economics, society

Protectionism or just delaying the inevitable?

Global Economic power is shifting on a mass-scale, for the developed economies of the World it’s time to (in the words of Ice Cube) “check yo’self before yo’ wreck yo’ self!”…

Image courtesy of CrappyGraphs.com

One of the big stories of the week has been the decision by the US Federal Reserve, The Bank of England, The European Central Bank, The Central Bank of Switzerland and the The Central Bank of Canada to inject around £110 billion into the market to ease concerns.

Why are they doing this? The simple fact is that borrowing in the inter-bank market has become too expensive and is stalling the cogs of the financial markets. The impacts of high libor rates can be seen in various areas; the doubts over the operating models of Northern Rock, Bradford & Bingley and Alliance & Leicester (because their operating model is reliant on borrowing short-term money on the inter-bank market); the number of large bond issues, syndicated loans and IPOs that have been pulled (these are all ways in which companies raise large sums of money – i.e. there hasn’t been the liquidity or inclination to execute some of these deals) and the general decline in the value of Bank stocks (although this is also in no small measure due to worries over bad debts/asset values and worsening economic conditions).

Don’t get me wrong, liquidity needs to be pumped into the market to allow the system to work, it’s not hurting the man on the street as some misguided commentaries have stated, if anything, making liquidity available for bank’s to lend to top corporates in all walks of life actually assists all those shareholders of said corporates, their employees and ultimately those that enjoy their products/services.

The more controversial point I want to make is around liquidity and in fact the global shift in liquidity. Let’s think what’s happened over the last 5 years…China and emerging markets have performed very strongly, attracting liquidity into their central coffers as the developed world flocks to purchase their wares. Commodity-rich countries especially those swimming in oil have benefited from the heady heights of their respective commodity prices.

So emerging markets and commodity-rich countries are suddenly bulging with liquidity, and you know what? They want a return. They want a yield better than US treasury bonds and have become more adventurous in achieving this return. See examples such as The Chinese Development Bank buying a share in Barclays and the aborted bid by the Qatar Investment Fund , Delta Two for Sainsburys.

The global balance of liquidity has tipped and now I can’t help but think that putting the liquidity into the market for the developed economies banks is protecting both the banks (as the distributors of liquidity) and the corporates (as a demander of liquidity). Ultimately, if liquidity continued to freeze up (frankly caused by its own over-exuberance) then more large debt placements would go on hold, banks would continue to feel the capital squeeze (thus not be able to do as much business) and the FTSE as a whole would be materially and negatively impacted (although some cash-generative corporate players would outperform the rest because they are ‘teflon’ in liquidity problems).

So…shares going down, not necessarily because of fundamentals but just because the market mechanism has fucked up and prevented the flow of cash. Some shares will go down beyond their fair value and suddenly holding these shares brings very reasonable returns indeed. In fact, if I’m looking at an underpriced Bank that’s turning £5bn in profit each year and I’m a petro-dollar rich state-backed investment fund…fuck it, I’ll have the lot…

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