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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When heritage becomes hate: why my home town of Charlottesville needs to address its complex past

After an invasion of white supremacists, we need to see what our history means today.

Watching a tragedy happening in slow motion, without any way to stop it - that’s how it has felt to be from Charlottesville, Virginia in the summer of 2017. A city that used to always get voted “happiest town in the USA” when I was growing up was the target this weekend of an ugly white supremacist movement whose roots spread far from the city.

It was a huge surprise when we won the lottery of Nazi flags, with our stupid old statues that have become icons of international fascism, with a park named after a distantly forgotten old man becoming a site of struggle for an attempted racist coup of the United States. Our first reaction is: they aren´t from here. Our second: make them go away. Our third: a realisation we need to examine the way that our own ways of life, which we thought so harmless, have inspired such horrible feelings in strangers.

Maybe for my African-American classmates at high school the statue of Confederate general Robert E Lee, and the park when it was still named after him rather than Emancipation Park, always meant violence. Pulling the statue down says no more about the historical Lee than tearing down Lenin in '89 says about socialism. We've been invaded by people pretending to protect us from invasion, and the symbols of our past will never matter as much as living people do.

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The invaders picked our town, probably, because Virginia was a confederate state, and was in fact where the southern gentry used to live. Lee exemplified this tradition. He was son of Lighthorse Harry Lee, a hero of the revolutionary war and governor of Virginia, and is a descendant of one of “Virginia’s first families,” the aristocratic Englishmen who emigrated to Virginia when it was a British colony. He is part of Charlottesville's heritage, and perhaps not even all that shameful a part. He opposed the secession of the confederacy, supported the reconstruction after the war, including giving rights to recently freed slaves. Not exactly woke, but for a confederate general, not as bad as some.

We were taught at Venable Elementary School that he fought only reluctantly, to defend his land, not slavery. In the version we learned, one would imagine Lee being very opposed to people from the Midwest coming to Virginia in cars with Ohio license plates to murder Virginians. Many non-racist Virginians, including quite a few friends, respect Lee deeply - the same is true in towns like New Orleans where other Lee statues are being taken down. Yet if once we could fool ourselves into thinking that the statue didn't represent hatred and racial hierarchies, we can't anymore. The discussion of local history has turned into one of national identity. The statue should be gone by Christmas. 

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The real hero of Charlottesville is the town’s founder, Thomas Jefferson, who was among the most enigmatic of the founding fathers, idealistic and hypocritical - a real American, in other words. His idea of the gentleman farmer is also part of our heritage. It was an alternative to Hamiltonian industrial capitalism, but lost out in the tustle to shape American history. Much like English contemporaries such as William Cobbett, Jefferson believed in a rural ideal, reading poetry by morning, farming by afternoon, playing the harpsichord by night. His thought is also present in our beautiful "academical village" of the University of Virginia which he also founded. It is one of UNESCO’s few world heritage sites in the United States, so I guess it is part fo the globe's heritage as well, and it is also where the white supremacists stomped around with their tiki torches.

It’s time for us to stop being romantic about Jefferson, too. The statue in our minds needs to come down. We can recognize the great parts of his work, of his thought, in Charlottesville today, but we can also recognise that he allowed himself to use violence to dominate others, that he owned slaves and raped them. And we can recognise that equivalent scenarios continue to play out today, and will continue to play out until we are willing to face the truth.

There can be no more excuses. It’s not about Jefferson, or Lee, after all. We use monuments, statues, heroes, to inspire ourselves. In the end, the “truth” about Jefferson or Lee is a matter of trivia and history. Today, for every white male in America, we need to deconstruct the parts of our identity built on the graves of others. It’s not easy.

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Jefferson's gentleman farmer was the forerunner of the people who populate the gentrified Charlottesville that exists today of expensive coffee-shops and celebrity-filled suburbs. This romantic idea, much like the lifestyles of the American and English elite today, seems to engender a lot of resentment from those who can only watch helplessly, and are often gentrified out. It’s not only immigrants or, in the United States, African-Americans, who are denied access to America's Williamsburgs and Charlottesvilles, London's Shoreditches and Oxfords. In Charlottesville, descendants of white sharecroppers and black slaves alike are unable to afford $15 glasses of local Virginia wine.

The paradox implicit in Jefferson’s beautiful idea is that in the end, it’s impossible to sustain this chilled-out and happy lifestyle without the labor being done by others, be they slaves, sharecroppers, or factory workers in China. If America is in trouble now, the conflict comes precisely from the fact that our universalist ideas of freedom, equality, and liberty correspond to an economy that is anything but universal. We actually did it, keep doing it, and unless we can use these ridiculous men dancing through our streets iin Halloween costumes as a funhouse mirror to make us see ourselves as we are, we’ll probably keep doing it.

