Panic stalks the Square Mile

In the tumultuous first week of August, the international markets woke up to the reality that extrem

During the stock-market panic of autumn 2008, we lived for the weekends. We were renting a cottage near Banbury in Oxfordshire and we would blast up the M40 on Friday nights, wend through the misty streets of our nearest village and then down into a dell, where the house nestled. An hour later, with our little boy tucked away in bed, I'd sit at my computer and watch the US markets until they closed.

Even when I knew that the traders in New York were stumbling from their offices to the bars of Broadway, I couldn't relax. It had become common practice for bad news to be released after the closing bell on Wall Street. Friday-night press releases - whether they were gloomy updates from struggling banks, a grim report from the Federal Reserve or a surprise downgrade from rating agencies - gave traders a couple of days to digest information before getting back to their desks on Monday. Those weekends, while walking through the bright clouds of falling leaves, I would try to get some perspective on the latest financial catastrophe, try to see the markets with a clarity that I wasn't afforded in the white-knuckle working week.

I thought back to that time as I sat up late on Sunday 7 August, trying to make sense of the negative headlines that had caused the stock-market jitters of late July to turn into an early-August rout. The trader's job is one of pattern recognition: to sift through information and judge between the incidental and the meaningful. The best in the business seem to make these judgements at the level of instinct. No mantic powers were required in the first week of August to tell that the news was bad. What traders, analysts and economists are now trying to work out is if this crisis is merely a big bump on the road to recovery, or a sign that the much-feared double dip is finally here.

As recently as 7 July, the FTSE was edging towards 6,100. By the end of 5 August, it sat at under 5,250. We entered correction territory - a fall of over 10 per cent from recent highs - on most major exchanges and, despite some decent US employment data, declines rivalled those that followed the bankruptcy of Lehman Brothers. The Dow Jones index staged a brief rally late that afternoon as Silvio Berlusconi announced measures aimed at liberalising Italy's economy. With the echo of the closing bell still ringing on Wall Street, however, Standard & Poor's (S&P) dramatically stripped the US of its AAA rating for the first time in history.

As long as the US retains its AAA status at the two other big rating agencies (Moody's and Fitch), S&P's move is largely symbolic. Banks and insurers will still be able to treat US treasury bonds as AAA-rated for risk management purposes and the downgrade will have only a marginal effect on borrowing costs. That doesn't mean we should ignore it.

Many will question the validity of S&P's move, given the tarnished reputations of such agencies after their decision to give ridiculously inflated ratings to sub-prime securitisations in the run-up to the financial crisis. The US government has highlighted flaws in S&P's calculations, pointing to a $2.1trn mistake. Yet S&P has, for once, got things right. The drawn-out relief rally that has taken place since early 2009 reflects the concerted, unilateral action taken by governments across the world to address the credit crisis. The over-leveraged financial system was bailed out by politicians, who realised that the only way to keep banks alive was to assume the liabilities of those in the worst shape, while pumping enormous amounts of liquidity into the markets to resuscitate the rest. The plan worked and stock markets heaved a communal sigh of relief.

Fearful symmetry

The political decisiveness of those mid-crisis days was a canard. In the weeks leading up to the S&P downgrade, there was a ghastly trans­atlantic symmetry as US politicians indulged in shameful point-scoring over the (usually routine) raising of the debt ceiling and Europe shilly-shallied over its response to the seemingly endless problems in Greece. Only debt of the most robust credit quality should be rated AAA. The US came within days of defaulting on its bonds as Republicans and Democrats played games of economic brinkmanship. In downgrading the US rating, S&P merely acknowledged that an investment in the country's debt risks falling foul of political intransigence.

Meanwhile, José Manuel Barroso, president of the European Commission, was correct to question the "systemic capacity of the euro area to respond to the evolving crisis" but this was unhelpful. The European Financial Stabilisation Facility - set up to bail out struggling euro-area governments - needs to be bigger than the current €440bn (£385bn) but any major increase will be resisted strongly by Germany. Italian and Spanish bond yields rocketed, pushed higher by a lack of direction at the European Central Bank (ECB), which initially held back from including their debt in its asset purchase scheme.

In the first week of August, the markets woke up to the reality that the financial crisis, which they had thought was behind them, had merely been transferred from the private sector to public balance sheets. Where companies led by supposedly decisive CEOs used to be the big borrowers, the debt is now in the hands of governments run by infighting bureaucrats. In the wake of the S&P downgrade, China called for the US to get over its "debt addiction". As a holder of over $2trn of US debt, China, by far the country's largest creditor, has a right to make its voice heard. More worrying for the US was a suggestion at the end of the press release that China might stop or scale down its purchase of treasuries. The S&P downgrade is not world-changing in itself, but if China uses it as an excuse to alter its asset allocation or push for the replacement of the US dollar as the global reserve currency, China's reference to the US as "the world's sole superpower" would end up carrying some heavy irony.

