When Lehman Brothers collapsed in 2008, the future of capitalism was not given. No one seemed to have full control over developments, and few offered any meaningful assessment of how deep the economy could fall. The effects of the financial crisis in 2008-09 can still be felt, but now we seem to have forgotten all about it.
Consumer confidence is high, growth is back to decent figures, interest rates are low and asset prices (shares, bond & commodities) are rising fast. Debt levels are increasing strongly and unemployment is low.
In essence: The table is set for another financial crisis! These signals in the economy are much the same as we saw in 2007, or before the dot. com crisis in 2000. The Bank of International Settlement (BIS) has released its latest quarterly report, which is almost impossible to understand for us non-bankers. Luckily, we have qualified economist to help us interpret conclusions and those are: Be aware, the wolf is coming!
To the Guardian, Neil Woodford, one of the UK’s most high-profile fund managers, said stock markets were in danger of crashing, resulting in huge losses for millions of people. He continues: “Ten years on from the global financial crisis, we are witnessing the product of the biggest monetary policy experiment in history,” he said. “Investors have forgotten about risk and this is playing out in inflated asset prices and inflated valuations. “There are so many lights flashing red that I am losing count.”
I was young and totally blue (not only as regards the fascination for Chelsea FC) when I worked in the financial sector in Oslo in the mid-eighties. The company I worked for enjoyed stellar growth, acquired a lot of companies and made huge profits. We grew from 50 to 800 people in a couple of years. Bang! The financial crisis that hit us wiped us out, Norwegian banks were taken over by the government and I was finding myself collecting unpaid cars. I have never driven finer cars than these days. Maserati 800 bi-Turbos, Porsche 911s and nice BMWs. Shortly after I left Norway for Denmark and enrolled at the Copenhagen Business School.
I was really marked by this macro turn of events. 15 years later, we had the dot. com bubble bursting. Could I see it coming? No! I was working for Dell at that time, a company which also enjoyed some tailwind from the sweeping optimism in the tech sector. The Dell stock price increased by 17,000 per cent in little over eight years. In 1998, Dell’s return on invested capital was 217%. So Dell was not a dot.com company, and survived easily the burst of the bubble in 2000, but the sentiment in the market was so bullish that anything ending on .com enjoyed very favorable, you might say bizarre, valuations.
I moved into Aerospace in 2007, working for Satair, a global distributor of spare parts. Satair was used to turbulence in the macro-economic air, having seen SARS and 9/11-crises eroding cash flows overnight. When the financial crisis hit us in 2008, the experienced management team was prepared. We reorganized the business and revised our strategy. Airlines (our customers) were hard hit, approaching us asking for all sorts of discounts and extended credit facilities only seen from companies fighting for their lives. Banks cut credit limits and fought for their own existence. If you believe the jargon “cash is king”, it has never been more true than during these stormy months of 2008.
I remember talking to the CEO one October day when Financial Times carried these headlines. We discussed, seriously, if there was a tomorrow for capitalism. What should governments do? Central banks? IMF?
As a Financial Times subscriber, I decided to keep these newspapers. They should forever remind me that behind a long and optimistic asset price rise, there could be a daunting tomorrow, for which we must be prepared.
As Nassim Nicholas Taleb says in his compelling book The Black Swan: “We humans are the victims of an asymmetry in the perception of random events. We attribute our successes to our skills, and our failures to external events outside our control, namely to randomness.”