The City had a wonderful spring. All the papers reported this week that bonuses for 2006, mainly paid out earlier this year were up over 40%. Around 4,200 people got a lump sum of over £1m. I hope they saved some of it. Why? Because it really doesn’t look like they’re going to hit the jackpot in quite the same way next spring. There are already suggestions that the fallout from the credit crunch – hedge-fund losses, the disappearance of the carry trade, the collapse of SIVs all over the place and the drying up of private equity deals – will mean that bonuses will fall by around 20% next spring. But I rather suspect that’s an optimistic guess. To see why just open any of this week’s copies of the FT at random.
I’ve got Wednesday’s in front of me. The front page tells us about the troubles at Carlyle Capital Corporation (it’s just had to sell $900m worth of assets to cover margin calls); about how the S&P fell 2.9% on Tuesday thanks to some lousy housing numbers; and about the impending wind-up of a hard-hit fund run by Cheyne Capital. In the next few pages we get stories about how the oil price is “too high”; more on the misery of America’s suburban housing (prices of McMansions are falling, too); an outline of the collapse of US consumer confidence (hardly surprising given that both house and stock prices are falling); some details on the odd goings on at Barclays; and analysis of the earnings prospects of the big banks (not good). There’s more of course, but you get the picture: the bad news keeps on coming and there is no reason to think it will stop. Perhaps it will even get worse.
Simon Denham of Capital Spreads thinks it might. As he points out, throughout all of the turmoil in markets in the past decade, from LTCM to the Dotcon bust, the one thing that “has shone through” has been the resilience of the job market in the US. “If the perception on employment security starts to slip, then the consumer-led economy may be in for a bit of a tough time.” More depressing still are the words of Crispin Odey, Britain’s “most famous hedge-fund manager”, according to The Guardian. In his latest letter to his investors he notes that “world growth nine months out will slow. Period”. His “gut instinct” (which is usually pretty reliable) tells him that the golden age of “extraordinary high profitability and low wage demands” from which he and so many others have made so much money will not continue. My gut is not as clever as Crispin’s (would that it were) but all the evidence points to him being right.
Still, I have one bit of good news. A survey just out from Syndicate Asset Management tells us that 75% of UK adults wouldn’t even need £1m to feel rich (a few hundred thousand would do) and that for most of the other 25% £1m would be plenty. So if the 4,200 who each got £1m-plus last year popped it into a bank account, perhaps they will still feel fine. Let’s just hope they didn’t buy houses with it instead.