The last time stocks hit the lows seen on the morning of 5 August was towards the end of August last year, when a combination of concerns over European peripherals (Ireland and Portugal specifically), Chinese inflation and poor US economic data hit investor confidence. The old trader adage "Sell in May and go away" (that is, hold only cash from May to October) would have been particularly useful this year. The rationale behind the maxim is sound: with investors on holiday, any moves in the market are affected by illiquidity. Where, in a fully functioning market, one would expect buyers and sellers to remain more or less balanced, in the summer months there is no one around to stand in the way of a rout. Last year's August slump was largely owing to this summer sluggishness.

The situation this time around is rather different. Because of the ongoing wrangle over the US debt ceiling, traders have been chained to their desks for the past few weeks. Many of those who did get away have been called back from their trips to the Côte d'Azur. Volumes have been heavy recently. On 5 August, US stocks experienced the highest levels of trading since the "flash crash" of May 2010, when computer-driven, high-frequency-trading hedge funds caused a correction of nearly 1,000 points in the Dow Jones index. Then, it was a technical fault in the market that caused the enormous trading volumes. This time, investors are scared and are selling out of all but the most defensive stocks.

Another sure sign of fear is the record volume of options trades that went through on 4 and 5 August as investors attempted to put in place hedges against further market turmoil. Panic once again stalks the Square Mile and traders are struggling to make sense of a complex picture. Usually, in times of market turmoil, gold rises in price; but when panic really sets in, the highest-quality assets suffer.

Some of the best trades of my career were made in the mad days between October 2008 and February 2009, when hedge funds were scrambling to raise money to meet margin calls (a requirement to post cash against the falling value of the fund's assets). Because it was impossible to sell anything but the most liquid assets (the "family silver", as it was described), those of us who did have cash to spend were able to pick up extraordinary bargains, with discounts of anywhere up to 70 per cent of face value. This time, gold is the "family silver". It is always useful to watch the gold price - it's a pretty good sign of where investors are on the greed/fear continuum - and falls in gold in times of panic suggest a capitulation of confidence. If you believe Warren Buffett's mantra of "Be fearful when others are greedy and be greedy when others are fearful", it's a good signal to start picking up bargains.

The big question for traders and portfolio managers is whether we have experienced a short, sharp shock and should be buying selectively or whether we are at the beginning of a new bear market, which would entail an overhauling of asset allocations. The picture looks bleak. If we are entering a double-dip recession, investment strategy will be a matter of quick thinking and guesswork - but there are obvious approaches traders could take and a few likely developments to keep in mind.

1 Equity exposures should be reduced for all but the most defensive stocks. Pharmaceutical companies, basic household and consumer goods should be held.
2 Currency investment will focus on a new breed of solvent nations with stable political and economic systems. The Singaporean dollar, the Norwegian krone and the Australian dollar will join the yen and the Swiss franc as the main safe-haven currencies.
3 We should not rule out dramatic inflation driven by governments attempting to inflate away the unsustainable levels of debt on their balance sheets. Already, there is talk of further quantitative easing in the US. Although everything points to a bubble in the gold price, it remains one of the few sure-fire ways of hedging against inflation.
4 Diversification is still key. A portfolio with a good spread of asset classes (including commodities, private equity and hedge funds) and geographies (with attention to Asia and South America) will - with luck - ride the storm.

Back to reality

As traders returned to their desks on Monday 8 August, it appeared that a weekend's contemplation had failed to lift the gloom. After following Asian stocks lower, the FTSE briefly rallied into positive territory. This window of optimism prompted Nick Clegg to claim that the ECB's buying of Italian and Spanish bonds was "calming the markets". He was wrong.

As Wall Street futures plunged, the FTSE gave up its modest gains and slumped towards the 5,000 level. Gold hit a record high. Crude oil dived. With unrest on the streets mirroring the turmoil in the markets, it is impossible to say how bad things will get from here.

Following Lehman's collapse, it felt as if all of the certainties had been stripped from the markets, as if there was nothing between us and financial Armageddon. It feels like that again. Without bold intervention from the governments at the heart of this crisis, traders will be looking back on the weekends of the 2008 crash with misty-eyed nostalgia. Back then, it felt like the end; now, we know that it was just the beginning.

