As Katie Martin noted in the FT this morning:
A couple of months ago, warning about a bubble in the world's most important stock market was largely the preserve of oddballs and attention-seekers.
I was pleased to be amongst their number.
As she added:
Uttering the B-word is the financial markets equivalent of shouting “fire” in a crowded cinema, and it is generally used sparingly. But as with so many aspects of life in 2025, it turns out you can get used to pretty much anything. And all of a sudden, the warnings are coming from all sides.
They are. I have already noted those from the IMF. Andrew Bailey of the Bank of England sounded positively alarmed when giving evidence in parliament yesterday. As the FT, again, noted:
Bank of England governor Andrew Bailey has said “alarm bells” are ringing over risky lending in the private credit markets following the collapse of First Brands and Tricolor, as he drew a parallel with practices before the 2008 financial crisis.
It would appear I am a Cassandra no more. The mainstream is with me. It's just a pity they are now likely to be too late to save anyone from the mess they have created, which now seems to be inevitably heading our way sometime very soon.
There is one thing else to note, though, which is that I am sure this issue is being studiously ignored by Rachel Reeves and the Office for Budget Responsibility, both of whose models will, I am sure, be assuming life will go on as normal, as they define it, from now until the end of time.
Fools and the ability to think are rarely closely associated, in my opinion, and there are a lot of fools in the higher echelons of financial power.
The alternative explanation was provided by Upton Sinclair when he said:
It is difficult to get a man to understand something when his salary depends on his not understanding it.
Have you noticed how high salaries are in finance?
Whatever the reason, crashes are built into our financial system because those in charge are too frightened to do anything about them, too incompetent to see them coming, and too indifferent to care.
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Why are salaries so high in finance?
Because they can exploit their market power to extract rents from those using their services.
The Upton Sinclair quote is one I have long thought sums up those in the City. And when you can make what for most people would be a lifetimes earnings in a year or two, no wonder morals and scruples go out of the window.
Also, those in the heart of the City and investment world are first in on the way up and first out on the way down. So they make a profit either way, whilst paying themselves fees from your investments which are, surprise, surprise, generally not performance related. As for the hedgies, they specifically want instability as thats how they make the most money.
Who really suffers in a crash?
Take 2008 – we saw pictures of whizz kids carrying cardboard boxes along the streets after losing their jobs, but how many really ended up on Skid Row?
Has anyone done analysis of which socio-economic groups really felt the pain post 2008?
Apart from the very few who hit the headlines (Leeson, Sir Fred the Shred), and some tragic individual suicide cases, where were all the City/Wall St bankers and traders a year later?
How were the ordinary middle class affected by the 2008 crash?
We know the devastating effects that austerity had on lower income groups for the next 15 years and more to come, but what about those in the “industry” that caused it? How far did they fall, and did they bounce back up, or go “crunch”?
Those who suffer from austerity – they have paid the real price
Nick Leeson and the collapse of Barings occurred in 1995.
Salaries and bonuses are paid so highly to incentivise risk taking as well as the above.
During the last crash, this was pointed out by the IMF’ s own economic advisor Raguram Rajan who asked the question. The message went down like a shit sandwich with people like Larry Summers who thought that it was OK to increase risk through under regulated financial instruments called derivatives.
The thing is that the whole thing is a self serving confection. These bankers are rewarded for taking huge risks that really they will never be accountable for since the banks always get bailed out by state central banks.
So, bankers win twice, they get to keep their ill gotten gains and get state welfare bailouts as well. And the rest of us get austerity.
And the people you vote for accept all this.
“A couple of months ago, warning about a bubble in the world’s most important stock market was largely the preserve of oddballs and attention-seekers.”
The S&P500 has increased 5.5% in the last 2 months. Keep calling the crash and you’ll be right one day.
You do know that is what happens in a bubble, don’t you?
One can never predict the precise timing of crash. It essentially depends on someone shouting “the emperor has no clothes” and a significant number in the markets to think ” Yeah , they’re right, he’s totally starkers” , a couple of banks crashing usually helps in that belief system. The biggest mystery is always why the supposedly knowledgeable markets didn’t see it when so many others did.
John Gray has been writing for decades about how the bond market is going to crash our societies. Too many of us have false beliefs that bonds and their derivatives make the market efficient and reduce risk. Derivatives tie everything up into knots so that no one knows how anything works. Without knowledge of how things work, there is no efficiency. The bond actors are guessing. Their freedom to guess and implement their false beliefs is going to produce the wrong answer. The freedom to make knots is what will eventually undo capitalism. We are also going down a route where our political class has lost knowledge that it once knew. The political class don’t know what they must do. They don’t believe that this is even a potential problem.
As one who works as an IFA, I have a big beef about ‘ad valorem’ charges and subtly cross-subsidy in financial services. I have been looking at a case in the last few days that serves as a good example. A client has a £1m pension fund – a nice problem to have – invested in a mixed portfolio of second-hand stocks & bonds. The pot is being ‘managed’ by a firm that is well-know for buying up small firms like mine with the promise of an annual review that simply has not happened for years. The firm acts as a ‘discretionary fund manager’ – choosing a range of funds or ‘funds of funds’ that it deems suitable for seemingly all of their clients. The cost of all of this is approximately 1.79% p.a., give or take. On a £1m fund, that is about £17,900 a year, for doing very little. Looking at the 2024 accounts, the firm looks after nearly 500,000 pension accounts. I don’t know what the average fund size is, but it certainly will not be £1m.
Looking at an alternative pension – setting aside other options such as buy an annuity(ies), etc. – we can find in the marketplace a SIPP costing £500 per year for the admin regardless of fund size, an investment ‘platform’ costing about 0.27% on which the investments are held, and a fee as low as 0.29% for an index fund portfolio. So, this £1m pension could have a fee reduction to about £6,640 allowing for an ongoing advice charge of around £540 a year. A saving of a not inconsiderable £11,260 a year.
Impressive.
If financiers want to play fast and loose all well and good but there should be some sort of firewall between them and the public at large. People do not want their livelihoods exposed to a casino.
This is helpful. The finance industry deliberately obfuscate. It’s easier to sigh and turn away.
There needs to be explanation in simple words with diagrams/ charts. Gary’s Economics has been helpful for me to understand the National Debt and borrowing implications.
I’d value something that helps me understand words like “ derivatives, second hand stocks & bonds, portfolio platform, ‘discretionary ‘ fund manager etc” – ad infinitum.
I have them on my list of glossary entries to make now.
Sir John Templeton is purported to have said “ ‘This time is different’ are among the most costly four words in market history”. I fear many are about to find out how true that is.
🙂
I hope that the Scottish Currency Group Conference at the weekend will provide some clues as to how an Independent Scotland will do Finance differently.
Do financiers conspire together, or is it a monumental cock-up from start to finish?
I remember reading years ago:
When deciding between conspiracy and cock-up, it’s almost always the latter.
Conclusion: We give the City too much respect.