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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The fish-eaters and the fasters

With a population split between whites and Asian Muslims, in some ways Nelson in Lancashire feels like similar-sized towns in Ulster: two communities separated by a gulf of non-communication.

In the late afternoon of local election day this month, the chairman of Nelson Town Council was working the terraces of old cotton weavers’ houses on his patch. Sajid Ali was wearing a red rosette and a navy blue cardigan over his capacious white shalwar kameez, and what looked like his dancing shoes.

This was not the forlorn ritual of unanswered doors, blank looks and curt responses habitually experienced by Labour canvassers even in more promising political times. Along these streets Sajid is a figure of some consequence: a jolly fellow and, as one opponent put it, an “interesting character”.

Almost everyone was in; Sajid knew almost all of them; and they in turn understood what was required. Sometimes a quick burst of Lancy Punjabi did the job: “Salaam alaykum, yoong maan, how yer doing? What time yer coomin’ to vote?” To older voters his spiel would be entirely in Punjabi and the response would often be a head-wobble, that characteristic south Asian gesture, which, when given to Westerners, can be baffling, but in these cases clearly signified solid intention.

The Labour candidate in the Brierfield and Nelson West division of Lancashire County Council, Mohammed Iqbal, held his seat comfortably on the day his party lost control of the county. And he did so on a poll of 58 per cent: a far higher turnout than in any of the other, whiter areas of Pendle; the highest in Lancashire; and higher than wards with these demographics would usually expect even at a general election. The average across Lancashire on 4 May was 37 per cent. It seems reasonable to conclude that the votes from those of ­Pakistani heritage, marshalled by Sajid, were wholly responsible.

Nelson is a strange, sad, divided, forgotten old cotton town, not without beauty. The weavers’ houses are stone not brick, which, elsewhere, might make them rather chic. A few minutes from town is wonderful Pennine countryside, and to the north the view is dominated by Pendle Hill itself, brooding like some sleeping sea monster.

Pendle is both the borough council and the constituency, where the mix of urban and rural has delivered it to the winning side in seven of the eight general elections since its creation 34 years ago. (Labour took it, five years prematurely, in 1992.) No one seriously believes the 5,400 Tory majority is in play. Nonetheless, Nelson can explain a lot about British politics in 2017.

“This was a cracking town,” said John Bramwell (“John the Fish”), who has been purveying cod, haddock and non-stop banter to Nelson for 41 years, first on the market, now from one of the last white-run, independent shops in the town centre. Nelson had a football team that played fleetingly (1923-24) in the old Second Division, what is now called the Championship. And in 1929 the Lancashire League cricket team, flashing cash in a manner that baffled the national press, signed Learie Constantine, the most gifted and thrilling West Indian all-rounder of his generation.

“When he arrived, no one in Nelson had ever seen a black man close-to,” said Derek Metcalfe, the club’s historian. “People would cross the road when he passed by. But he grew into their affections. He was a highly intelligent man as well as a great player.” Constantine, after a post-cricket career in the law, Trinidadian politics and diplomacy, finished life in the House of Lords as Baron Constantine of Maraval and Nelson, Britain’s first black peer. In July 1943 the Imperial Hotel in Bloomsbury accepted his booking but not his presence, and he promptly sued. His victory at the high court the following year was an early landmark in the fight against racial discrimination.

It was the 1950s before Nelson would get used to seeing non-white faces again, when the mill owners, battling labour shortages and overseas competition, turned to Pakistan to find biddable and affordable workers. They found them in Gujrat District, which is not one of the more worldly places, even in the rural Punjab.

“The first group were young men who in many ways integrated better than they do now. There were no mosques. They went to the pubs with their workmates and knocked around with local women. Then they had to go to the airport to collect the intended wives they hadn’t met yet,” recalled Tony Greaves, the Liberal Democrat peer who is deputy leader of Pendle Borough Council.

