Tips for handling the 'financial tsunami'

Dubai: With Alan Greenspan describing the last few weeks as a "financial tsunami", a "once in 100 years event", its time to take stock and start to clean up debris.

Make no mistake, there will be very few wallets and purses with the ability to have avoided the first wave or the impending second wave.

Before the clean-up, it's important to recognise the nature of the storm; the fact that we continue to be impacted by the confluence of two waves - a financial/banking wave, followed by a routine econ-omic recession.

On the first wave, Glyn Owens (RMB) makes the "heroic assumption" that the banking crisis is over. Whilst high-profile defaults will continue, we are through the worst of that storm.

Governments around the world have "blessed" the recovery process. It is clear that while policymakers didn't see the storm (although many an economist did), they nevertheless took actions that will solve the problem.

Explain? Ok. Governments have essentially seen that banks built up too much debt. On that debt, by-the-way, Tim Bond (Barclays Capital) believes that 80 per cent of debt was used to buy assets (property/equities etc) with only 20 per cent entering the "real economy".

That debt must be financed and repaid on the one hand and more cash (liquidity) must be found in order to provide money for the banks to lend to the real economy, both corporate and private. It will take time.

'Hosepipe problem'

At the moment, it's the classic "hosepipe problem". Governments around the world seem to have agreed to do whatever it takes to pump money (liquidity) down the hose.

Normally this would flood the garden, but hang the consequences (inflation), the job needs to be done. In the middle, you have this debt which needs to be repaid. A hosepipe blockage.

Out in the garden are you and me, and the capital markets. When we can see the water coming, we can get our face out of the way. It's a precarious operation.

That blockage of debt is a real issue. It helps if we get to grips with the difference between borrowing for assets and borrowing that goes into the real economy.

Some $10 trillion (Dh36.78 trillion) of asset value has been wiped out in the last few weeks. As I explained this to my wife she asked, "Where did it go?" This is awkward.

I tried to say that our home at The Ranches is worth Dh10 million (I made this up, but make-believe helps the point) and if the market falls, it might only be worth Dh8 million, so Dh2 million has been lost in the ether.

In the first wave of the tsunami, a lot of capital value has been lost in the ether because the first thing that goes in such a catastrophe is the ability to value anything logically.

To this my wife says: "It disappeared then, so was it there in the first place?" It's not a bad question. If I value our Ranches gaff at Dh10 million, having purchased at say Dh5 million, was the value ever there in the first place?

What is real is that we took a loan and whatever happens to our value (whether realised or remaining in the ether) we still have a real loan to repay!

This is the nature of the blockage: real debt requiring real financing, at a time when all asset values are taking a kicking.

Not much choice

Tip No 1 then is: de-leverage. Whatever it takes, look at your outgoings and consider what you can finance. Pay back credit cards. Focus your desires downward.

It's not as if there is much choice: banks and future lenders will need to be much more circumspect on how they lend. Conclusion on the first wave: Pouch on asset value, clean up on borrowing and prepare for the second wave.

The second wave features our forthcoming recession. Hoping it doesn't mature into a depression. The problem with this recession-thinking is that it is clearly preventing a V-shaped capital market recovery.

Still: tip two: Don't sell. Switch into other assets, maybe, but not into cash, it's too late. For Angus Murray at Castlestone: "Most of the selling was and remains forced de-leveraging to reduce debt.

People have been selling what can be sold (liquid assets) regardless of the value," implying that the sell-off is not normal or value-driven.

Indeed the City feel for a recovery is extremely strong. The problem is that nobody is confident enough to provide the "when".

The beginning of a recession and the eventual sighting of the end of a recession seem to be the dominant issue to negotiate, before "fair value" as a concept can re-visit capital markets.

Tip three: This remains a great time to "average-in" investments into regular savings plans. Just don't read the short-term valuations; they are irrelevant to future value.

This leaves me with the following associated crisis. Tip four: Recruit a financial adviser who understands asset allocation. You will get your money back on good advice from this position.

This tip should take you into a review of the following critical KPI's (Key Performance Indicators): your benchmark; your attitude to risk/tolerance to loss; your currency risk and the risk in your current portfolio. Ask you adviser to explain multi-manager and how that reduces risk.

Protect against erosion

Tip five: Protect against capital erosion. Remember: a 50 per cent capital loss requires a 100 per cent gain to recover the monies.

This will not be an unusual position for Gulf News readers. It was a tsunami! In order to get 100 per cent returns, an investor targeting 7 per cent annual performance will need 10 consecutive years at 7 per cent to recover the 100 per cent.

With a 4.5 per cent annual target you are looking at a 16 year recovery period. Cash might be the short term king, but, clearly just a short-term safe haven.

Things to do

- Deleverage: Borrow only what you can afford to repay.

- Revise expectations downwards.

- Don't sell now: Too late. What was sold was because it could be sold.

- Get good financial advice.

- Review Key Performance Indicators (KPIs): Performance benchmarks; attitude to risk (tolerance to loss); currency risk.

- Protect from capital erosion.

The writer is chairman of Mondial Financial Partners LLC