Jim Duffy comment: Navigating the choppy waters of global pressures

It's evident that emerging markets are now paying the price for crazy borrowing, says Duffy. Picture: Ian Howarth.
It's evident that emerging markets are now paying the price for crazy borrowing, says Duffy. Picture: Ian Howarth.
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Where’s Fred Goodwin when we need someone to blame?

It must be someone’s fault, right? The fall in shares prices across the world that started last week has been predicted for months. In this very column, I suggested that the ten-year bull market was about to come to a grinding halt. It has, but we have not fallen off a cliff – yet.

I’m no economist, which is probably a good thing, as I have heard about eight different viewpoints from economists on the TV in the last wee while. That said, what they are jabbering on about does make sense in many ways, while being a trifle confusing in others.

There is no doubt that America is booming. President Trump, of course, has been taking all the plaudits up until now. He has been lucky, though. Barack Obama came into office at one of the worst times ever for the markets. But that cycle has moved on now and Donald Trump has enjoyed the upside of it. US employment is at its highest, with the lowest unemployment rate since the 1960s. American firms led by the tech giants have been the darlings of Wall Street, providing decent returns for institutional investors, adding value to pension and investment portfolios. So, has this recent “correction” in the markets been a blip? Or simply a warning shot indicating that a lot worse is to come?

Companies and nations have loaded up on cheap borrowing since the financial crises. But, now that the Federal Reserve is spoiling the party, many of these loans and debts are becoming expensive. Those who borrowed are wondering what is going wrong. Donald Trump is also wondering why the Fed is raising rates just now. It’s still only 3am and the financial party could go onto 5am, then spill out for chips and curry sauce. So, who has called the noise police and why has the music stopped?

It’s evident that emerging markets such as Argentina are now paying the price for crazy borrowing. The fund-managers are reducing their risk in these markets with many emerging markets funds showing losses over the last 12 months. The IMF has just doled out the biggest loan in its history to Argentina. A whopping $57.1 billion (£43.3bn) will be handed down over the next three years. Now let me see… The country is already skint and now it gets into even more debt from the lender of last resort. So, debt means more debt that piles up more debt for the long term. In the hope that this lending will pay a growth dividend. I should try that with my bank. “Hi, I’m in 50 grand’s worth of personal debt with lenders chasing me for late payments. But, if you give me another 50 grand, I’ll keep dining out and running my Bentley for the next three years. However, I might win at the bingo and repay some of it.”

It’s not quite contagion yet. But, with loans this size being handed out, we are not in a good place. Yet, I’m not pressing the doomsday button for now.

The USA is still in a pretty good place with a minimal chance of recession in the next 12 months. There is still some juice to squeeze from the equity markets, which are not quite dead and buried. And of course, Trump will always surprise us with a some form of rabbit from the hat. Despite what many think, he is no dummy and his Wall Street chums will be steering him on a steady course. If you were the most powerful person on earth and you had many millions tied up in the stock markets, would you not make sure that the cash did well under your tenure?

No, we have not hit ground zero yet in terms of a potential, global financial meltdown. Albeit even China is feeling the pinch, allowing its banks to free up rainy day cash for the current rainy day, leaving banks less able to cope should something more drastic occur. But, despite IMF warnings on borrowing, who is actually steering the ship and ensuring we do not hit an iceberg? No, we do not get to blame Fred Goodwin next time. Next time, it’s going to be far bigger, if those on top don’t keep a firm hand on the tiller.

Jim Duffy MBE, Create Special.