Evercore Pan Asset

The Credit Crunch dashed the dreams of many in the US and UK, in Iceland and Ireland, in Spain and the Baltic republics. The model of easy money, banks lending ever larger sums to fuel a property boom came crashing down. As Central banks withdrew liquidity and regulators demanded stronger balance sheets, property values fell, developments were left unfinished or empty on completion and banks revealed large holes in their accounts. A huge volume of paper traded on the back of property and commodity positions had to be sold on or written off. Hedge funds contracted. Securitisation, the way of lending more money off balance sheet, was reined in.

Whilst the financial disaster was most obvious in its impact on the banks, the real economy suffered badly from the lack of income and credit in the system. A sharp industrial recession was joined by a longer property recession. People moved from taking some pleasure at seeing well paid financiers humbled, to pain at the results it all had on jobs and living standards.

Industry recovered soonest, after dramatic falls in 2008-9. It was buoyed up by large stimulus in China and the rest of the developing world. The west managed to maintain relatively high living standards, borrowing more money to keep it going. The west imported many of the goods the emerging market was making. It appeared the old paradigm was working again. The emerging world was the world’s workshop. The west was the world’s consumer, borrowing money from world markets to sustain its lifestyle. The west also decided to print more of its own money in the belief that others would be willing to accept it as payment.

It is this model which is now under pressure from both sides. The emerging world is suffering from inflation. Too much liquidity and pressure on raw materials has given China, India, Brazil and some others faster price rises. These countries are now raising interest rates and tightening money to curb their inflation. Meanwhile, the west has discovered that countries cannot go on borrowing and printing money indefinitely. Greece, Portugal, Ireland and Iceland have already run out of scope for higher borrowings and have been forced into externally planned austerity programmes. Rumours abound about how sustainable the fiscal positions are in Spain, Italy and Belgium. The UK has set out on a budget deficit reduction programme before the markets demanded it, whilst the US is now in the throes of a political debate about how far and how fast it needs to go in curbing borrowing.

All this produces uncertainty and a poor background for many investments. Bonds once thought safe are now seen as risky. Even governments may not meet their obligations. Western economies may well have to adjust to a period of slower growth as they seek to repair their banks and pay off some of the debts. These are not easy times for economies, so they are not easy times for investors either.