The essential lesson from financial crisis: We will recover

A trader works on the floor of the New York Stock Exchange (NYSE) as the building prepares to close indefinitely due to the coronavirus disease (COVID-19) outbreak. Reuters extent of monetary support from central banks and state budgets, in the fight against the economic damage caused by the COV-19 coronavirus pandemic. (AFP)
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Updated 25 March 2020

The essential lesson from financial crisis: We will recover

  • This crash is the reverse of previous crashes, in that it started in the real world and spread to financial systems

We are in the middle of one of the most savage stock market crashes in history. Shares across the world have been pummeled for the past two weeks, and nobody can honestly say where it will end.

But it will end, as I can vouch. As a journalist over more decades than I care to remember, I’ve covered the ups and downs of financial markets. There is always a recovery.

The media cynics say that “bad news is good news” in the newspaper industry, meaning that you can sell more copies and get the full attention of your readers when their livelihoods are threatened.

Certainly, as a financial journalist, stock market crashes are the events you live for. They are for us curmudgeons what general elections are for political journalists, the World Cup final for sports writers, the Oscar ceremony for Hollywood correspondents. 

The current crash is different from others, in a way that I’ll come to later, but each of the previous big ones I lived through and reported on — in 1987, 2000 and 2008 — was different in its own way.

I guess too that they were all different from the other famous event in financial history — the Great Crash of 1929 — which still frames the popular crash memory. Plunging stockbrokers and soup queues are probably most people’s immediate reaction to news of a market crash.

But in 1987, those images were far from my mind as I struggled to get to work in central London on the morning of Oct. 19 — Black Monday. The city had been hit over the weekend by a genuine hurricane, and fallen trees and damaged buildings made the journey difficult.

It was a good time to be a financial journalist in London. Share prices had been rising most of the decade, and it was the Gordon Gekko era of sensational takeover battles. The stories virtually wrote themselves: “Profits and dividends up” and “XYZ Corp. bids for ABC Inc” were the default headline.

The next 48 hours changed the way I viewed financial markets. Markets, it turned out, were not just booming — they were massively overvalued and riding for a fall. On that Monday, the London indices fell 11 percent in a matter of hours, and billions of pounds in value was wiped off share values.

The damage would have been even greater but for the fact that many stockbrokers had not made it to the office through the hurricane-ravaged city, and were unable to sell. Quaintly, this was before the age of remote working, or even of mobile phones.

The absent traders made up for it the next day, when they managed to get to work and sold off another 13 percent of share value. It was carnage, the biggest two-day drop in London stock market history, and seemed an epoch-defining event.

It wasn’t though. Life went on pretty much the same after Black Monday, and indices began an upward climb that continued more or less steadily through the 1990s, until the Dotcom bust of 2000.

I was more experienced by then as a financial journalist, and determined I would never be caught out again as I was in 1987. I was on the lookout for warning signs as markets forged ever upwards, inflated by the first breath of the Internet revolution that promised to bring a “new paradigm” to the investment world.

I remember precisely the moment that I knew it would all end in tears. It was in one of those City of London clubs where sophisticated businessmen would gather to discuss the day’s market news before heading off to a decent dinner.

All pin-stripes, cufflinks and perfectly coiffed silver hair — except for one young man in his twenties dressed in chinos and casual shirt. He was seated in a big leather armchair explaining an investment proposition to one of the pinstripes, who was concentrating hard but obviously, judging by the number of times he asked the same question, failing to understand the deal. Regardless, they shook hands.

It had all the makings of a disaster. The venerable older man had just committed millions of pounds worth of investment to a scheme he obviously did not comprehend. Over the coming months, as the indices went into a long decline, it was obvious that scene had been played out on a grand scale: Wealthy old men who should have known better, betting the farm on the “new paradigm” that they did not understand.

Their pain was compounded in 2001 when the 9/11 terrorist attacks in New York hit the heart of global capitalism, and set off another tsunami of selling.

But again, stock markets recovered, buoyed up by soaring prices in real estate around the world. By now, I was living and working in the Middle East, and was amazed by the quality of life in my new home, Dubai. 

In 2006, when I moved there, it seemed each day brought another stupendous development, from the Palm Jumeirah to the under-construction Burj Khalifa. Dubai was the “Switzerland of the Middle East” for the quality and reliability of its financial industry, and life was good.

But somewhere — London or New York probably — a smart financier had an idea that was to eventually dent the Dubai
dream — and for a time threaten
a global financial collapse. That idea was the collateralized debt obligation (CDO), a complex financial instrument that allowed bankers to pool together and sell assets, notably mortgages and other forms of securities.
The problem, as the world discovered in 2008, was that all sorts of risky assets had been mixed in with the good ones, corrupting the whole.

In September that year, toxic CDOs led to the collapse of Lehman Brothers in New York, and suddenly every bank in the world looked vulnerable. I remember going on a Dubai radio station and declaring it to be “the financial equivalent of 9/11,” for which I got a certain amount of criticism as a scare-monger, but I like to think subsequent events at least partially justified my hyperbole.

Towards the end of 2009, the strains that had been building up in Dubai could no longer be confined, and Dubai World — the builder of the glamorous Palm and lots of other Dubai icons — announced it could no longer pay back its debts and was seeking a “standstill” on repayments.

Dubai, and the rest of the world got through it, of course. The Economist coined one of its legendary headlines about the emirate — “Standing still, but still standing” — which summed up the situation. With reliance, determination and a little help from your friends, you can get through anything — even a global financial meltdown.

