FT Letters - Jackson Hole comment by Paul Hodges

Today’s financial crisis confirms that “failing to plan, equals planning to fail”

FT Letters - Jackson Hole comment by Paul Hodges

There’s really no great surprise in the fact that we now seem to be at the start of another major and lengthy financial crisis. The Financial Times gave my letter lead status back in August. It asked central bankers, at their annual meeting at Jackson Hole, to prepare for a financial shock.

But so far, there is nothing in their actions over the past few days to suggest they have properly prepared. Yet if it was obvious to us that a shock was coming, it should have been obvious to them.

Last week’s exchange in the USA between Senator James Langford and Treasury Secretary Yellen provides all the evidence one needs for this statement.

As the senator notes, regulators panicked and decided to support depositors in Silicon Valley Bank and Signature Bank. But they forgot all about the potential impact of this move on smaller community banks. Their depositors are not covered.

And as the New York Times reported:

“Jerome Powell, the chair of the Federal Reserve, blocked mention of regulatory flaws in Silicon Valley Bank collapse.”

Being asleep at the wheel is bad enough. Trying to deny that you were asleep, when it is obvious that you were, suggests a lack of common sense.

And that, in a nutshell, gets to the heart of the problems we now face. “Common sense”, it turns out, is not very common.

The problems are not just limited to the USA, of course. It has been clear for years that Credit Suisse is a deeply troubled bank. But at least there does seem to have been a game plan to support it via a merger with fellow-Swiss bank UBS.

We can only hope that plans exist for other troubled banks, such as Deutsche Bank.

And all the while, as discussed last week, a major potential Asian debt crisis continues to build in China and Japan. Japan’s debt, after all, is 263% of GDP, whilst China’s is an eye-watering 295%.

Companies and investors now face a potentially very difficult spring and summer.  Earnings are already under pressure, as we have warned since November.

Scenario planning, based on a wide range of potential outcomes, has therefore become mission-critical given today’s volatility. We can no longer simply tweak a base case to reflect whether we are feeling marginally more optimistic or pessimistic.

Essentially, there are two key questions that now need to be addressed as the chart summarises:

  • Are regional economies and the global economy now moving into recession?
  • Are we facing new risks in terms of geopolitics, energy prices, demographics and the need to move to Net Zero?

The issue is that we are no longer in the 1983 – 2000 Boomer-led SuperCycle, where demand growth was more or less constant:

  • Before then, recessions typically came along every 4 – 5 years
  • During the SuperCycle, we suffered only one, very short, recession (due to the first Gulf War)

But those days are clearly over.

It is therefore very important to spend time on having a genuine debate about the risks ahead. The regulatory failures of the past few days highlight what can quickly go wrong, if one hasn’t war-gamed out potential risks. As the saying goes, “Failing to plan, equals planning to fail”.