When the elements speak, elemental forces are unleashed, and it is important, in the middle of this storm, to capture the right tone of voice. Any false attempt to give reassurance, to boast about early success, to bury oneself in clichés, is unhelpful – even worse, it is historic: by the time these words are read, events will have unfolded which make them, as the CD music reviews have it, ‘of historic interest only’. We are a long way from terra firma; at the time of writing, it’s a case of ‘so far, so good’. If this were a tennis match, all we could say is that we’ve had a decent first set.
We have been writing for a long time – too long? – about the cataclysm ahead. If our judgement has been sound, then the maelstrom cannot be put down to a pandemic – utterly unforeseeable, and certainly not predicted by us. The Titanic was sunk by an iceberg; the Ark Royal by a torpedo – both were great surprises, as coronavirus has been. Another way of looking at the fate of the Titanic and Ark Royal is that the former sank because of inadequate bulkheads, the latter because of a flaw in the siting of the engine exhausts. In the long run-up to market dislocation, we were preoccupied with the ship, not the icebergs or torpedoes. The instruments of destruction are always out there. If markets are resilient, they cope with them. The danger comes when they are not, and this has been the centre of our earnest enquiry: where were things going wrong? Where were they headed?
This is a far harder market to navigate than the crisis of 2008 – or the one before it at the turn of the century; in both cases the market dropped by 50%. In the first, you needed to observe just one rule of the road: avoid the tech and media stocks completely. In the second, you needed to know one thing – that loads of borrowing would give way, dislocatively, to loads of de-gearing. In 2008, we had a single insight: that the many people who had borrowed in Swiss francs and Japanese yen, to take advantage of low interest rates, would in a crisis compete to buy these currencies back, to pay off their loans. As that bloody meerkat says, ‘simples’.
This time round, it is neither ‘simples’ nor ‘easyies’. The problem can be condensed into a single idea – where there is borrowing, there is danger – but this does not come with an obvious solution. Leverage has flooded into every asset class. In the world’s portfolios, the most exposed positions have been the first to tumble. But as investors have struggled to re-establish an even keel, they have had to sell the things which are not obviously wrong, simply because these things are capable of being sold. This is not a surprise, of course, but it does mean that there has been, ahead of this rough water, a good reason for not owning any type of asset at all. In many ways, the battle has been less frightening than the eve of battle, when there seemed no certainties of safety.
