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

Ralph Steadman for the New Statesman.
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Tim Farron: Theresa May is "the prisoner of the Ukip wing of her party"

The Liberal Democrat leader on his faith, Blairism and his plan to replace Labour as the opposition. 

This is Tim Farron’s seventh general election. His first was in 1992, when his Tory opponent was a 36-year-old called Ther­esa May. He was just 21 and they were both unsuccessful candidates in the Labour fortress of North-West Durham. He recalls talking “to a bunch of ex-miners who weren’t best pleased to see either of us, some kid Liberal and some Tory”. Now he sees his former and current opponent as “the prisoner of the Ukip wing of her party . . . I think it has rendered Ukip almost pointless – she is Ukip now.”

May was elected to parliament in 1997, but it took Farron until 2005 to join her. She leads the dominant Conservatives while he heads a party of only nine Liberal Democrat MPs. Still, their reversal of fortunes gives him hope. “After the 1992 election, every­one said there’s no way for a non-Tory government, and it turned out there was. So let’s not assume it’s a given there’s a Tory government [for ever].”

In April, I accompanied Farron to Manchester Gorton, in the lead-up to a by-election that was cancelled by May’s decision to call a snap election on 8 June. Still, the 46-year-old’s party has been in campaign mode for months; Lib Dems spoke of using last December’s Richmond Park by-election to test their messaging. It clearly had an effect: the incumbent Conservative, Zac Goldsmith, lost to their candidate, Sarah Olney.

Brexit, to which the Liberal Democrats are vehemently opposed, will be a dominant theme of the election. Their party membership has just exceeded 100,000, close to an all-time high, and they have enjoyed much success in council by-elections, with more to come in the local elections of 4 May.

However, any feel-good factor swiftly evaporated when Farron appeared on Channel 4 News on 18 April. He was asked by the co-presenter Cathy Newman whether or not he believes that homosexuality is a sin, a question that he answered obliquely in 2015 by saying that Christianity started with acknowledging that “we’re all sinners”.

This time, he told Newman, he was “not in the position to make theological announcements over the next six weeks . . . as a Liberal, I’m passionate about equality”.

The Channel 4 interview divided opinion. One Liberal politician told me that Farron’s stance was “completely intolerable”. Stephen Pollard, the influential editor of the Jewish Chronicle, described it as
“a very liberal position: he holds certain personal views but does not wish to legislate around them”. Jennie Rigg, the acting chair of LGBT+ Liberal Democrats, said it was “as plain as the nose on my face that Tim Farron is no homophobe”.

Farron declined the chance to clarify his views with us in a follow-up phone call, but told the BBC on 25 April: “I don’t believe that gay sex is a sin,” adding, “On reflection, it makes sense to actually answer this direct question since it’s become an issue.”

For his critics, Farron’s faith and politics are intertwined. He sees it differently, as he told Christian Today in 2015: “. . . the danger is sometimes that as a Christian in politics you think your job is to impose your morality on other people. It absolutely isn’t.”

Tim Farron joined the then Liberal Party at the age of 16 but didn’t become a Christian until he was 18. Between completing his A-levels in Lancashire and going to Newcastle University to read politics, he read the apologetics, a body of Christian writing that provides reasoned arguments for the gospel story. “I came to the conclusion that it was true,” he told me. “It wasn’t just a feel-good story.”

In speeches, Farron now takes on the mannerisms of a preacher, but he had a largely non-religious upbringing in Preston, Lancashire. “I don’t think I’d been to church once other than Christmas or the odd wedding,” he says. “I went once with my dad when I was 11, for all the good that did me.”

When we meet, it is Theresa May’s religion that is in the spotlight. She has condemned the National Trust for scrubbing the word “Easter” from its Easter egg hunt, a row it later emerged had been largely invented by the right-wing press in response to a press release from a religious-themed chocolate company.

“It’s worth observing there’s no mention of chocolate or bunny rabbits in the Bible,” Farron reminds me. “When people get cross about, in inverted commas, ‘us losing our Christian heritage’ they mean things which are safe and comfortable and nostalgic.” He pauses. “But the Christian message at Easter is shocking, actually, and very radical.”

