Monday, 8 September 2008

Macro-Level Trends – Economic & Social Mesh – The Need for New Business Vehicles that Create Bridges to Optimism

As the mire of the current multi-trillion Dollar financial crisis keeps slowly unwinding, now contagion across the globe and yet to find a natural 'concrete' bottom various stakeholders are searching for the formula that will stem the decline.

It is generally accepted that the key is in understanding the construct and nature of risk present in the very complex, multi-tiered and heavily traded US mortgage market, so that confidence can be put back into investment decision-making and the banking sector can finally arrest the spiraling trend of quarter after quarter write-downs caused by having to bring back onto their balance sheets the nebulous financial instruments (eg CDOs etc) that are the eye of the storm.

Of course there are those (mainly large PE firms) who are buying the risk off of the banks at well below par, giving banks some added 'firm finance' and of course seeking sizable returns of their own – effectively betting that the “America Inc” will in turn provide market security and confidence. And with the Fed's effective takeover of Freddie Mac and Fannie May, that's precisely what has happened.

Whilst the Fed has intervened over the last year with 2 emergency interest rate changes, injected liquidity and 'guidence' of Bear Stearn's disposal, it had tried to appear as uninterfering as possible and tried to maintain an 'open markets' stance, only acting where necessary and with only with a light touch. That attitude some argue has led to little consequence - as with the lacklustre effect of the previous $600 per head tax rebate.

[NB. as of 15.09.08, the Federal Reserve's decision to not underpin Lehman Brothers, yet increase the collateral acceptance terms for lending to other banks demonstrates the fine-line it is having to walk to assist yet not prop the US's capital markets]

As the theory posits, in a global economy and market where information and capital flows instantaneously, a 'natural bottom' will eventually be found from which the US economy, and latterly the world economy, can rebound. But that 'natural bottom' is perhaps harder to find than anticipated. This exemplified by the LSE's very jittery movements last week before the Fed's announcement and the resultant massive 199bp leap today 08.09.08 before an IT problem halted over-frenzied trading. Hence Treasury Secretary Paulson's and the FHFA's Lockhart's decision to create a temporary stop-gap through the major assistance measure.

But for all the financial engineering that is being created behind the scenes to 'seize the opportunities within the present challenges', it is generally recognised that a further 18 months will pass, and perhaps longer given the core role that Freddie Mac &Fannie May play – and indeed its own outcome - before the seeds of growth (initially apparent in the commercial sphere as opposed to consumer world) will sprout. Realistically that means at the very earliest 2010 for business to start the value-creation trickle-down in society and the beginning of a re-bound in the housing market – the price of which may well have fallen on average 20% by then from its Q207 high. The general housing fall-out compounded by wave after wave of small-time landlords off-loading their property holdings as they decrease in capital value and annual yield; a trend occurring from Los Angeles to London to Lisbon.

The case is of course that across the US, UK, Europe, Japan and Australia that, even with incentives like Gordon Brown's temporary stamp duty concession, potential buyers with increasing living costs and new threats of unemployment (as seen by the US's recent 6.1% jobless reveal) are effectively in a state of limbo, lacking confidence to buy into their 2 biggest life purchases – houses and cars.

The evidence is clear: the US faces an annualised autos sales figure close to a lowly 14m units, the UK experiences the worst August sales environment since 1966 down 18% (the SMMT predicting a further 10% fall) and European sales fell 16% YoY in August.

Today automakers and the investment community are querying just how to deal with the situation beyond the down-turn norms of sector contraction, consolidation and alliance-forging and asset disposals. All of which make for new value creation, especially with the possibilities of full-scale sell-offs or commercial agreements with highly liquid foreign parties which, along with the flight from now risk-laden oil speculation, are helping to repatriate foreign dollar reserves back into the country.

However, whilst FDI and new latter-year ventures are welcome, both parties (bankers and automakers) should understand that such a momentous period of social and economic stagnation – the worst in 60 years according to Alistair Darling – also has embedded commercial promise if approached and executed properly. That means stepping back, philosophising and visioneering short, medium and long-term futures that may well co-related the utility of mobility and housing.

investment-auto-motives appreciates the enormity of getting the American and advanced countries' economies back on their feet, and the socio-economic effect that starting-over will have. (Unlike the EM / BRIC economies that simply face a periodic slow-down). The west is undergoing a major turnaround scenario that could possibly radically change the face of the population's perceptions – hence the calls from certain political corners for a re-focus on the human-centric measure of “GHP”(Gross Happiness Product) as opposed to the economic-centric GDP (Gross Domestic Product).

And it is this social re-alignment that takes place whilst the western economies are very slowly bottoming-out and picking-up that holds potential for advanced thinking commercial entities, devising new pertinent business models that offer combined 'holistic' products and services that satiate people's domestic and mobility needs within singular solutions, that give the populous a bridge (of high commercial profitability) to access future better times when they return.

Such visioneering will demand a merged concentration from both sides of the commercial equation, capital backers (leveraging their own business networks) and the still massively powerful and influential auto-industry. For it is at times like these that Creative Capital comes to the fore, for both financial fixed-income and quoted markets and the hard-pressed, but ultimately optimistic consumer.