The mills disappeared, gradually but inexorably, but the Pakistani community kept growing and has now reached its fourth generation. The young men do not normally spend time in pubs; indeed, in a town of 30,000 people, there are only two left, plus a couple on the outskirts. It is hard to imagine anywhere that size in Britain with fewer. There are, however, at least a dozen mosques. The 2011 census recorded 40 per cent of the population as Asian, but on market day in the town centre the proportion seems much higher. The most prominent retail outlets are two bazaars: the Nelson (the
old Poundstretcher) and the Suraj opposite (the old Woolworths). Few white faces are seen in either: the saris and hijabs are beautiful but of little interest. They are all imported to this textile town from south Asia.

The white people have retreated, either out of the town altogether or to the semis of Marsden, on the hill. In the visible life of Nelson, they are clearly a minority. Population change on this scale can be accommodated, if not always easily, in large cities. It is a different proposition in a small town that was once tight-knit and, despite its closeness to larger places such as Blackburn, Accrington and Burnley, largely self-contained.

Even after 60 years, hardly anything has melted in the pot. The early migrants were villagers who placed little value on education. Recent history has led Muslims all over the world to turn inwards, to their own religion and culture. This is being exacerbated by white flight and by the advent of religious free schools, a disaster for anywhere in search of cohesion. The old Nelsonians have turned away. “Nelson is not multiracial or multicultural. It is biracial and bicultural,” says Greaves. “I would love to tell you that I go round to Abbas’s house to have chicken jalfrezi and he comes to mine for steak pudding and chips,” says John the Fish. “It’s just not like that.”

Unemployment is high at 18 per cent; there is no shortage of taxis. Educational attainment is patchy. Teachers at the two high schools fear their best pupils will be creamed off further by the promised grammar-school boom.

The vicar of Nelson, Guy Jamieson, and at least some of the local imams do their utmost to make connections between the communities. In certain respects Nelson feels like similar-sized towns in Ulster: two communities separated by a gulf of non-communication. In other ways, this description is unfair. When Burnley, just four miles away, suffered riots in 2001, Nelson stayed quiet. I could sense no threat, no active tension, merely resigned indifference on both sides. “There’s a poverty of confidence,” Jamieson said. “They don’t know how to sit down and engage.”

***

A modern English town council, subordinate to Brussels, Westminster, county and district, is an improbable power base, but Sajid Ali seems to be making Nelson’s work. Its precept is only £330,000 a year but this is not capped, so it suits both district and town if Pendle offloads smaller assets: parks, play areas, community centres. It is a minimalist form of devolution, but harks back to the days when Nelson was a borough in its own right, and looks forward to an improbable future when our towns might again be allowed to take their own decisions as they do in more grown-up countries.

But the council votes on party lines, Labour’s 16 councillors trumping the Tories’ eight. “They won’t work with us,” Sajid says flatly. “They don’t run it fairly for the town itself,” says the Conservative Neil McGowan. “If we put something forward for Marsden, we are always outvoted. One council official told me they’d never come across a town like it.” In Tony Greaves’s words, “The
politics in Nelson were always sour.” In the 1930s it was known as Little Moscow.

When I first met Sajid, however, he was outside a polling station doing a stint as a teller and laughing merrily along with his blue-rosetted counterpart, Arshad Mahmood. Yet things were not quite as they seemed. Mahmood was part of a mass defection of Pakistani Lib Dems to the Conservatives which appears to have nothing to do with Brexit, extra taxes for the NHS or Maymania. What it does have to do with remains elusive even to local politicians: “clan politics” and “personal ambition” were mentioned. It may be even more complicated than that. “So you’ll be voting for Theresa May next month?” I asked Mahmood. “Oh, no, I like Jeremy Corbyn. Very good policies.”

Perhaps this helped Sajid maintain some enthusiasm for the bigger campaign ahead, though he was daunted by one fact: the general election coincides with Ramadan, and dawn-to-dusk fasting comes hard in these latitudes when it falls in summertime. Still, he was impressed by all the new members Corbyn had brought to Labour: “The way I see it is that each new member has five, ten, 15, 20 people they can sell the message to.”

This seemed a bit strange: it implied he thought politics in the rest of Britain worked as it did in these streets. He had boasted earlier that he knew everyone. “All over Nelson?” “Oh, no,” he had backtracked. “In the English community nobody knows their next-door neighbour.” Which was an exaggeration, but perhaps not much of one.

