Posted: 2008-09-16 23:59 Naked capitalism?  Presenter: Giulietta Talevi Guest(s): Paul Theron - Click here to listen to the interview Summit TV speaks to Paul Theron from Vestact who isn’t too worried about the current calamities in the US financial markets Giulietta Talevi: The good news is Old Mutual, FirstRand and Investec have all sought to reassure the markets that their exposure is minimal - not that it helped their shares very much today. After two extraordinary days what’s next for shell-shocked investors? Paul Theron is from Vestact. Paul, another panic stricken trading session - when is it likely to end? Paul Theron: The natural sentiment in markets like these is for buyers of shares to assume the market is going to go down further - so they sit on their hands, and they don’t step up when stock is offered at depressed levels by panicky sellers. So there is a tendency in both thin and heavy volume for stocks to fall quite sharply, but the fact of the matter is these things normally stop when those buyers start sensing that crazy bargains are available - and that silly prices are being offered. Then the whole machine starts up again. As you know the markets are as they say a balance between fear and greed - and sometimes the fear predominates, and sometimes it’s greed. Giulietta Talevi: Certainly the greed has led us to the situation where Lehman Brothers collapsed with the sub-prime issues - because really it was greed that caused the banks to structure products around sub-prime. Paul Theron: I think that is fair enough - to some extent they had it coming to them. What they were doing was using shareholders’ funds to invent ever and ever greater and cleverer geared or leverage based strategies in order to make money. One is somewhat sympathetic towards them because you know what it is like in the financial markets - if you are not participating in whatever the latest craze is that’s adding hugely to bottom lines then you are some kind of idiot, and you’re accordingly being marked down by the market… Giulietta Talevi: The herd instinct kicks in… Paul Theron: So they were all involved with collateralised debt obligations - they were all extensively involved with securitisation - and one of the most popular areas in which to do that was mortgages. The assumption was always that housing prices would continue to rise - so you could squeeze a little extra out of each lemon. Where we find ourselves today is that all of those debt instruments - which were issued at one dollar that are now trading at something around 20 to 30 cents in the dollar - it’s those write-downs that are being taken out of shareholders’ funds that have basically brought Bear Stearns, Lehman Brothers and Merrill Lynch to the point where they have to either do these deals or declare bankruptcy. Giulietta Talevi: But the fact that it’s bought these banks to the brink - the London Financial Times called it “incredible.” What I would like to know is have you seen this kind of market reaction before in your career as a trader? Paul Theron: I remember similar write-downs in the post dotcom days where the assumption was that anything that was trading on any PE above a certain level was absurdly overvalued - therefore you had to sell it. Of course that was compounded by the 9/11 events that created a real sense of crisis and dismay in what had previously been assumed to be the end of history kind of market where things were only ever going to go up, and liberal capitalism was going to take over the world. I also remember the Asian debt crisis of the late 1990s that came in a series of waves - where people assumed that anything associated with the emerging markets also had to be sold forthwith. So the market has been through these crises before, and it will go through this one too. I think you have to keep this in mind - these are big numbers, and these are big and venerable institutions that are being wiped out. As was covered in the earlier stories firms like AIG have got tentacles throughout the world’s financial system - but the sun will come up tomorrow. Giulietta Talevi: The world is not going to end? Paul Theron: No, it’s definitely not going to end. In fact losses will be sustained - there will be losses sustained principally by shareholders who owned those companies, in businesses that are exposed from a risk and counterparty point of view to these big global concerns - but I don’t think it’s going to be terminal. It’s certainly not terminal for the industrial economies of the world… Giulietta Talevi: That is an interesting point. If you take a medium term time frame - so for example in five years this is all going to be out of the system presumably - but short term the news headlines are going to be dominated by the shocks. In the medium term surely there is going to be a affect in the real economy. You can’t have 26,000 people at Lehman Brothers loose their jobs and you won’t see a knock-on effect on the real consumer economy? Paul Theron: I am going to tease out two things you said there. Firstly five years - in fact the average memory amongst shareholders, and certainly amongst institutional shareholders - is not five years but about five months. So I expect people to be back nibbling at the banks and financials in the US market a lot sooner than in five years. As far as real affects are concerned obviously the unemployment filing numbers in Manhattan is going to be higher in the forthcoming weeks… Giulietta Talevi: Luxury penthouses going on sale… Paul Theron: Exactly. You might find that some associated dealerships in the art and the high speed motor vehicle environment are also going to have hard times for the next couple of months. Probably much more significant is what banks do in a environment like this is conserve liquidity - so they go out into the market and pay higher rates to try and attract retail depositors, and they normally turn away all but their most blue chip of blue chip customers. They do this because they are under enormous pressure themselves to retain liquidity and so on - that’s the second order effect in the real world. Giulietta Talevi: In the financial markets… Paul Theron: People are unable to obtain credit. But even there I wouldn’t overstate it. At all times you would be surprised if you looked at the total cash on deposit - in the US there’s trillions and trillions of dollars in cash that’s underutilised, not actively invested sitting in investment accounts. Even in this country there’s more than R1trillion in cash that’s not in the market, it’s not invested in businesses. There is a normal tendency in a market environment like this for people to use non-banking sources of cash in order to fund business growth… Giulietta Talevi: So you don’t see a systemic collapse? Paul Theron: I depends what you mean by systemic. Obviously some problems are easier to absorb than others. But human beings are very resilient - they adapt to circumstances - and the economy is really the aggregate of all the human actors in the market. So what you are going through in your personal life and I am going through in mine writ large is what goes on in the economy. Normally there is a process of the absorption of loss and people start to move on. I wouldn’t get too depressed as it’s what happens - it’s naked capitalism at work. www.summit.co.za Transcripts: 082 962 2772 ar/met Comments Related to this transcript: Comment on this transcript... Name : Email : Comments :