Investors well and truly out of luck

Allister Heath
WHAT a rout. The markets took a major battering yesterday, in what looked like a belated wake-up call. The Eurozone crisis is getting worse, a major sovereign default in the EU is becoming closer and growth in the West is grinding to a halt. There was talk last night that some Eurozone banks may need to be recapitalised; if this does materialise, it would mean that the next step of the crisis may be about to begin.

The last few days have seen more bad economic data (including from the US, China and the Eurozone), Operation Twist (which underwhelmed the QE junkies), and more political nonsense, including a ridiculous letter from six G20 leaders calling for action (who do they think they are writing to? Themselves?).

The FTSE 100 just kept its nose above 5,000 but suffered its largest loss for around 30 months. US shares slumped. Emerging market stocks fell by the most since 2008. The Greek stock market is now down by 88 per cent since its peak. Commodities investors have seen their gains of the year more than wiped out. Oil prices slumped, gold fell sharply, as did silver. It was a bloodbath for investors.

The problem when all asset prices move together and are correlated in this way is that diversification no longer works to reduce risk – standard financial theory becomes much less useful. Investors are now much more exposed. True, they can put their money in bank accounts – but with retail price index inflation at 5.2 per cent, they are being slowly decimated (and with the possibility of a Eurozone crisis, real risk has returned to the global banking system).

The only asset class that is doing well is the bonds of supposedly safe governments such as that of the US. Ten-year Treasuries are now yielding just 1.75 per cent and the 30-year 2.81 per cent, which is negative in real terms and utter madness (though of course the otherwise largely useless operation Twist had some small effect on this). So that’s the choice: play along with an unsustainable bubble or face immediate losses. With average UK house prices also falling in real terms, no wonder investors desperate to preserve their wealth are tearing their hair out.

FOR years, a large chunk of the British establishment, including to their discredit some large companies and City firms, argued for Britain to join the euro. At one point, the Confederation of British Industry was massively in favour. Many current ministers, including Danny Alexander and Kenneth Clarke, were fanatically in favour (and who knows, may even still be). All of these people got it totally wrong yet have escaped with their reputations intact. It would have been an unmitigated disaster had the UK abandoned sterling. The bubble would have been even worse and the bust fatal; the UK would have ended up another Ireland or even Iceland.

As Peter Oborne argues in Guilty Men, a brilliant pamphlet for the Centre for Policy Studies, the strategy was to create the impression that those arguing against the euro were mad, racist or xenophobic. This moral and cultural bullying almost succeeded. It is high time that those who got it so wrong hid their heads in shame – and that business and the City makes sure it never again backs these kinds of economically irrational, corporatist and undemocratic projects.
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