There were no posters along Sajid Ali’s streets – not one. The information about which house to choose was on the canvass return and, more significantly, in his head. Just once he got it wrong. A little white girl opened the door and then a tattooed, muscular figure in a singlet barrelled towards the door. He wasn’t aggressive, just brisk. “Naaw. I doan’t vote.” End of. It was a sudden reminder of the norms of modern British politics.

***

Another norm is that, at any local count, no one ever thinks much of the big picture. The rise and fall of prime ministers, earthquakes and landslides are no more than distant rumours, of surprisingly little interest to the principals; what matters is the here and now. Where did that ballot box come from? How big is the postal vote? Any chance of a recount? When the five seats for Pendle were counted the next day at the leisure centre in Colne, one stop further up the clanking branch line from Nelson, no one was talking about the Tory takeover at County Hall.

Here there was something for everyone: Mohammed Iqbal won, just as Sajid predicted. Azhar Ali took the other Nelson seat even more easily for Labour. Both results were greeted with more effusive male hugs than would be considered seemly in Berkshire. In Pendle Central the Tories knocked out the sitting Lib Dem, but – heroically, in their eyes – one of the Lib Dem candidates grabbed a seat in the rural division.

But the most interesting result came in the most trifling contest: a twinned by-election for two vacancies in Nelson Town Council’s lily-white ward of Marsden, so electors had two votes each. The seats were won by a Conservative married couple, the Pearson-Ashers, who got 426 and 401; the single BNP candidate had 359 votes, with one Labour candidate on 333 and the other on 190. The first of these was called Laura Blackburn; the second Ghulam Ullah. This suggests a good deal of vote-splitting that Labour might find rather unpalatable.

In fact, Marsden already has one far-right relic: Brian Parker, who sits on Pendle Borough Council, is the last survivor in the top two tiers of local government of the BNP mini-surge that took them to 55 council seats across the country by 2009. Of Parker, two opposing councillors told me: “He’s actually a very good ward councillor.”

Curiously, Ukip has made little impact in Nelson or in Pendle as a whole. So there is not much scope for the party to fulfil what appears to be its immediate destiny: as a way station for Labour’s historic core voters to catch their breath on the arduous journey into Theresa May’s arms. According to John the Fish, whose shop functions as a kind of confessional for white opinion, they may no longer need a stopover: “I’m getting plenty of people, staunch Labourites, telling me they can’t stand Corbyn.”

I asked him how many Pakistani regulars he had. He broke off from chopping hake and held up five fingers. On 8 June the fish-eaters of Marsden can be expected to rouse themselves more energetically than the Ramadan fasters across town.

***

Seedhill, the cricket ground graced by Constantine, is pretty Nelson rather than gritty Nelson, even though a chunk of it, including the old pavilion, was lopped off years ago to form an embankment carrying the M65. Upstairs in the pavilion is a wonderful picture of the great man, eyes ablaze, down on one knee for a full-blooded cover-drive. It would have made a better monument in the town centre than the 40-foot weaving shuttle that has dominated Market Street since 2011. I thought it was a torpedo; children think it’s a giant pencil.

The packed houses that watched Constantine lead Nelson to seven league titles in nine years have dwindled now: there were only a couple of dozen to watch his successors play Accrington recently. But it was a drab day with a chilly breeze and Burnley were at home to West Brom in the winter game down the road.

And generally the club thrives better than the town. Given the lack of hotels and pubs, the pavilion is much in demand for functions, and the team remains competitive. Nelson fielded four local Asians for the Accrington match, which suggests that, in one activity at least, integration is just about where it should be.

It seems unlikely that a similar situation would apply at the crown green bowls or the brass band, or any other of the long-standing recreations in Nelson (though small but growing numbers of Pakistanis are now taking allotments). The knee-jerk liberal reaction might be that this is somehow the fault of the white Nelsonians. I think this attitude is a grave oversimplification that has done much damage.

In one respect the incomers have re-created the old life of Nelson. In the hugger-mugger stone-built terraces, the neighbourliness, the power of extended families, the external patriarchy and the internal matriarchy, the vibrancy, the sense of communal struggle . . . that is exactly what this cotton town must have been like a century ago. 

This article first appeared in the 18 May 2017 issue of the New Statesman, Age of Lies

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