Abigail with attitude: Bubbles and burning topics for 2014

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I am a worried woman. I am starting to see bubbles everywhere, and it’s not easy to work out how to protect oneself. I am not alone. In mid-November, the cover of the respected Barron’s financial magazine had one word emblazoned on it: “Bubble?”

The Financial Times, around the same time, had a lengthy article examining London’s frothy property market: “The only thing Londoners can discuss is the rapidly inflating price of the houses they have bought or cannot afford to buy. To add to the air of insanity, there is talk of lights-out London. Rich foreigners are snapping up prime property for tens of millions of pounds... and then leaving them empty while they sail around in gigantic yachts... the housing bubble looks set to burst.” The granddaddy of stock markets, the US market, climbs ever higher into record territory: the Dow Jones Industrial Average touched 16,000 and the S&P500 hovered around 1,800.
Finally, there is the art market. At the November sale at Christie’s, collectors and dealers feasted on contemporary art works by modern masters such as Bacon, Rothko, de Kooning and Warhol. Christie’s achieved the highest-grossing auction ever and the star lot – Francis Bacon’s 1969 triptych ‘Three studies of Lucian Freud’, sold for $142 million, easily surpassing its $85 million pre-sale estimate. “Quantitative easing has inflated asset prices for the rich but left the real economy relatively untouched,” my mole murmured. Of course, he is right. No one wants to hold cash, savers are being forced to take on risk and yet developed economies exhibit only tepid growth. Legendary investor Carl Icahn referred to this when he stated in a Bloomberg interview that he was very cautious on the stock market, which he could see taking a big drop, “because earnings at many companies are fuelled more by low borrowing costs rather than the strength of management.” It was against this bewildering backdrop that the Abigail with attitude column gathered together a select group of senior financiers to discuss the burning topics of the day. The theme of the evening was ‘risk in 2014’. Some were worried that bankers in the distressed parts of Europe saw little remaining risk in their countries. One guest pointed out that he had recently been in Spain meeting senior officials who had been optimistic about the prospects for the Iberian peninsula. Another guest concurred that when she visited Greece, the authorities seemed relaxed and claimed that the worst was behind the Olive belt. A German guest was less sanguine. He agreed that, in the end, the good German burghers would end up underwriting their less fiscally prudent neighbours, but railed against the creeping socialism that now pervaded his country. One of the other topics that the group touched on was whether multi-billion dollar fines and litigation risk were now the new normal rather than exceptional mishaps for banks. When we first heard about Libor fixing, we were shocked. The substantial fines imposed on Standard Chartered and HSBC for money-laundering surprised us. Now, new allegations about FX fixing find us inured. We shrug our shoulders and think: ‘Of course. Everything is rigged against the little guy.’ Some of the bankers grumbled about the regulators, who were tightening the noose so much that they were virtually strangling their charges. It is a truism that compliance is the only growth area on Wall Street these days. But banks now have to see the risks around every corner – even when in some cases one is dealing with “unknown unknowns”. Another guest, who had spent many years in military intelligence, drew a comparison with the onus placed on soldiers in hostile places such as Afghanistan to foresee risks that might appear negligible. Military man also warned that the situation in Egypt could turn very nasty and affect the delicate geopolitical balance in the Middle East. “One in four Arabs is an Egyptian,” he told us. As the bankers round the table looked blank, I bit my tongue to prevent myself chipping in with that wonderful phrase: “Denial is not a river in Egypt.” A senior corporate financier preferred to move the conversation back to more familiar territory. He chided that universal banks had not really learnt anything from the financial crisis concerning concentration of risk and that it was merely a matter of time before history repeated itself. He also harrumphed that conflicts of interest were still rampant at the big banks. I was intrigued that none of the representatives from the big banks challenged him on this point. A banker who worked in the credit markets endorsed my bubble theme by pointing out that levels of junk bond issuance continued to break records, year on year. Indeed, we are now back in the era of covenant-lite loan transactions for the poorest-rated issuers. Institutional investors, desperate for yield, are gobbling up such offerings. And we should remember that such investors are managing money for the general public, as pension fund or asset fund managers. At the end of the evening, I came away with the impression that banking might be back. The bankers present certainly did not seem as dejected as in previous years. I cast my mind back to 2009 when lay-offs and forced mergers were prevalent, 2010 when banker vilification tumbled out of every newspaper, or 2011 when many thought Europe would go bankrupt.

My hunch is that bankers are walking taller these days. The regulators might rule the roost but there is money to be made, bank share prices are more stable and, especially if you work for a US bank, there will be a hefty bonus pool to look forward to at the end of the year.