The week that was... or should I say the era that was?

Posted by Morgan on 22nd Sep 2008
If you went on holiday last week, a cursory glance at the FTSE 100 could persuade you that you did not miss much. The market opened last Monday at 5,238 and closed on Friday at 5,335. A modest gain of 1.8%, so you probably didn't miss much....

How statistics can lie. During the most incredible week, we saw the demise of Lehman, Merrill, HBOS and AIG. A series of events that would have sounded preposterous only days earlier. These events were of such magnitude that everyone from tabloid hacks to esteemed economists have suggested that this could herald the end of the financial system as we know it and the start of a new era.

In a fascinating article, Robert Skidelsky argues that the enormous steps taken by central governments to nationalise Fannie, Freddie and Northern Rock and to support the financial system represent the end of Neo-Classical conservative economics and a return to Keynesian Liberal economics, where the state regulates, supports and creates markets. See http://skidelskyr.com/site/article/farewell-to-the-neo-classical-revolution/. In effect a step back to the 1930's.

What does this mean to a humble property business like Ellandi. We will have to wait and see... It is unlikely we will see another week as eventful as the last but I think it is inevitable there is worse to come. I say this for two reasons. 

There remains a liquidity crisis - banks are reluctant to lend to each other, let alone to corporate or retail clients. In order for there to be stability, let alone growth, we need confidence and liquidity. Neither is likely to develop in an environment where even banks are reliant on state support to prove they are solvent. There will need to be a period of ongoing pain and further asset right downs until people have confidence that balance sheets reflect their true worth and trust that an orgainsation is creditworthy.

We are yet to see the full force of a credit crisis. Falling consumer and corporate demand will result in losses for many companies, combined with the lack of liquidity, this will inevitably lead to an increase in corporate bankruptcies. Setting Lehman aside, we are yet to see this impact on a large scale. It is likely to result in job losses, a fall consumer expenditure and economic contraction spreading beyond the City of London into the wider UK economy.

I can not offer as eloquent an economic arguement as Skidelsy but we have all enjoyed a very long period of economic growth, sustained by corporate and personal leverage. The world is now "de-leveraging" and the result of which will be a painful hangover. To date, this pain has been largely theoretical for most people and unfortunately it will need to be felt by more people before the green shoots of the next growth period can germinate.

Until then banks and property companies are likely to batten down the hatches and the HMS Ellandi will continue to focus on restructuring distressed property deals. There could be quite a few around...

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