WINSTON Churchill once said that "the Americans will eventually do the right thing, but only after exploring every available alternative". This certainly looks the case today. The US treasury secretary, Henry Paulson, and the head of the Federal Reserve Bank, Ben Bernanke, have acted resolutely to ease the log-jam within the international credit markets which, at one point, was threatening disastrous consequences.
After much dithering and vacillation, the UK government got in on the act, with proposals which, to my mind, were rather more imaginative than the re-heating of the 1980s Resolution Trust proposals which were put in place across the Atlantic to bail
out the defunct Savings and Loans Association.
Gordon Brown's approach – and it had been endorsed by him even if he is not the architect – is rather neater, injecting equity capital into the banking system so that, in effect, tax payers' money is being used to acquire assets on behalf of tax payers. Not only does this avoid an escalation in national borrowing, it also means that we – and, indeed, the shareholders of the banks – should, in due course, benefit from restored stability within the international financial community.
Predictably, the Prime Minister is now being feted as the saviour of the financial edifice. This is not dissimilar to congratulating the arsonist for putting out the fire. After all, it was Brown who plundered our pensions and whose policies converted one of the most robust structures in the world to one of the weakest. His much-lauded decision to offer the Bank of England independence failed to put in place an overall authority to regulate the disparate strands of the financial markets. Even so, this is not the time to apportion blame. The crisis may have been contained but it is not over.
Today's problems have their origins in 1997. The collapse of the Long-Term Capital Management Hedge Fund, run by a terrifying array of cerebral talent but which, unfortunately, made some disastrous bets on the foreign exchange markets, threatened the entire international financial edifice. The response was the aggressive reduction in monetary costs, which was extended after the 11 September 2001 attacks. Whatever the appalling human dimension of these attacks, the actual number of casualties was more or less in line with the number of people killed on British roads in any year. The attacks were not, therefore, really much of an assault on the US economic core. Nevertheless, cash remained cheap, to a point where it was dismissed as an asset class. Increasingly weird and wonderful ways were found to persuade people to borrow money, the banks to operate higher margins and for us, the recipient, to acquire tomorrow today.
What we are now enduring is the inevitable purging of this excess. It is, ultimately, probably, healthy, but the question today is, what now?
I believe investors should be preparing for the next bull market. There are some appreciable hurdles ahead. Dividend income will come under pressure in key areas. The banks are now tied into a Gordian Knot of preference stock and, it is suggested, will not be in a position to pay equity dividends until this prior charge has been cleared. In fact, I suspect these preference shares will be bought back quite quickly as banks, under new management, sell out non-core assets. Even so, over the next 12 months, at least, the dividend stream from many UK financial institutions will dry-up, with a consequential impact to institutional and individual shareholders.
Interest rates are also going to come down with a bump so cash deposits, if now secure, may not be of much appeal as a source of revenue. As a result, investors should take advice but consider converting some of their cash liquidity into Treasury Bonds to entrap contemporary yields. Sterling may fall but this should be of little relevance to a UK investor whose spending destinations remain in this Sceptred Isle.
As for equities, with the consumer not just tightening the belt but probably selling it to boot, the outlook for the demand curve looks a little bleak. Nevertheless, the plunges in stock prices that we have seen over the past couple of years have left many investment sectors on quite compelling valuations, even if one does factor-in possible dividend reductions. In my opinion, the likelihood of a full-blown 1930s recession, or the decade-long stagnation that occurred in Japan in the 1990s, is remote. Two years down the road, the international economic engine should be moving forward under the ambitions of the emerging economies, re-galvanised by the impact of cheaper raw material costs. I have argued before about the progressive migration of international financial and industrial authority from the western hemisphere and I expect this trend to continue. However, it does not mean the extinction of a mixed economy, merely the rebalancing of its emphasis. I have no idea when stock markets will start to recover, I am just sure they will, and want to be aboard when it happens.
• Bryan Johnston is director of Bell Lawrie stockbrokers in Edinburgh
The full article contains 862 words and appears in The Scotsman newspaper.
