Howard Davies: Nightmare on Wall Street

MT DIARY: Portuguese problems, bargain books in Lansing, Michigan and a miserable start to the year for the US financial markets.

by Howard Davies
Last Updated: 21 Apr 2016

Not many foreigners go to midweek Benfica league games in Lisbon in January, especially when it is pouring down. I can assert that confidently, as when I turned up at the Multimedia Bilheteria (ticket office) with my internet receipt they said, ‘Ah Mr Davies, we have been expecting you,’ just like in the Bond films. The stadium holds 65,000, but there were only about 30,000 there for the game against Marítimo, who are apparently almost the best team in Madeira. Even that modest claim was hard to believe as they crumpled to a 6-0 defeat, twice conceding two goals in a minute, on the second occasion in the form of two identical penalties.

Even though there were six goals it was about as exciting as watching Manchester United, and you can’t say worse than that these days. Though you can get tasty almond tarts delivered to your seat, which gives the Estádio da Luz the edge over Old Trafford, even in a downpour.

Apart from the footy, Portugal is in an interesting condition. Their recent elections delivered a tricksy outcome. The centre right remains the biggest party, but can’t form a majority government, so a leftist coalition is having a go, but it is an eclectic group of mainstream socialists, Corbynistas Portuguesas and some Varoufakian austerity-deniers. Whether you shake it or stir it, it looks about as stable as the shadow cabinet. If there weren’t so many other places to worry about in Europe we would be hearing a lot about the Portuguese threat to the stability and growth pact. If you could buy a put option on the Lusitanian economy, I think I would.

Getting from Lisbon to Lansing, Michigan, is a good challenge to give to your travel booking folk. There are no direct flights on a Thursday, so you need to drag your carry-on from plane to plane. But I did have the opportunity to look at a few new runways in Madrid and Chicago, not something one can do in London, of course. Barajas was built with big ideas in mind, and after a political battle O’Hare decided on expansion a few years ago. The mayor concluded that the city couldn’t be held back by a lack of capacity.

Lansing does not have a runway problem, though it could use more flights. The town was hit by the closure of the Oldsmobile plant in the crisis, but is home to a successful life insurance company, owned by the Pru, and to a huge university. So it is surprisingly good for bookshops.

It’s a tough life running a bookshop these days, though it seems that print is fighting back against the soulless Kindles and Nooks. Even a bibliophile like me tends to showroom in bookstores and then buy online. For second-hand books, the procedure is a bit different. If you find something of interest (I collect a narrow range of authors) you nip behind a stack and check the price on AbeBooks, a network of  second-hand stores, before deciding. In Lansing, I found a first edition of a David Garnett novel for just over half the going rate.

I suppose the super-ethical consumer would come clean to the owner and bargain the price up to the internet clearing rate. The pure efficient market theorist would say it isn’t possible that the price is below market, or the book is a fake, and decline to trade. But I concluded that by buying low and, eventually, selling at market I would be doing my bit to enhance the price formation process. Oh the agonies a former regulator goes through in making a simple consumer purchase. The saving, by the way, was about $15, and the cost of getting to Lansing, from almost anywhere in the civilised world, would comfortably exceed that, so transaction costs make it unlikely that I have identified a sustainably profitable arbitrage strategy.

That subset of the civilised world bounded by the Hudson and East rivers is not in a very cheerful mood, after the worst start to the year in the financial markets for a century or so. All the phraseology one hears is a version of battening down hatches, pulling in sails, cutting losses, weathering storms, etc. The old saw ‘sell in May and go away’ has been replaced this year by ‘they sold in Jan and simply ran’.

China is spooking everyone. (Not least those Hong Kong booksellers now assisting police with their enquiries.) The Middle East looks more dangerous than ever. The oil price is telling us something not very optimistic about expectations for economic activity, and low commodity prices are weighing on most emerging markets. The US primaries could deliver a peculiar outcome on the Republican side. Europe remains problematic, and Brexit has now started to become a serious preoccupation. It is perhaps a good thing that the Corbyn story seems so implausible to Americans that they glaze over if you try to explain.

And in the midst of all this we have new and untried leadership at the Fed. More importantly, if there is another leg to the last recession, the central banks begin with very little ammunition in their arsenals. Interest rates are almost as low as they could be, and the political appetite for more QE is low. The right think that the Fed’s balance sheet is already supersized, and the left see QE as contributing to the growth of inequality by pushing up the price of stocks, held mainly by the better off.

In the meantime, unemployment continues to fall at a reasonable rate, while the dollar is sky high, putting pressure on the external account. This is, in total, an odd combination of indicators. Maybe second-hand book prices have further to fall. That would please the efficient-marketeers. My arbitrage could prove illusory after all.

Howard Davies is the chairman of RBS. Follow him on Twitter at: @howardjdavies

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