Alex Preston is the author of "This Bleeding City" (Faber & Faber, £7.99).

This article first appeared in the 15 August 2011 issue of the New Statesman, The coming anarchy

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In the heartlands

What does visiting Wallasey, Pontypridd and Islington North reveal about Labour’s future?

Islington. It’s the idea, as much as the place itself, that the right hates: an enclave of wealthy people who have the temerity to vote against right-wing interests. The real Islington, and Jeremy Corbyn’s patch of it in particular, is not all like that. Although parts of his constituency do resemble the cliché of large townhouses and overpriced flat whites, Labour’s 78-year hold on the seat is founded not on the palatial houses around Highgate Hill but on the constituency’s many council estates.

It’s a place I know well. As a child, Islington North was the place next to the edge of the known world, or, as I would come to call it later in life, Barnet. After going to church in Bow, my mum and I would take the bus through it to choir practice, where I sang until my voice broke, in both senses of the word.

Today, austerity is making Islington North look more like its past. Not the Islington of my teenage years, but of my childhood: grimy streets and growing homelessness. Outside the Archway McDonald’s an elderly woman points out the evidence of last night’s clubbers and tells me that today’s teenagers are less considerate than I was or her grandson is. She’s wrong; I once vomited in that same street. But street-sweeping, particularly at night, has been one of the first things that councils have cut back on under constraints from decreasing local authority budgets.

As for homelessness, that, too, has come full circle. Tony Blair’s government was the first to count the number of people sleeping rough, and by the time Labour left office it had been reduced by two-thirds. In the six years since David Cameron first came to office, the homeless figure in England more than doubled from 1,768 estimated rough sleepers to more than 3,569 today. This is the world that Jeremy Corbyn’s supporters want to fight against. These are the effects of Conservative rule that make Labour activists yearn for an anti-austerity champion.

***

Demolishing the stereotypical views of Islington and elsewhere is vital if we are to understand the currents flowing through ­Labour. This summer, there have been three main characters in the soap opera (or farce) that has played out in the party – the beleaguered leader, Jeremy Corbyn, of Islington North; the leading rebel, Angela Eagle, whose constituency is in Wallasey; and finally, the eventual challenger, Owen Smith of Pontypridd. I visited all their constituencies in a whirlwind week in the hope that it would illuminate the leadership race and the wider challenges for left-wing politics in Britain.

In all three places, the easy assumptions about Corbyn’s appeal were complicated by the facts on the ground, but a common thread united them. Outside the Holloway Road Odeon, I heard it first: “Jeremy is a nice guy, but he’s not a leader.” The trouble was that even those who questioned Corbyn’s leadership had little faith in those challenging him.

On 4 July, during a meeting of the Parliamentary Labour Party, Neil Kinnock talked about “the supermarket test”: how people in Tesco or Lidl would say “I want to vote Labour, but I can’t vote for Ed Miliband”. He urged Labour’s representatives in the Houses of Parliament to “apply the supermarket test for Jeremy Corbyn and see what answer you get”.

In reality, they had been applying it for months. That was the spur to the attempts in late June to oust Corbyn as Labour leader. For the 172 MPs who said they had no confidence in him – and the 41 per cent of Labour members who told YouGov that they thought Corbyn was doing either “fairly badly” or “very badly” – he is an obstacle on the road to saving Britain from the Tories. Idealism didn’t create a minimum wage, set up Sure Start centres, or bring in civil partnerships: assembling a broad enough coalition to elect a Labour government did.

The minority of MPs who support him, and the thousands of members who say they will vote for him again, feel differently. For them, Corbyn’s demise would feel like a capitulation. It would feel like ­accepting that neoliberalism, capitalism and austerity have won the day, that the role of the Labour Party is to ameliorate rather than oppose them.

When I visited Islington North, Labour’s leadership election was only just starting to get under way and Angela Eagle was still in contention. Her tough performances deputising for the leader at PMQs have made her popular at Westminster but that enthusiasm has not made it as far north as Islington. “To me, I can’t see Angela Eagle as a prime minister either,” said Mike, one of the regulars at the Coronet, a Wetherspoons on the Holloway Road. “What are they running her for?”

The same sentiment prevailed in Wallasey, the Wirral constituency that Eagle has represented since 1992. There, too, were a few pockets of Corbynmania. There was also a sense that Labour is heading for defeat as long as Corbyn remains in place – but little faith in Eagle’s ability to alter that trajectory.

