9 October 2008
Ian Rushbrook, the Edinburgh-based fund manager once described as a “perma-bear”, was for many years a voice in the wilderness. He came in for a lot of flak from more bullish investors while the debt-fuelled consumer party continued apace.
They couldn’t quite get their heads around Ian’s pessimism. Instead they preferred to turn a blind eye to his utterances. Maybe they [other investment managers, hedge funds, private-equity types, bankers etc] were genuinely unaware of the inherent unsustainability of debt-addicted economies such as the US and the UK. Like the myopic managers of failed banks like HBOS and RBS, they chose to shutter out such negativity and continue to make hay while the sun shone. Of course, this enabled them to turn in some reasonable short-term returns. But since the music stopped last summer, many of these people have been left gasping for air.
Now that the bust is truly upon us, with banks going bust or being rescued almost daily, and as hatches are battened down for hard times ahead, Mr Rushbrook has been utterly vindicated.
In July 2006, Ian gave a prescient speech at the annual general meeting of Personal Assets Trust, the investment trust he has co-managed with Robin Angus for the past 18 years. For about half that time, they have been managing PAT very cautiously, even going 100% liquid through the use of futures contracts last year. This all stemmed from Ian and Robin’s unshakeable belief that a crash was on the cards.
I reproduce a key excerpt from his 2006 AGM speech here:
In our view, there has been no real GDP growth at all (that is, growth based on savings and investment) from 2000 onwards. All GDP increases have been generated from debt: government debt, corporate debt and particularly consumer debt. But, unfortunately, a consumer boom and GDP growth based on debt can only continue for so long . . . Since all debt must be repaid ultimately, whatever boom consumer debt has caused must be followed by a bust of exactly the same magnitude.
Effectively, real household earnings in the UK and US have not increased over the last six years. This is why company earnings are currently so high; businesses haven’t had to pay their employees more. When consumers spend not only their earnings but also their increased borrowings, businesses get to sell more without having to pay anyone more. The result is high but unsustainable corporate earnings.
Meanwhile, consumers have borrowed against the increased value of their houses and banks have been delighted to extend the credit. Unfortunately, even if their houses are worth three times what they were six years ago, it won’t help them pay off their debt – they still have to live somewhere and therefore they can’t very well sell their houses to repay the debt – so they have to cut their consumption.
As housing weakens so will the UK and US economies.
One year later, at the Personal Assets Trust AGM in July 2007, Ian issued an even starker warning: –
Is the financial world sleepwalking into disaster? No. It’s worse than that. It’s walking into disaster, wide awake. The Federal Reserve, the US banking system, the US mortgage industry, the investment banks, the hedge and private equity funds, all know what’s happening; yet they carry on regardless. Charles Kindleberger, author of Manias, Panics and Crashes, explains this by quoting the Roman writer Petronius: ‘Mundus vult decipi: ergo decipiatur’ — ‘The world wants to be deceived, so let it be deceived.’
To read an interview I did with Ian Rushbrook for the Financial Times see Why a veteran outperformer sees a crash on the cards, published November 27th, 2006