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Sit out the storm

If the US Congress can't be bothered to pump in $700bn to fix the disaster the US created in the first place, I think the least it could do is send everyone involved in global financial markets on a two week beach holiday.
Read time 4min 30sec

As I write this I wonder which banks have been up all night, working on a deal to stave off collapse. I wonder which reserve banks in which countries are getting the most distress calls.

Thankfully I'm pretty sure our own central bank governor got a good night's sleep and that the CEOs of our big four banks were comfortably wrapped up in expensive linen.

But the US' decision not to engineer a $700bn bail out for international banks is going to be catastrophic for stock markets, bond markets and the global financial system.

While those of us banking in SA should be fine, our savings are looking pretty bad. Money market investments will still get you a positive return, but with our pension funds invested in shares and bonds, there's going to be a lot of pain.

I notice those pushy newsreaders on TV are already harassing markets commentators to tell them when there'll be a recovery. But I have a nasty suspicion that there won't be a full recovery for about five years.

Look at the terror attacks of 9/11. That closed down the New York Stock Exchange for three days and led to the biggest one-day fall in share prices that the world had seen in a long time. There was a relief rally shortly after that terrible week, but it took two years before stock markets steadied themselves. Take the dot com crash. It began in 1999 in developed countries and it took until 2005 for investors to contemplate tech stocks again.

In this instance we have already suffered more than a year of the subprime mess and it's not over yet. We have seen bail outs - Bear Stearns, Merrill Lynch, AIG, Washington Mutual, Wachovia, Northern Rock, Fortis, Bradford & Bingley, Freddie Mac and Fannie Mae. And we have seen one large failure - Lehman Brothers.

But with markets panicking we will see more failures in developed countries.

People in the US are withdrawing their cash fast. In the two weeks before Washington Mutual tumbled to its knees, Americans withdrew more than $16bn in cash.

Goodness knows what they were doing with it thereafter. If you can't trust your biggest banks, where do you put your money but under the mattress?

I have a nasty suspicion that there won't be a full recovery for about five years.

Ren'ee Bonorchis, Business Day, editor at large

But if the US Congress can't be bothered to pump in $700bn to fix the disaster the US created in the first place, I think the least it could do is send everyone involved in global financial markets on a two week beach holiday. No really. Because if you get them away from their desks and the panic, they'll realise the world is not falling apart and they won't be able to keep selling the market down. By the time they get back the fear will have subsided and although the market will be a very different animal, perhaps a level of calm would return.

But even without the beach holiday, I don't think we're headed for the Great Depression Version 2.0. The world is a very different place. In the 1920s in America there were a lot of poor people. The middle class was nothing like it is now. When you're poor to begin with, a depression rips away any resources you might have. The majority of Americans right now are not poor, they're just in a lot of debt. In the 1920s people had also not learnt about diversifying an investment portfolio - many people traded in stocks and stocks alone. Day trading was a big thing. But the US is not like that anymore and the day traders that there are will, for the most part, not have put all of their money into the stock market.

But I think there will be a recession - particularly in the UK and parts of Europe, but it should not spread to South Africa. A recession is a pretty hard thing to get into. It means that for two consecutive quarters a country has to record negative growth. It would mean, by way of example, that gross domestic product growth would have to be recorded at minus 2% in one quarter and minus 3% in the next quarter. While South Africa's gross domestic product growth is expected to slow from its heights of 5%, it is not forecast to drop below 3% thanks to the fact that we are a developing country with huge infrastructure spending planned. For South Africa, going negative on growth is almost impossible.

So what do we do while we sit out the global financial storm? Personally I would stay away from offshore investments, I would have the bulk of my portfolio in the money market and I would send the bill for my two-week holiday in Mauritius to the US Congress.

* Ren'ee Bonorchis is Business Day's editor at large.

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