Or perhaps that should be unhinged?
The Great Unwind, first coined by Dresdner analysts Stefan-Michael Staimann and Susanne Knips more than a year ago, is upon us. And it will affect everyone:
Robert Buckland and the global strategy team at Citi have picked up the phrase and run with it.
Steady growth, low inflation and rock-bottom interest rates had encouraged economic and financial participants across the world economy to gear up over the past few years. Easy money encouraged many to buy a bigger house, a bigger car or a bigger speculative position.
But now, any behaviour that relied upon continued access to easy money is being dramatically reassessed — leveraged banks must lend less, leveraged consumers must consume less, leveraged companies must acquire or invest less, and leveraged speculators must speculate less.
The upshot from an investment point of view is to stay well clear of leverage. Avoid leveraged economies, leveraged asset classes, leveraged companies, leveraged customers, and leveraged investors. They all have the most to lose from the disappearance of easy money.
So the banks are out, say Citi. European lenders have increased gearing from 26x in 1998, to 32 times in the early years of the decade, to 40 times. Non-financials in contrast have been deleveraging since 2001-02. Out also go private equity, hedge funds and real estate. At the country level, the reliance by the US and UK on external capital makes them less appealing than the emerging world.
Leverage, encouraged by the great moderation, is now unwinding in increasingly disorderly fashion, says Citi.
Yet some remain perplexed as to how this whole mess came about. Interfluidity’s Steven Waldman has the answer: a children’s guide to credit. It’s all about marbles, chores, promises and broccoli. Read the sorry story in full, but ultimately, he writes:
A credit crisis arises when many more promises are made than can possibly be kept, and disputes emerge about how and to whom promises will be broken. It’s less a matter of SIVs than ABCs.
Related links
The Great Unwind is coming, warn Dresdner pair - FT Alphaville
