What, Me Worry? - Yes, Me Worry!

The well known figure of Alfred E Neuman that has graced MAD Magazine for decades, and his catch phrase "What, Me Worry?" was only changed to a "negative" - "Yes, Me Worry" in 1979 at the time of the Three Mile Island nuclear meltdown in the USA.
I have long been considered a "conservative Scottish banker", (or some such similar terminology), with a reputation for urging caution in credit, property and stock markets. Advice that I tended to aim at the general public rather than the big investment houses and banks. Why? - Because all too often I have seen unsophisticated and under-informed investors getting into these markets, at the time the big players were leaving. Okay, so I worked for one of the big players, but that doesn't mean you cannot have a conscience.

Despite my reputation, and as I said in a speech some five years ago, "I am neither a raving pessimist, nor a naive optimist. Rather, I'm a realist." Well, I think I am. And I have been asked a number of times in the last week for my views on the current situation, which led me to think about what I should say.

So, what am I worried about? Sub-prime debt? - not anymore really; we've been there and now we seem to be getting all optimistic about financial industry figures that will finally disclose the extent of the damage - albeit some municipalities that bought the paper will go bankrupt - and some banks will have a tough time explaining to their shareholders just what they thought they were doing. (And it’s about time the rating agencies did the same, if only to clear their names!). And if you read the same papers as me, we believe that the package of financial measures being discussed in the USA will be the panacea for the remaining ills of sub-prime. Oh, and according to one US newspaper I read last week, it is really only Florida and California in the USA that will be affected by on-going sub-prime problems!

No, actually, I am worried about much more than sub-prime. The fallout from sub-prime woes may not, at the end of the day, be overly significant in terms of, say, US GDP - painful, but not life-threatening. My "Yes, Me Worry" is much more directed at the impact from credit card defaults than we saw in the sub-prime market, and as there is going to be a global impact on trade as a result of all this bad news, I am worried about Asia.

On the financial side first, I see the chain of events as having securitised commercial property loans being the next to fall. Perhaps not with the same impact as the sub-prime residential mortgages, and perhaps with more value in the underlying properties - on average. But then will come the credit cards. Receivables have been bundled up and sold, just like the sub-prime mortgages, but delinquencies are rising as American Express has already announced. People who have been using their credit cards to pay off their mortgages are now "running out of room" in their limits. Receivables have been securitised and sold on to anyone who was looking for yield pick-up - but unlike sub-prime loans - with not a whisper of security in most cases. Sorry, but watch this space because I think that potentially there is real trouble brewing.

If I am near enough to the mark - and I am not an economist, so someone will be able to produce all sorts of figures to prove me wrong (statistically), let's then think about the impact on Asia with the US economy in (or near to) recession.

China is going to come under pressure, but I don't think it is likely to be a disaster scenario. A reduction in orders from the USA will have an impact on China, for sure. But it will help the country to focus on a much-needed growth in domestic consumption. It may also still have orders from a Western economy that is weathering the storm so far, and an intra-Asian market that looks interesting. It is certainly big.

What will China do? It will continue to produce goods, in greater quantities for the local market, but it will switch to much more import substitution. Those goods they currently import (as much as 60% content, in some cases) before they add value and then export as finished products, will in future be made in China. This will see a decline in number and value of goods imported into China, which is unlikely to be good news for other Asian producers.

China will also, according to an economist friend of mine, boost spending. This will take place in the rural areas as well as in other geographical regions of China, and will be for a number of reasons. One is to create jobs for at least some of the factory workers who will inevitably lose jobs. Failure to do so could lead to unrest in, for example, Southern China where there are many migrant workers who will otherwise be reluctant to return to their homes. Another will be to boost agricultural production that seems to have been slipping.

I could go on, but this is long enough already. It is, for those who ask, a brief picture of what I see coming - and by the way, I think we have the potential to survive it.

The wife of a friend of mine used to say she preferred the thought of earthquakes to typhoons. While we would of course rather have neither, most other people I know prefer the fact that you can make preparations for a typhoon that you cannot do for an earthquake. I think we need to consider those preparations now, to stand a chance of weathering whatever storm might come.