(Not) Learning From History

Fri 25 Aug 2017

By Sam Lees

Access Level | public

Market commentary



What have we learnt and has anything really changed?  And how worried should you be?

Back in 2007, when everyone was queuing up to take money out of Northern Rock, I was queuing up to put money in – a bailout by the government was, I believed, a certainty.  Someone needed to do that to make the point, so I did.

The media loved it, and the next day the government stepped in.

Are we now in a better place?

The first run on a British bank for more than a century originated in over-confidence and flaky lending.  Not enough attention was paid to the quality of the loans; banks just kept lending to those who couldn’t afford to pay it back.  

If flaky lending in volume was the problem then, haven’t we learned from those mistakes?  To paraphrase Mark Twain: history doesn’t repeat.  But it often rhymes.

  • Auto-loans, one of the murkier areas of the lending market, are up massively.  In 2008, they were a little over USD 800bn.  They are now over a staggering USD 1.1 trillion.

Why does this matter?  Credit quality in such areas tends to be lower, as was the case with the “sub-prime” mortgage market that precipitated the financial crisis of 2007/8.

At a company level, things don’t look much rosier:

  • The amount of corporate debt outstanding is USD 5.8 trillion, 65% higher than it was in 2008.
  • And the last time their capacity to cover those interest payments was this weak? 2008 

Nevertheless, are gobbling up the bonds issued by these companies.  Often these bonds offer little protection to those doing the lending and even give the borrowers the option to “vary” the interest payments.  

Things don’t look much better in the UK.  Debt, excluding student loans, is higher now than it was in December 2008 and there are similar stories in Europe where the ratio of debt to GDP is over 100%.

Debt itself is not a problem.  A limited amount of debt is a good thing for economies as it allows investment to increase productivity and allow the economy to grow more quickly.  

However, that’s not the situation we’re in.  Productivity isn’t growing.

And debt at this level is asphyxiating.  It’s like oxygen being sucked out of the economy.  It’s insidious and it’s a vicious circle.  Once it gets above a certain level it slowly but surely waterlogs the economic system - it sucks out the dynamism and confidence which allows business to provide more generous wage increases and invest in the future.

That goes for individuals, companies and countries, in Europe, the US, the UK, and beyond.

Great Financial Crisis 2.0?

There need not be a crash.  But governments, central banks, businesses and individuals all need to realise that the path we’re on isn’t sustainable. 

Our financial system remains fundamentally unstable.  Will governments and central banks be able to step in next time? 


  • Don’t panic but be wary of over-indebted companies or countries
  • A good test: think about the reasons why you hold your investments…
  • …if you sold your portfolio of investments today; would you buy them straight back tomorrow?
  • You will only if you had a very good reason to buy it in the first place.



Market commentary


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