Not quite so wonderful

MEDIUM CLOSE SHOT –– More people have crowded around the counter.

Their muttering stops and they stand silent and grim. There is panic in their faces.

 

GEORGE

Now, just remember that this thing isn't as black as it appears.

 

As George speaks, sirens are heard passing in the street below.

The crowd turn to the windows, then back to George.

 

GEORGE (cont'd)

I have some news for you, folks. I've just talked to old man Potter, and he's guaranteed cash payments at the bank. The bank's going to reopen next week.

 

ED

But, George, I got my money here.

 

CHARLIE

Did he guarantee this place?

 

GEORGE

Well, no, Charlie. I didn't even ask him. We don't need Potter over here.

 

Mary and Ernie have come into the room during this scene. Mary stands watching silently.

 

CHARLIE

I'll take mine now.

 

GEORGE

No, but you . . . you . . . you're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house . . . (to one of the men). . . right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?

 

TOM

I got two hundred and forty-two dollars in here, and two hundred and forty-two dollars isn't going to break anybody.

F     - From Frank Capra’s ‘It’s a wonderful life’ (writing credits: Philip Van Doren Stern, Frances Goodrich, Albert Hackett, Frank Capra, Jo Swerling and Michael Wilson)

It’s difficult to write objectively about the current money market crisis, perhaps because so many greater fools have been revealed to be swimming naked. Investment banks colluding with ratings agencies and packaging liar loans and salting the vehicles with leverage and then selling the structures on to investment funds and hedge funds and.. and then all of a sudden banks aren’t willing to lend money to each other, which seems about as bad as free market capitalism can get until the banks actually start falling over, which some of them presumably will.

The Austrian school would presumably prefer to see judgment being meted out to the guilty parties. But I am increasingly minded, albeit reluctantly, to concede that a severe money markets crisis transcends plain morality when the normal functioning of those same markets is jeopardised, as it surely is today. As my friend Warwick Lucas of South African brokers Imara SP Reid puts it:

“In the middle of a shooting war, if you get philosophical about man’s inhumanity to man, there is only one outcome. You die.

“Moral hazard is something that should be assessed when a banking system is lending busily, not when it is on the ropes.”

As things stand, one plausible future looks as follows: monetary authorities implement emergency rate cuts; the dollar declines further; precious metals rally further (“fright to quality” being one of the current crisis’ better coinages); one or two pretty big lending institutions are unable to survive the liquidity drought; institutional vultures circle; risk aversion continues its belated rally; and the desperate monetary pumping starts to sow the seeds of the next debacle.

From an equity investor’s perspective, only the foolhardy (and complacent insiders, which might be the same thing) step in to buy financials here. While the Knight Vinke agitation will be music to the ears of HSBC shareholders, HSBC is, one presumes, among the category of banks too-big-to-fail. And in any case, UK depositholders will be well served by refreshing their familiarity with the maximum compensation levels from the Financial Services Compensation Scheme:

(http://www.fscs.org.uk/consumer/key_facts/limitations_of_the_scheme/compensation_limits/)

Outside HSBC, Standard Chartered looks like one of the west’s better longer term bets; as Eric Knight points out, the world’s economic centre of gravity is shifting eastwards.

Also from an equity investor’s perspective, previous recessions have by and large shown which sectors perform least worst: utilities; food groups; brewers; tobacco; consumer staples; healthcare. Energy has historically been a poor performer, but one suspects that this time round, the dynamics of the demand pull / insufficient infrastructure spend in the hydrocarbon complex will ensure a different outcome. A random array of the sort of equity holdings that should outperform the broader market in the event of a more developed economic slowdown would include, for UK investors at least, the likes of United Utilities; Unilever and Reckitt Benckiser; Diageo; British American Tobacco; GlaxoSmithKline and AstraZeneca. Insert your own national favourites here. And on the basis that Asia and other emerging markets somehow manage to pick up the slack left from a softening US (and Europe ?), the diversified mining groups (including Anglo American, BHP Billiton and Xstrata) should continue to benefit from the secular bull market for resources notwithstanding their higher market betas. (Gold, of course, is one of the most ‘special situations’, but should continue to do well as Armageddon insurance despite the sporadic sell-offs triggered by delusionally bullish behaviour on the part of the speculative community.)

Equities, of course, are not the only game in town. But when the ‘alternatives’ only trade with visible prices once a month or less, it’s so much more enjoyable to play the casino on a day-to-day basis, and see other people’s misery in real time.

“As calamitous as the sub-prime blowup seems, it is only the beginning. The credit bubble spawned abuses throughout the system. Sub-prime lending just happened to be the most egregious of the lot, and thus the first to have the cockroaches scurrying out in plain view. The housing market will collapse. New home construction will collapse. Consumer pocketbooks will be pinched. The consumer spending binge will be over. The US economy will enter a recession.” – Eric Sprott, Sprott Asset Management.

And to revisit an old favourite from earlier this year; as Countrywide CEO Angelo Mozilo outspokenly suggested:

“I’ve never seen a soft landing in 53 years.”

Comments

[John Greenan]

Historically the UK part of HSBC was called "Midland Bank". This was one of the big four banks in the UK - National Westminster - (NatWest), Barclays, Midlands, Lloyds. It's not been said for many a year but former Chancellor of the Exchequer (Finance Minister) Nigel Lawson gave a policy speech (late '80s I think) that strongly suggested that none of the big four UK banks could or would go bust. The impact on the UK economy would be too painful. The deposit protection scheme would never come into play - the political uproar of allowing one of the big four to fail would bring down a UK government. Remember that the UK has a highly concentrated banking sector. Too big to fail is right...