Home' Trinidad and Tobago Guardian : July 23rd 2015 Contents On July 18, 2007, exactly eight
years to the day at the time
of writing, what came to be
known as "The Great Reces-
sion" and "The Global
Financial Crisis" began to
This was the day that Bear Stearns, an
investment banking firm---at the time was
very popular in the Caribbean and, in particular,
T&T---wrote to clients to inform them that a
hedge fund that was worth approximately
US$1.5 billion at the end of 2006 was effectively
Some of these hedge funds were up to just
three months prior and for three years since
inception generated returns of one to 1.5 per
cent per month which, on an annualised basis,
meant upwards of 12 per cent.
The market reaction was tepid in the context
of what was to follow. Shares in Bear Stearns
were down just 3.6 per cent on the day with
the stock down about 14 per cent year to date.
Nothing to write home about our cause any
remote sense of panic for a company whose
stock was at the time trading at around US$136
Eight years on and the most fundamental
of all lessons are there for investors to see.
The lesson is that hindsight is 20/20. Many
investors look back at a trade where they sold
a stock that went higher with regret as they
felt they could have held on for more gains.
Similar feelings come about when buying a
stock at a particular price only to see it go
lower which means that holding out would
have resulted in acquiring the stock at a lower
These second guesses are only possible with
the benefit of hindsight. When we engage in
such activity, we actually destroy the disciplines
that give rise to sound investing techniques
and proper risk management.
Rather than trying to pick the absolute floor
or the absolute peak of a stock, it is much
more advisable to manage risk parameters
associated with your portfolio and understand
your investment objectives. It is risk manage-
ment rather than striving for trading perfection
that is your saving grace when events such as
those of 2007-2008 recur as they no doubt
Connect the dots
Today, we can piece together the dots and
understand how a US$136 per share company
went to zero. During that period Bear Stearns
had lots of company in the form of Lehman
Brothers, Washington Mutual, AIG and others.
At the time, however, the warning signs were
nothing more than a blip on a trading screen.
If you had spoken to an investment adviser,
at the time, the typical response would have
been that Bear Stearns is a well established
company with a proven track record. The
company had consistently performed well and
although hedge funds do go bad from time to
time, the company was well capitalised to deal
with any issues that may arise. More than
likely you would have been reassured.
When the crisis was unfolding, it was dif-
ficult to see the extent of what was to come.
That only became obvious after the fact. What
was taking place was easily rationalised in the
context of the experience up to that time and
what had taken place before. Since what was
to happen was never seen or envisaged, the
market as a whole was unable to assimilate
the events taking place and saw it as just an
unusual day at the office as opposed to any-
thing more sinister.
It is important to remember that period in
time in the context of how you manage your
investment portfolio today.
It's not over
Appreciate that the financial crisis is not
over. It has simply taken on a different shape
and form. What began as a sub-prime mort-
gage debt crisis affecting the balance sheets
of households and, ultimately, banks has now
morphed into a sovereign debt crisis that will
continue to impact households through meas-
ures introduced by the State. The only problem
is that it is not yet seen as a crisis. It is rea-
sonable to ask whether Greece is the equivalent
to the Bear Stearns hedge fund of eight years
ago. Today, it is also considered to be small,
inconsequential in the grand scheme of things
and the resources are there to deal with the
issue, at least in theory.
We will not know the answer to this until
after it is all over providing, of course, that it
actually turns into a bigger crisis and does not
turn into the many blips that we see from
week to week. You can either wait for the
clarity of hindsight or manage your investment
process to take these realities into account.
The bailout of 2008 resulted in private debts
being nationalised. That was not only the case
internationally but also the case in T&T with
the bill for the CL Financial and Hindu Credit
Union debacles being borne by the taxpayer.
Private sector spending (based on debt) fell
off drastically in the immediate aftermath of
the crisis resulting in a negative impact on
economic activity and economic growth rates.
To pick up the "slack" governments in the US
and around the world began to borrow and
spend in order to grow their respective
economies and prevent greater economic fall-
Here, in T&T, it was very much the same.
With the fall off in spending from CL Financial,
the reduction in commission payments to
agents, policyholder s capital being trapped
and the removal of interest payments to certain
policyholders, the flows through the economy
declined drastically. Government spending
had to offset otherwise the recession, at the
turn of this decade, would have turned into
something much deeper.
Globally, the challenge is that the years 2000
to 2007 involved so much excess as a result
of increased expenditure levels fueled by debt
that there is now significant overcapacity after
the crisis. This overcapacity means that despite
unprecedented stimulus, growth remained
tepid at best and in some scenarios there were
drawn out recessions.
The overall impact is that countries around
the world have seen significant increases in
their debt burdens but very little returns in
terms of robust economic growth. Aside from
Greece, drastic fallout from this dichotomy
has been muted due to record low interest
Low interest rates created its own challenges
for while it allowed governments to manage
its higher debt service burden, it allowed for
a level of money creation that can also bring
about boom and bust cycles. The surplus sup-
plies of crude oil compared to demand is but
one example of the misallocation of capital
due to extremely low financing costs.
What other misallocations exist around the
When, where and how will they come into
the glare of the markets?
Is it the Chinese stock market, the Chinese
property market, Japan s over indebted econ-
omy, contagion from Greece to other Eurozone
members who are also struggling with high
It could be all at once, it could also be all
contained by some other policy measure or it
could all unfold piecemeal.
What we do know is that interest rates are
set to rise in the US and that means the cost
of US dollar funding will also rise. If rates in
the US rise, then many emerging market
economies will also have to raise rates or risk
capital outflows. T&T will be one of those
countries. Even if these events are managed
due to the fact that the rate of increases is
likely to be very gradual, there will come a
time when existing debt will have to be refi-
Having to refinance a growing debt burden
at higher interest costs in the midst of a fragile
economic recovery is where the biggest chal-
It took seven years from the time when the
US began to raise rates in 2001 to the crisis
in 2008. One should at least expect a recession
of some type over the next five years.
Overall we know when the crisis began, we
don t exactly know when it will end. All we
can do is hope that where we are at right now
does not represent the beginning of the end.
Ian Narine is a broker registered with
the SEC and can be contacted at
BUSINESS GUARDIAN www.guardian.co.tt JULY 23 • 2015
The beginning of the end
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