The dark clouds have gathered overhead and, clearly, there is visible anxiety in the current drop in asset prices and of economic activity.
Focus seems to have reverted to the level of leverage and the possible “toxicity” of real estate assets, even though it is difficult to see the said contagion effect in the balance-sheets of these entities. Clearly, investors, having been fed on the trope of “investing in assets for the long run” have been left to lick their wounds as most asset classes have shown increasing volatility.
But, mind you, nowhere close to the commensurate amount of returns that would have been predicted for stomaching such volatility. In the region, as well as in most developed markets, holding on to assets over the last two decades would have gotten you a rate of return inferior to that of bonds. Even though history attests that investing in assets over the long term is the best way of creating wealth.
Economics is supposed to have been a predictive science. If so, then it clearly gets a failing grade, for not only did it not manage to predict the current recession, it has had very little to say about what exactly needs to be done. Policy prescriptions have been very different.
One focuses on the level of leverage and the consequent effects of financial fragility — what happens to economies when asset prices decrease — and therefore argues for austerity. The other ignores it and relies on government spending and quantitative easing to keep the economy perpetually stimulated.
Is history to be ignored? Is it to repeat? Do we need to keep having these crises before we decide what a sustainable mode of creating wealth is? At what point does disillusionment kick in?
There are no easy answers, especially when we note that since 1980, there have been a total of 124 economic “crises”, as defined by asset falls of 20 per cent or more. Clearly, with increased globalisation has come increased turbulence. Even as America tries to turn back time, it is clear that this is a genie that cannot be put back into the bottle.
Part of the issue therefore is on the variable of vision, and the role that prices play towards capital formation.
Prices reflect some of what is going on in the economy, but there is a lot of extraneous noise. So much so, that few businessmen can actually rely on the information that is supposedly provided for by these prices.
At the same time, the differentials in prices reflected in real estate prices — between the payment plan modules and those traded in the secondary markets — suggest a liquidity premium or a “cost of money” differential that has become alarmingly high. Asset prices affect cost of capital and impact decision-making, but what real estate firm would decide to stop rolling out new communities simply because some investment club decides that real estate in that city is no longer desirable and decides to dump those basket of stocks?
What oil firm would base its exploration decisions based on the current price of oil, affected as it is by short-term speculation?
This leads to the other critical variable that is needed, which is vision and time. Clearly, in a society that is dominated by short-termism, capital allocation decisions will be lumpy and herd-oriented, with generous amounts of leverage.
Fostering long-term vision is not an easy task, and it comes through a combination of financial, social and immigration reforms, some of which are already underway). The ecosystem also benefits from-think tanks, as well as regulatory oversight.
The Nobel Prize winning economist Joseph Stiglitz argues for a “holistic” regulatory oversight department, especially as the boundary lines between disciplines start to get increasingly blurred.
We know that Dubai and the UAE has developed at a breathtaking pace over the past two decades, a pace which is unlikely to be replicated in the coming decade, given the law of large numbers. This augurs for, on the one hand, increased stability.
However, given the rapid change that we are engulfed in across a variety of disciplines, we know this flies in the face of our recent experience. Anxiety cries out for a faster pace of reforms, and when it does not materialise, results in a change of zeitgeist.
The optimism that was felt even at the beginning of 2018 has given way to a palpable sense of despondency. The cost of failures are clearly high, and the toll that it extracts on families and communities is visible.
Historically, reform always comes at a gradual pace. Given the rapid change of the economic world order, perhaps what is needed is a greater interdisciplinary dialogue as envisaged by Stiglitz — a new framework to generate a navigational map for the increased economic anxiety that has become the new normal.
Sameer Lakhani is Managing Director of Global Capital Partners.