity income fund, run by professionals will be the best course of action. Where would be a safe haven for your cash if it all did go wrong? I struggle to find an asset class that will allow you to sleep at night, as even gold is relatively volatile and specialist.
What I’m doing is keeping a ‘high’cash weighting. I’m not happy with this situation, as the rate of return is awful and results in a real loss of purchasing power in my pension, and personally. In those spare moments during the working day, I’ve started using my SIPP again to buy positions in certain companies that I follow and know a bit about. While not a ‘day trader’, my average holding period is around 48 hours and I work on a 10% stop loss/gain limit, which at the moment works. The magic 10% number also applies to the amount of total capital that I’m willing to employ on this strategy. All I’m waiting for is some clarity as to where the global economy is heading, then I’ll be upping my commitment, which I hope is sometime in the next 25 years –otherwise retirement at age 65 will be all but a dream.