Finance has always had a strong sense of direction. When Lee Beale, on the firm’s 40th anniversary in 1995, asked the group’s economists to estimate what the next five years could bring, he was given the simplest answer he’d ever heard: “to pile on $7.5tn or more”. Like David Stockman, economist and former budget boss at George W Bush’s Treasury Department, the staff were asked to speculate about how the world economy was going to look in five years’ time. They answered confidently: “Smart girls may start to get good, efficient, and specialised, but dumb boys may still be hung in the headlights of reality”. That day, they declared that the Labour government would do better than John Major: unlike the prime minister, Labour would not be driven towards the centre by aggressive “innovation”.
It was one of the most impressive results of the group’s decade, and so was the payment to the Labour government: £132bn in the form of cash. Yet no wonder: as the financial crisis threw the world’s economies into severe instability, 2,000 contributors were retrenched and more than £1tn in borrowed money went into speculation, retrenchment and deregulating. The stockmarket’s success was also at the behest of computer modelling, algorithms and ageing.
Now the world’s top two firms, UBS and Goldman Sachs, just keep moving up the ladder. But just about everybody is writing about the fundamental change. David Morgan, president of Morgan Stanley, warns that we are heading for a “new” pension crisis. Joe Glaser, head of research at Man Group, thinks the stockmarket could top the $1 trillion mark by 2025. The team at Alston & Bird, meanwhile, predicts it will take until the middle of the next century for stock markets to recover from what it calls a “financial-regulation twilight zone”. The latest results show that bank lending is at the lowest level since the 1930s, despite cutting interest rates. Investors are asking, is the sky really that blue? This is the message that shakes the stockmarket into action. A major consequence is that even the most pessimistic view of equity valuations now looks ludicrous.
Many traders have looked for the right hedging tools to stop the current crisis, but neither Nick Beecroft, the outgoing chief executive at HSBC, nor Adam Applegarth, the chief executive of JP Morgan, gave them a chance. He left under pressure. This year, Stephen Green, the treasury chief, has stepped down after his unfashionable call for a spike in interest rates backfired. The truth is that the commercial banks are so frightened of being taken over by their bigger rivals that they are betting that it will be a good year for bargain-hunting.
Many institutions are doing the heavy lifting, using global computer models to beat the market in the interest of avoiding the large losses that come with quitting. It is also the main focus of the Royal Institution of Chartered Surveyors. The regulators have got nervous, and the sector’s chief, Ian Smith, has warned that the poor performance could put some big property firms under pressure to raise short-term borrowing.
But for people who buy and sell the stockmarket, there is no sense of vulnerability. Asset managers look particularly good, as the decline in short-term borrowings is easing pressure on their earnings. Martin Kent and colleagues at the stockbroking firms Charles Stanley and Charles Stanley Investments are suggesting ways of “structuring” the market to allow the average investor to benefit from the ongoing rout.
A more fundamental change in the way people think about the market has already arrived. The computer modelling has changed. After some initial claims that “quant” only accounts for mistakes, the industry now insists that there are whole economies of regulation—businesses and societies are being subjected to the same kind of social input, including health, safety and fairness. Put another way, a market structure that some experts and researchers liken to a “rational allocation of capital” will do its damage more quickly, and by more complicated than can be clearly explained.