Evercore Pan Asset

Today the markets are discovering there is one thing worse than a Democrat Congress trying to agree pay cuts for US Autoworkers allied to a tide over loan for the big three car companies, and that is no deal at all. We are in the second phase of the economic crisis, when the centre of the action moves from the banks to other industries. The combined impact of falling demand from the monetary squeeze and a shortage of cash for major companies will have a bad effect on employment levels, factory closures and local communities adjacent to the big plants.

Meanwhile in the EU there is a dispute at the summit. Mr Brown for the UK wants international endorsement of his borrow to cut VAT policy. The German administration thinks the UK’s level of borrowing is unacceptably high and risky. They have no intention of signing up to a common course of action for all EU states based around the UK model. They and some others think you cannot solve a crisis of over-borrowing in the west, by borrowing even more. Nor do you make weak private sector concerns strong by transferring them into the state sector. Germany and Poland are leading the charge to dilute the climate change agreement to limit the costs to their high carbon using industries.

The western economies are still badly placed, as they seek to live with malfunctioning banks, with erratic and risky Central banking monetary policies, and governments which have in some cases lurched from complacency to panic in recent weeks. I was pleased to learn from media sources that the UK government does privately accept it has to revisit its £450 billion banking package, and try to find ways to make it work better. It had better hurry, for the sharp deterioration in the rest of the economy will generate more bad loans for the banks, undermining their reserves and their confidence further. This week’s NIESR prediction of a very sharp drop in UK economic output in this fourth quarter of 2008 represents a more pessimistic view than the government’s recently published new forecast, and feels closer to the reality.

Some companies report problems with powerful suppliers wanting down payments, and difficulties in obtaining credit insurance and trade credit, at the very time when banks are reluctant to maintain let alone increase overdraft facilities. Out in the real world of trading companies there is no sign yet of the Credit Crunch being over, or even of the Brown plan having “stabilised” the position. Banks report the need to cut more jobs. In the UK where there is now substantial government involvement in bank share ownership there are difficulties in deciding how to price loans and to remunerate savers, with political pressure to offer more to depositors and to charge less to borrowers. As the banks need to generate more profit to be able to build up some reserves, to repay government Preference capital and then pay some dividends, this is going to be a difficult set of exchanges and decisions.

At Evercore Pan Asset we remain negative about UK real assets. We are beginning to look at some UK corporate bonds where investors want to have some sterling assets against their sterling liabilities, but recognise that there remain covenant risks in some cases, even at these price levels. We prefer Asian investment for the recovery, and regard the yen as the best of the major currencies.