Wallasey is of less long-standing Labour vintage than Islington North. It remained steadfastly Conservative even between 1945 and 1966, and Eagle first won the seat in 1992. Although she is now in possession of a 16,000-vote majority, her neighbour Margaret Greenwood took Wirral West seat back from the Conservatives by a margin of only 400 votes. Tory strategists still eye the Wirral hungrily.

Wallasey is home to New Brighton, the seaside resort commemorated in Martin Parr’s 1985 series The Last Resort. A popular tourist destination for most of the first half of the 20th century, New Brighton was hurt by tidal changes in the River Mersey, which stripped most of its sand, and by the closure of its pier, but it remains a favoured destination for retirees and day trippers. In times past, Liverpool families that did well for themselves crossed the Mersey, bought a home – and promptly started to vote Tory. Wallasey, and the Wirral as a whole, is still where Scousers who have made it good set up their homes, but nowadays their politics usually survives the river crossing unscathed.

Yet there is still a vestigial sympathy for Conservatism in the leafier parts of Victoria Road and Seabank Road, one that is largely absent from Islington North. Perhaps Theresa May’s diligence in dealing with families affected by the Hillsborough disaster, which was mentioned frequently when I asked people for their opinion of the new Prime Minister, is sufficiently well regarded here that it is beginning to erode the Thatcherite taint still hanging over the Tory rosette on Merseyside.

However, it is not just Labour politics that is proving increasingly capable of weathering the journey across the Mersey. In Westminster, the chatter is that Militant – driven out of Labour in the 1980s, though most of its members continued to live and work on Merseyside – is back as a force in the city’s constituencies, and that many of its members have moved out and retired to New Brighton. Their influence is blamed for the series of damaging stories that slipped out of Wallasey in the days after Eagle declared her candidacy.

“There’s a reason why they’re so good at getting themselves on the national news and in the papers,” one MP tells me. “It’s that they’ve done all this before.”

***

The perception that Eagle “lost control” of her local party, as well as a disastrous campaign launch, led to support from fellow MPs ebbing away from her. It went instead to Owen Smith, the MP for Pontypridd, a little-known figure outside Westminster, but one who has long been talked of as a possible Labour leader inside it.

Smith’s great strength, at least according to some of his backers, is that he is a blank canvas. Certainly, as with Corbyn in Islington, there was a widespread perception in Wallasey that Eagle was not cast from the material from which leaders are made. Smith at least had the advantage of introducing himself to voters on his own terms.

His slim hopes of defeating Corbyn rest on two planks. First, the idea that a fresh face might yet convince wavering members that he could win a general election. A vote for him rather than Corbyn can therefore be seen as a vote against the Conservatives. Second, he is willing to call for a second European referendum. Among Labour Party activists, who backed staying in the European Union by 90/10 per cent, that is a compelling offer.

In Islington and Wallasey, both of which voted Remain (and both of which still have  houses flying the flag of the European Union when I visit), that message also has wider appeal. But in Smith’s own seat, a second referendum is a tougher sell. The Valleys voted to leave by a near-identical margin to the country at large. No one to whom I spoke was enthused about replaying the referendum.

Smith’s status as a “blank slate” will only be useful if he manages to write something appealing on it over the course of this summer. It is also possible he could just remain largely unknown and undefined.

Travelling around the country, I became accustomed to explaining who he is. Even at my hotel in Cardiff, which borders his constituency, the name “Owen Smith” was met with blank looks.

Unfortunately, the habit proved hard to break once I was in Pontypridd, resulting in an awkward scene in the back of a taxi. “I know who my MP is,” my driver said angrily, before launching into a lengthy diatribe about the arrogance of London-based journalists and a London-led Labour Party. The accent had changed, the setting was more confrontational, but the story remained the same as in Islington and Wallasey: he was convinced of neither Jeremy Corbyn’s nor Angela Eagle’s ability to fight and win an election. “That voice? In a room with Putin?” he said of Eagle. Then he said something unexpected. “But I’ll tell you what – they need a change from Jeremy Corbyn – and why not Owen Smith?”

“Why not Owen Smith?” As much as they might wish to deny it, that is the message with which Corbyn’s critics will try to take back control of the Labour Party. It is a message that feels unlikely to move or inspire. As I catch the train back to London, I reflect that those who want to convince Labour activists to give up Jeremy Corbyn – and what they feel he represents – need to offer them something compelling in return. No one puts “Vote for the lesser of two evils” on a banner.

Stephen Bush is special correspondent at the New Statesman. He usually writes about politics. 

This article first appeared in the 28 July 2016 issue of the New Statesman, Summer Double Issue