Editorial - Issue 30 InterIM Insight

30 October 2008

Spend, Spend, Spend?

As I finished my editorial for the last issue of InterIM Insight, closed my laptop and headed for Gatwick and the Greek islands (fortunately not on XL Airways!), little did I imagine that, within short, Lehman Brothers would collapse, heralding the rapid move into world economic meltdown.

The announcement of rescue packages including the government refinancing of major banks with share capital appears to have stemmed the problem in the banking sector for the time being, and there is evidence of green shoots in inter-bank lending.

But the domino effect is only just getting going. Hedge funds now look likely to be the next in line to suffer major difficulties – Emmanuel Roman, co-chief executive of GLG Partners, Europe’s biggest hedge fund, was quoted in the Daily Telegraph as saying that 25 to 30 percent of the world’s 8,000 hedge funds faced extinction. The sector is believed to be responsible for the recent rise of the Japanese yen, as hedge funds scramble to buy back into the yen to unwind their carry trades (in a carry trade, a currency with a relatively low interest rate such as the yen is sold and the proceeds used to buy a different currency with a higher interest rate, to profit from the difference in rates).

A recent forecast suggested that the fall in house prices in the UK might not bottom out until 2014 – although this was predicated on a return to the borrowing regimes of 30 years ago, when it was unheard of to be able to take out a mortgage of more than three times salary.

The stock markets are already factoring in a major recession in what the politicians call the ‘real economy’, with share prices tumbling. The US approach earlier this year was to give all its citizens $600 to spend to help keep the economy ticking over.

Commenting on this, investment analyst and entrepreneur Dr Marc Faber concluded his monthly bulletin (June 2008) with the following:

''The federal government is sending each of us a $600 rebate. If we spend that money at Wal-Mart, the money goes to China. If we spend it on gasoline, it goes to the Arabs. If we buy a computer, it will go to India. If we purchase fruit and vegetables, it will go to Mexico, Honduras and Guatemala.

If we purchase a good car, it will go to Germany. If we purchase useless crap, it will go to Taiwan and none of it will help the American economy. The only way to keep that money here at home is to spend it on prostitutes and beer, since these are the only products still produced in US. I've been doing my part."

In the UK, Alistair Darling is also spending money in Keynsian fashion to stimulate the economy, but on public expenditure projects rather than in the way envisaged by Dr Faber. Whether this spending will be effective in having an effect on the economy at large remains to be seen – if the money is not properly targeted, any short term gain will not be sustained in the long term.

However, the current economic conditions are bringing increased opportunities for professional Interim Managers, and IIM Members should use their professional accreditation as a quality assurance for clients as more people enter this growing market for Interim assignments.

Tom Brass