2009 and the Challenge of Recovery

2008 has come and has (thankfully!!) gone, yet the scars and fears inflicted on us by 2008 are still clear and present.

In 2008, seizures hit the Global financial systems as a result of a Credit Crunch more severe than any the world has seen since the great depression of the early 1930s. If early 2008 marked the height of the global financial crisis, I believe 2009 may be the start of the recovery, starting with Financial Markets and then filtering into the Real Economy.

My belief in the resurgence of the Global and Nigerian Financial Markets are premised on two (2) main points: (1) assets may have been oversold and prices may reflect a worse situation than may be the case and (2) profit seeking investors (who still have access to funds) still need to make money and earn a decent return on their funds (this applies more for Global Markets than Nigerian markets though).

The crises witnessed in global credit and stock markets have led to unprecedented levels of risk aversion on the part of investors which has inevitably led to massive selling of securities with any hint of riskiness which is then followed by a swift flight to safety. A clear testament to this was the ever widening TED spread (difference between yields on 90-Day Treasuries and those on 90-Day LIBOR) and in Nigeria, the 46% decline in the NSE's ALl Share Index, spiking NIBOR rates and the practical collapse of the Nigerian Interbank Market. A further testament to the extreme risk aversion prevalent was the 29.1% Yield To Maturity on GTB's Eurobond (a yield reflecting an unrealistically high probability of default) and the low to mid single digit Price to Earnings (PE) multiples at which Nigerian Banks and Corporates are trading (which i also believe reflects unusually low estimates of growth prospects). The resulting effect of these activities have been a propensity for investors to hold cash or short term government securities which has made 90-Day US Treasury Bills to be priced at yields close to zero (in effect the US government is borrowing from the world at no cost!!) and FGN Bonds in Nigeria witnessing hitherto unprecedented levels of activity.

The fact that there has been such a high degree of "flight to safety" gives me the greatest belief in the resurgence of the Equity and Credit Markets. Many institutional investors always have access to liquidity even in the bleakest of times due to constant inflow of investible funds. Such investors include Pension Plan Funds (with constant monthly inflows from plan participants) and Insurance Companies (who receive periodic premium payments from policy holders irrespective of the states of the markets). These investors have been placing the bulk of their new inflows in short term government securities, which as discussed above are yielding next to nothing due to the heavy demand for them. I believe that the time is not far from now when such investors will realise that handing out all new inflows for free (i.e. at 0% yield) to governments which in turn invests these (costless) money into the same banks and corporates that the investors are avoiding like plaque, may not be the best allocation of their funds and may be stretching risk aversion to a near breaking point. This idea has started to gain some ground in the new year with the burst of activity witnessed in international debt markets prompting many analysts to speculate that January 2009 may be one of the most active months (in terms of new issues) in recent debt markets history. This "mini resurgence" has been due to the willingness of big institutional investors (e.g. Central Banks, Pension Funds and Insurance Companies) to buy the credit of high grade, blue chip companies, a situation which is a significant reversal from Q3 2008 when practically nobody could borrow without a sovereign (i.e. government) guarantee.

The problem with the application of the idea discussed in the preceding paragraph in Nigeria is the unrealistically high rates of interests which banks are willing to pay on term deposits. There are rumours that some banks are offering depositors (annualized) interest rates of up to 20% on 90 and 180 day deposits. An assured 20% return on a term deposit may incentivize people to stay out of the stocks, thus further delaying the recovery of the Stock Market

I believe that once gains occur in Financial Markets, the Real Economy will also pick up (as a result of the multiplicative effect of the financial industry's activities on the wider economy). However, improvements in the global economy may lag those in global financial markets and may make people wonder why the "stupid financiers" who put everybody in this "economic mess" have suddenly began to smile while the
general populace (which the financiers of course dragged into the mess) is still in teeth gnashing mode.

Book Review: Niall Ferguson's "The Ascent of Money"

I just finished reading this book during the New Year and Christmas holidays and i was very impressed by its depth, historical basis and contemporary relevance.

I was initially put off by the book's sub-title: "A financial history of the world", my initial thoughts were that writing a financial history of the world is such a major undertaking that whoever attempts to do so will fail and that the book will not live up to its promise. However, the book's author (Niall Ferguson, one of the most renowned economic historians in the world) has delivered on the promise of the book in a way that only an history professor who grew up in scotland, went to school in England and Germany and holds concurrent academic appointments in Oxford University, Stanford University, Harvard University and the Harvard Business School can.

Not only did he give an exacting historical background to the important role that money, financial instruments and financial markets have played and continue to play in modern societies, he delivered it in such an engaging way as to make the book simply "unputdownable"!.

• 
  The various sections of the book, include:
  
  Dreams of Avarice (basically an introduction to the rise of modern banking in medici-era Florence (in modern day Italy);
  Of Human Bondage (a chronicle of the rise and importance of Bond Markets and instruments);
  Blowing Bubbles (history of investment in stocks and behaviour of stock markets);
  The Return of Risk (history of the Insurance Industry and the concept of the "social safety net" (i.e. Social Security, National Pension Schemes etc))
  Safe as houses (description of mortgages and the housing finance industry)
  From empire to chimerica (overview of "emerging market" and cross border investments over the centuries and the unique role currently being played by America & China in the global economy); and
  The Descent of Money (sort of an epilogue to the whole book).

I really enjoyed reading the book as it reinforces my views (as an unashamedly ardent capitalist) that financial markets and innovation are the main contributors to the improvements witnessed in incomes, standards of living, longevity and even the rise of democratic systems in the modern world.

Above all, i recommend the book to the legion of "doomsdayists" currently predicting (or is it "prophesying"?) the ruin of financial markets. They will quickly learn from reading the book that crises are an integral part of Financial markets and that financial markets have (just in the space of the last 100 years) survived two world wars (one of which was tagged "the war to end all wars"), a great depression (during which unemployment rate crept to almost a third of the adult population), many recessions, earthquakes and other natural disasters, numerous sovereign bond defaults, widespread hyperinflation and even thieving dictators and strongmen.

There is no reason why international trade and finance should not recover, and even emerge stronger and better, from this current financial crisis. The world has witnessed and survived worse situations than this!!!!