Bankscaping

Friday, January 30st, 2009 Euronext 100: - 0.98%

18:45 - The Carlton hotel bar (quit the smoking, guys)

A corduroy man with a scratchpad wants to ask me some questions. He buys me a glass of overpriced merlot, in return for which I give him my views, for what they're worth.

Q: Will there be deflation or inflation?

A: There is a good chance there will be both, and that’s bad news.
For technical reasons, deflation comes first. Prices are staying flat, as consumers stopped consuming wherever they can, immobilized by fear.
But then the enormous financial packages the government granted the banks to pay bonuses to those who screwed up must come back.
Governments raise money by collecting more tax or issuing bonds. Either way causes inflation to return, with a good, but not inevitable chance this might turn into hyper-inflation, which would be a scenario for disaster. All it takes then another up-and-coming extremist, and you’ll have the thirties all over again.

Q: Is this a good time to buy real estate?
A: If you have your eyes on a place to live in, and one that is not in an area plagued by political instability or on the route favoured by illegal immigrants, it is an excellent time to buy. Take a mortgage with fixed rates, mind, or you might regret it soon.

Q: Will the oil price stay what it is now?
A: Almost certainly not. With the current price, it hardly pays to get the stuff out of the ground. A bit lower, and it becomes a loss making exercise. Oil producers are too powerful to let that happen. This year, the following factors need to be taken into account:
- For a number of countries this winter is the coldest since decades
- Most electric cars that are popping up won’t go into serial production until 2011
- Aeroplanes don’t fly on wind, at least not those that carry freight and passengers.
I would predict crude to be between 70 and 80 dollars per barrel by year-end.
Long term though, oil is a lost cause.

Q: Will banks change their way of operating?
A: Most banks are, by nature, conservative and as such learn too little too slow.
In 2009, they sadly will be extremely restraint in lending as well as investing in their own technology. Both are cardinal sins.
It’s not the lending as such that caused the current global recession. It’s the insufficiently regulated shifting of risks that brought us where we are now.
As for innovative technology, look at the business that are growing fast. Facebook went from 6 to 40 million users in less than three years. YouTube has more regular viewers than most established TV channels. Consumers behaviour is rapidly changing, and only those banks that understand and play into that will prosper again.

Q: Do you expect more big banks to disappear?
A: How many big banks do we really need?