15th December 2008

After hating the 8 – watch out for the malign 9

Beware of consensus – it is often an excuse for complacency. However, when looking at 2009 there seems to be a growing consensus that it’s going to be a year of recession – you may have “hated the 8” but now prepare for the “malign 9”.

So what will this actually mean? The indicators of the real economy – by which I mean actual comments from business people around the country – seem to show that the slowdown has not been coming at a gentle pace. For some months I had been hearing comforting words that there had been no real effect so far, but that there was a nervous feeling that was becoming more pervasive and that the ice we had been skating on was getting ever thinner.

In fact it would seem, that there have been an increasing number of instances where there have been sudden shudders of businesses feeling the ice cracking as a result of their turnover quite dramatically falling off.  The days of old supply chains slowly feeling the gentle rippling effect of lower demand eventually being passed through to producers seems to have been radically changed – the effect of operational efficiencies and “just-in-time” production and delivery means that the reaction from retail outlet to manufacturer is almost immediate.

Add to this the figures of increased redundancy advice requests last month, and the falling of consumer confidence and the evidence for a deeper recession is piling up. Whilst all this news is of course worrying, if not even frightening, we must put it into some perspective. We have in effect squeezed two decades of expenditure into one single decade and compounded this further by the huge increase in personal debt– thus leaving the second decade with the hangover of little demand and unwinding debt. Difficult yes and painful for some, but not necessarily a surprise for those willing to watch and understand.

Right, enough hand wringing....

The facts are that economic actions around the globe are being taken, albeit in not necessarily a very co-ordinated manner. Actions have already been taken in the UK, again in my view not necessarily the right ones – 2.5% off VAT, phooey – but action there is. We must remember that this is a most unpleasant cycle, but a cycle nonetheless.

As I have mentioned before, investment markets will endeavour to look through the recession, and the result will be rallies of optimists all searching for a turnaround.  At 7IM, we will be sitting down shortly to do some more tactical asset allocation planning for the first part 2009 and it will be as much about risk management as investment management to ensure as much control and protection as possible, whilst also keeping an eye out for opportunities.  2009 may well be feeling malign but I suspect it is also going to reveal some excellent opportunities which may well give the seeds for more benign and positive investments.

One area of encouragement is the fact that we have a range of nations with surpluses. The forecasts for just 2008 show that China could have $400bn, Germany $280bn and Japan $194bn. Additionally, the major oil exporters will have $813bn. This is quite an arsenal of spending power if it were to be deployed. On the other side of this equation are the borrowers, not unsurprisingly led by the USA, but then in order of value, Spain, UK, France, Italy and Australia. The next stage therefore will be to see the stimulus initiatives of the indebted countries go through but it will still be the responsibility of those with surpluses to stir up their economies as well. After all, those countries with reserves need those who are consumers and buyers – both sides need each other and both need to play their part. Actually the global position also appears to be a net surplus $350bn.

Last week saw the two day Strategic Economic Dialogue – which is a grand term for the vital US and China relationship. It was in effect Mr Paulson’s swansong in his current role as Treasury Secretary and dealing with the Chinese authorities. Presumably now he can go back to his usual role as Uncle Fester in the Addams family. The meeting, although never going to come out with dramatic decisions, is crucial to ensure that these two huge economies carry out their economic stimulus packages with at least some co-ordination if not necessarily in tandem. If the Chinese suddenly take to devaluing their currency then we could find ourselves with further problems, especially around accusations of trade barriers and dumping of goods.

I know gloom is the fashion and grey is obviously the new black, but yes there was one piece of positive news last week. There was a record rise in US home financing applications in the past week. Mortgage applications rose by 112% which was the largest such rise since 1990. Well it may only be one straw in the wind – but better than none.

And finally ... have the Americans excelled themselves with their latest set of catchy titles and descriptors for their various refinancing packages?  The Primary Dealer Credit Facility – yup, seems ok so far. The Term Securities Lending Facility – yes also ok – but how about the Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility or the ABCPMMMFLF? Yes,  well that’s clear then.

Have a good weekend,

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited

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