Which brings me to the current situation. This one, it seems to me, is different in a number of significant ways from previous crashes. The past collapses were all, at bottom, to do with some defect in the financial system, coinciding with inflation of asset values over a number of years.

Certainly, there has been a period of soaring prices in world markets ever since the 2009 crash. The world got over that disaster pretty quickly, and embarked on a 10-year spending spree for shares and other assets, especially related to technology and the digital sector. It also loaded up with debt again in a big way.

But, before the coronavirus outbreak, most experts thought this would continue for much longer, or at best would only suffer some minor “corrections” before taking off again. What has happened now is that, because of the severe dislocation to global trade and national economies because of the virus, huge chunks of economic activity have been effectively shut down. It is the reverse of previous crashes. This one started in the real world of national economies and spread to financial systems.

The other difference, of course, is that this time it is not only livelihoods that are threatened, but lives too, on a potentially catastrophic scale. With this threat over us, it seems heartless, almost irrelevant to watch the share prices or the financial indices.

But we will all need some distraction, and some hope, in the weeks and months ahead. Searching for the first sign of the inevitable recovery in global stock markets could be a valuable therapy. Whoever spots if first, and backs their judgment with cash, will be ahead of the curve when times get better — as they surely will. We always recover from crashes.


Make or break days for global oil ahead of OPEC crunch meeting

Updated 08 April 2020

Make or break days for global oil ahead of OPEC crunch meeting

  • OPEC, led by Saudi Arabia, were on Thursday scheduled to take part in virtual discussions with non-OPEC members, led by Russia, about a possible deal to revive the OPEC+ alliance
  • On Friday, energy ministers from the G20 nations, under the presidency of Saudi Arabia, will convene in another digital forum that will bring in the third part of the global oil equation – the US

DUBAI: The global energy world, in the midst of crisis as demand slumps to unprecedented levels due to the coronavirus disease (COVID-19) pandemic, faces two days that could make – or break – the oil industry for months to come.
Leading producers from the Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia, were on Thursday scheduled to take part in virtual discussions with non-OPEC members, led by Russia, about a possible deal to revive the OPEC+ alliance that fell apart in Vienna at the beginning of last month.
Then, on Friday, energy ministers from the G20 nations, under the presidency of Saudi Arabia, will convene in another digital forum that will bring in the third important part of the global oil equation – the US, currently the biggest oil producer in the world.
If no deal is reached from the two days of oil summits, the immediate prospect looms of a further fall in crude prices and, with global storage facilities already filling rapidly, the possibility of major exporters “shutting in” oil fields, jeopardizing future production.
Energy experts say the purpose of the meetings is two-fold: To reach agreement on how to limit the vast quantities of oil that are still being produced even as demand collapses; and to present some kind of united front in geopolitical terms in the face of the biggest economic recession since the 1930s.
The most visible immediate sign of any success from the meetings will be an increase in the price of crude oil on global markets. Brent crude, the Middle East benchmark, has lost nearly half its value in the past month.
The first aim – to try to balance oil supply and demand – is the more difficult. Global demand has fallen by at least 20 per cent from the usual daily consumption of around 100 million barrels, oil economists have calculated.
But, following the collapse of the OPEC+ deal that was putting a lid on supply, all producers have been pumping more crude. Saudi Arabia is producing more than 12 million barrels per day (bpd), a bigger volume than at any time in its history. All OPEC members, as well as Russia, have said they will increase output.
In this stand-off, US President Donald Trump intervened last week to say that he had spoken to Saudi and Russian leaders and that he “expected” a cut of 10 million, possibly even 15 million, bpd.
That looks like wishful thinking. For one thing, it would not rebalance markets. Anas Al-Hajji, managing partner of US-based Energy Outlook Advisers, said: “The amount of the cut is relatively small given the major drop in demand.”
There are also some difficult relationships to smooth over in the OPEC+ alliance. Saudi Arabia and Russia exchanged angry statements last weekend, each accusing the other of starting the oil price war. Iran, with big reserves but hampered by US sanctions from exporting in large quantities, said that it might not take part in the conference.
The choreography of the two meetings also presents hurdles. The US will not be present at the OPEC+ meeting, but American Secretary of Energy Dan Brouillette said he would take part in the G20 event.
Because it is a free-market industry, America cannot order its oil producers to reduce output, but most analysts are agreed any attempt to rebalance global supply would be impossible without a US contribution.
By going first, Saudi Arabia and Russia are “playing blind” without knowing what the Americans are thinking. Neither would want to agree big price-restoring cuts only for US producers – under big financial pressure at current levels – to swoop back into the market.
This week there have been some signs that the Americans are considering their own versions of cutbacks. The biggest US company, Exxon Mobil, said it would reduce capital expenditure on future projects by 30 percent; the US Energy Information Administration said oil production would fall by nearly 1 million bpd this year, in response to falling demand and financial pressures.
But even if the Saudis and Russians cut substantially alongside other big OPEC producers such as the UAE, and the Americans enter a long-term pattern of falling demand, it is still hard to see how cuts could reach the 10 million barrels Trump “expects,” let alone 15 million.
J. P. Morgan, the big US investment bank, said that it expects OPEC+ to come up with combined cuts of about 4.3 million barrels, most of that coming from Saudi Arabia, Russia and the UAE. “If it’s 4.3 million it only puts off the day when global storage gets filled completely,” said Robin Mills, CEO of Qamar Energy consultancy.
Storage facilities are nearly at the brim. Malek Azizeh, director of the premium facilities at the Fujairah Oil Terminal in the UAE, joked that he was going to hang a sign on the terminal gates: “Thanks, but no tanks.”