Shares everywhere dived for cover as missiles started flying. But one stock ahead of the pack, and responding to a different alarm, was Barclays, which has dropped 20 per cent since early February, having quadrupled over the preceding two years. I’ll declare an interest as custodian of a modest family holding – making me all the keener to understand what this rise and fall is telling us.
All banks were deeply devalued after the 2008 financial crisis and remained so, long after their balance sheets were repaired in the 2010s. More recently, the market narrative was that they were behaving sensibly again and their shares were shiny bargains. Barclays – run since 2021 by C.S. ‘Venkat’ Venkatakrishnan after the departure of Epstein-connected Jes Staley – became the sector’s hot stock. NatWest, Lloyds and HSBC more than doubled too.
Venkat recently called Barclays ‘a very risk-controlled shop’. But his bank’s shares started falling when it was revealed to be on the hook for £600 million to Market Financial Solutions, a Mayfair-based ‘shadow bank’ that specialised in short-term property lending. MFS has been placed in administration and is under scrutiny by the Prudential Regulation Authority, its founder having reportedly left for Dubai. Other creditors include Santander and a clutch of private equity firms that are themselves partially funded by borrowings from major banks. Last autumn, Barclays said it had £20 billion of exposure to the ‘private credit’ sector as a whole, though that’s only 6 per cent of its total loan portfolio.
The wider concern is that MFS is just one of numerous red-flagged names on both sides of the Atlantic in a private credit market, estimated at $3 trillion, that doom-pundits have been saying for some time is the next financial crisis in the making – the irony being that private lending ballooned as mainstream banks became more restrained. The more reputable of this new breed are backed by pension funds and insurance companies in search of higher returns; but at the bottom of the pile are US car loan providers and lenders to uncreditworthy smaller businesses, for whom a downturn provoked by the Iran conflagration could lead to a major shakeout.
Incidentally, some observers see the explosion of private credit as evidence of the irrepressible animal spirits that lead finance astray at least once in every generation. It has certainly been attracting vivid epithets from the natural world: JP Morgan Chase chief Jamie Dimon labelled subprime lenders ‘cockroaches’ while former Goldman Sachs boss Lloyd Blankfein says he senses a coming storm because ‘the horses are starting to whinny in the corral’. Devotees of the risk-analysis guru Nassim Nicholas Taleb see it as the next ‘black swan’, his celebrated metaphor describing unforeseen economic shocks; but I’ll settle for calling it the slumbering crocodile in the money pond mud.
Always watch oil prices
But are we really heading for a downturn driven by rising energy prices? And does this week’s oil-price excitement constitute a blip, an extended bump or the start of a spike? Those nuances matter because (as I wrote last week) while even short-term disruptions to oil and gas supplies threaten an uptick in inflation, history teaches us that a serious price spike has almost always been followed by recession.
Older readers may remember this as the theory of Professor Andrew Oswald of Warwick University, who in the 1990s produced studies tracking oil prices against US employment and other data over the previous half century. But after the turn of the millennium – as the world became more efficient in energy use, western nations deindustrialised and attention focused on risks emanating from financial markets – the price of fuel seemed to matter a lot less.
Yet the correlation was still visible in the post-financial-crisis recession that was preceded by a $147-per-barrel peak in July 2008; and after Russia’s invasion of Ukraine, when oil rose by 50 per cent in the first half of 2022 and recession was avoided by a technical whisker in the second half. This week’s panic took Brent crude to $119 (almost double mid-February’s level) before it fell back after President Donald Trump said the conflict could end ‘very soon’. Believe that if you like, but remember also what Professor Oswald told me a long time ago: ‘A rising oil price remains an enduring signal of trouble.’
On the skids
Browsing a copy of Classic Cars in the dentist’s waiting room, I’m reminded of another leading indicator I used often to quote. Falling prices of British sports cars were a sign that markets ahead looked choppy and City bonus expectations were correspondingly low. In good times, bankers and traders bought show-off motors: seven-figure Ferraris for top dogs, more affordable Jaguars and MGs from the 1950s and 1960s for many others. In nervous times, they sold them again. Do their graphs still tell us where financial markets might head next?
This season’s bonuses were mildly disappointing, I gather, and the threat of renewed crisis will loom over the sector’s pay prospects for the rest of the year. And guess what, coincidentally or otherwise, the Economist says the classic car market is ‘in a skid’. Data from Hagerty, a specialist insurer, shows a 20 per cent decline in collectable sports car prices over the past two years, though this probably has as much to do with generational change as financial uncertainty.
Many of today’s eco-aware trading-floor thrusters would rather buy expensive exercise bikes; few yearn for the planet-burning roar of a 1965 E-Type Jag at full throttle. All of which makes a buyers’ market for the nostalgic older petrolhead. The small ads in Classic Cars offer Jaguars and Aston Martins galore in the £100,000 range and gas-guzzling Bentleys for less. But I think the trophy for me could be a 1971 Morris Minor Traveller with exterior woodwork, at just £14,995: the perfect time-machine to escape the horrors of the modern world.
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