British politics is tolerant of atheists (such as Ed Miliband and Nick Clegg) alongside those who, like David Cameron, are culturally Christian but whose faith is “a bit like the reception for Magic FM in the Chilterns: it sort of comes and goes”. But the reaction to Farron’s equivocation on homosexuality prompted many to wonder if a politician who talks openly about his faith is now seen as alarming. Nebulous wishes of peace and love at Christmas, yes; sincere discussions of the literal truth of the Resurrection? Hmm.

Tim Farron’s beliefs matter because he has a mission: to replace not only Jeremy Corbyn as leader of the opposition but Theresa May in Downing Street. Over lassis at the MyLahore curry house in Manchester, he tells me that Britain is facing two calamities. “One is Brexit, indeed hard Brexit . . . and the other is a Tory government for 25 years. We have to present a genuine, progressive alternative that can not only replace Labour as an opposition, it can replace the Tories as a government.” This is ambitious talk for a party with nine MPs. “I understand the ridicule that will be thrown at me for saying those things: but if you don’t want to run the country, why are you in politics?” He pauses. “That’s a question I would ask most people leading the Labour Party at present.”

What does he think of May, his one-time opponent in North-West Durham? “She strikes me as being very professional, very straightforward, somebody who is very conservative in every sense of the word, in her thought processes, her politics, in her style.” He recalls her 2002 conference speech in which she warned Tory activists: “Our base is too narrow and so, occasionally, are our sympathies. You know what some people call us: the nasty party.”

“In many ways, she was the trailblazer for Cameron in being a softer-focused Tory,” he says. “It now looks like she’s been trapped by the very people she was berating as the nasty party all those years ago. I like to think that isn’t really her. But that means she isn’t really in control of the Conservative Party.”

Voters, however, seem to disagree. In recent polls, support for the Conservatives has hovered between 40 and 50 per cent. Isn’t a progressive alliance the only way to stop her: Labour, the Liberal Democrats, the Greens, the SNP and Plaid Cymru all working together to beat the Tories?

“Let’s be really blunt,” he says. “Had Jeremy Corbyn stood down for us in Richmond Park [where Labour stood Christian Wolmar], we would not have won. I could have written Zac Goldsmith’s leaflets for you: Corbyn-backed Liberal Democrats.

“I’m a pluralist,” he adds. “But any progressive alliance has got to be at least equal to the sum of its parts. At the moment, it would be less than the sum of its parts. The only way the Tories are losing their majority is us gaining seats in Hazel Grove –” he ticks them off with his fingers, “– in Cheadle, in the West Country and west London. There’s no chance of us gaining those seats if we have a kind of arrangement with the current Labour Party in its current form.”

What about the SNP? “Most sensible people would look at that SNP manifesto and agree with 99 per cent of it,” Farron says. “But it’s that one thing: they want to wreck the country! How can you do a deal with people who want to wreck the country?”

There’s no other alternative, he says. Someone needs to step up and offer “something that can appeal to progressive younger voters, pro-Europeans and, you know, moderate-thinking Middle England”. He wants to champion a market economy, strong public services, action on climate change, internationalism and free trade.

That sounds like Blairism. “I’m a liberal, and I don’t think Blair was a liberal,” he replies. “But I admire Blair because he was somebody who was able to win elections . . . Iraq aside, my criticisms of Blair are what he didn’t do, rather than what he did do.”

Turning around the Tory tide – let alone with just nine MPs, and from third place – is one hell of a job. But Farron takes heart from the Liberal Party in Canada, where Justin Trudeau did just that. “I’m not Trudeau,” he concedes, “He was better-looking, and his dad was prime minister.”

There is a reason for his optimism. “I use the analogy of being in a maze,” he says, “You can’t see a way out of it, for a progressive party to form a majority against the Tories. But in every maze, there is a way out. We just haven’t found it yet.” 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.

This article first appeared in the 27 April 2017 issue of the New Statesman, Cool Britannia 20 Years On

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