I resent Jefferson for his hypocrisy, because in truth, I would love it if America looked more like Charlottesville than the industrialized and nasty-looking Interstate 95 highway that leads up the East Coast, the aftermath of Hamiltonian industrial-revolution factory America. The New Jersey towns, the gas stations, what we contemptuously call “McMansions,” suburban Northern Virginia... none of it is really authentic enough. Parallel to the rich and ugly suburbs, are poor and ugly towns, the sort of places with unemployment and discounts on cereal that tastes like sugary trash in the supermarket.

The residents of these towns don’t hate the residents of more gentrified towns for our organic granola, they hate the world for the structures of oppression that they can’t escape, even as an international class, an educated class, a well-meaning class, escapes without even needing to. We coexisted in the same place but not the same set of opportunities, and we glided on to new and bigger worlds of possibility, ones denied to those of different class backgrounds, regardless of their ethnicity.

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Some of my African-American classmates at Charlottesville High School were likely descendants of Jefferson’s slaves, coming from poorer neighbourhoods and housing projects and taking "standard" level classes, with honors and AP classes for students whose parents worked in the University (very liberal, of course), a genteel place where every year, some kid wears blackface or a Nazi outfit to a party - as a joke, of course. While my classmates in AP and Honors classes got help from our teachers in applying to Ivy League schools, the general level classes saw black and white students who shared poorer backgrounds acting out to get attention from harried teachers. This was public school, but Charlottesville’s many excellent private schools, of course, didn’t even have the general level students at all.

Despite some southerners such as Lee supporting the post-war “reconstruction,” white resistance to racial equality led to a Jim Crow system that wasn’t much better than slavery, and an American South which dozed in sweaty decline while the rest of the country industrialised and modernized. From 1865 to 1965, not much happened in the South. True, there were intellectual movements like the Agrarians, whose 1920s manifesto “I’ll Take My Stand” I found one high school afternoon in the local bookstore, we had our Faulkners, our occasional geniuses. But as a society, it was stagnant. 

It was only when the civil rights movement began that the south began to actually rise again. UVa went from being a minor regional school to being a world-class one. Charlottesville went from being a mediocre gentleman’s club to a place that people of all backgrounds could make lives for themselves in the public service. And we, the public, gained so much - that’s why my family chose to live there.

I remember as a child strolling the beautiful downtown mall to go to dinner al fresco with my parents, my father pointed out a man in a turban; it was Satyendra Huja, a Sikh professor at the university who had planned the downtown mall, and made a useless street into one of the nicest places to congregate in town. In 2012, Huja became the mayor. I guess the former mayor of Charlottesville who single-handedly made Charlottesville one of the most charming towns in the country often gets told to “go home,” as if that's somewhere else.

Martin Luther King Jr.’s birthday is a national holiday in the United States, but in Virginia it used to be “Lee/King/Jackson” day, with two confederate officers added in just as a reminder. That’s not really our heritage, and as students, we were grateful for the day but always laughed at how immature it was that the powers that be needed to block out Dr. King’s achievements so much.

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Charlottesville is a southern town true to and even obsessed with our heritage - a place filled with museums, historians, bookstores - which wants to dissect that heritage to remove the parts of our forefathers (and mothers) lives that we can’t accept, like a sandwich that you open up, take the pickles out of, and then keep on eating. We love our heritage in Virginia. We read about it, celebrate it, live it every day. But heritage isn’t a static thing, fixed in time, and the walls between myth and history are thin. In fact, perhaps knowing about your heritage is the ultimate form of privilege. I doubt that either the descendants of slaves I went to high school  with, or the “redneck” (so-called because they got sunburned by working in the fields - “redneck” is a class slur) descendants of the illiterate sharecroppers of rural Maryland, do. 

What happened this weekend to Charlottesville could happen to any town as long as we those who are deprived of their history and who don’t feel at home in their hometown. But the Charlottesville I remember, and the one it is now, proves that you can go from war and conflict and institutionalised racism to one where people of all races and identities can coexist, for the most part, peacefully and happily. We can, if we try, honor Jefferson for his achievements without forgetting the slaves his beautiful buildings were built by. A “Memorial to Enslaved Laborers” is being built on the campus he founded.

For the first time, every one of my old friends is thinking about racism, white privilege, the origins of violence, and what we can do about it. We can honor Jefferson and General Lee’s memory best by trying to learn from their mistakes. Maybe, if it seems like we are able to solve these problems, I’ll have a child myself. I hope she goes to Venable Elementary School, and I’ll take her to Emancipation Park afterwards.

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