There is rich and there is, er, rich. One is the 'I bought a house in London 15 years ago and now it earns more than I do' rich, but the other is the 'I own more homes than I can list' type of rich. Walk down any street in London and you can bump into several of the first group, but the second group is a more rare breed. I have two friends who probably qualify for membership of this latter group, and annoyingly, both are self-made, charming and super kind. Both are worried at the moment. What's worrying them you ask? I'll tell you, it's debt.
They say that the seriously rich always carry a healthy slug of debt. It's efficient to use other peoples money (borrowed at low rates) to earn higher rates of return and very few people have no debt to speak of. However, the normally clueless Bank of America Merrill Lynch has come out and said that Britain could face an 'explosive debt trajectory' in the long term if it does not deal with its problems now. Of course, banks are useless at predicting this type of thing and their views generally only useful as contrarian indicators as they are nearly always behind the information curve and always have a bias and a backside to cover. But sometimes, it's OK to agree with them. And this time, I agree with Merrill Lynch and the poor wage slaves they flogged to produce their latest piece of 'research'. Don't worry loyal traders and analysts, your bonuses may be paid in deferred non voting B shares, but who really wants cash anymore?
That's the problem really. Cash isn't important until its very, very important and you absolutely, desperately must have it. By then - its too late.
I actually think that Britain's debt problem/explosion could come to a head much sooner than people think. I can see failing banks, seized assets and property prices collapsing. And if this happens, I see instability leading to anarchy. You simply can't have an economy built on debt.
I believe that the figures emerging from government and press releases from firms claiming 'growth and recovery' and talk of things 'getting better' is largely an illusion. If you are struggling now, it won't be any easier with interest rates at 3% or where they were a decade ago, say 5%. My friends both tell me that the cash flow of their businesses has been stretched in recent months (both run very different businesses in totally different sectors - if one had said as much, it would not warrant a blog, but both...). Customers are taking longer to pay and negotiating extended time to pay their bills. Revenue in their businesses is steady but only when inducements or offers are made to lure new customers on board.
Both men fear that when rates climb, and they surely must, businesses and families will be overwhelmed. Those that have not insulated themselves will find themselves exposed and sunk. Both have paid down substantial debt within their empires during the last 12 months in anticipation rates climbing.
I will write more about this subject in the future, but I believe that gold, diamonds and a little cash may not be a bad 'fall back' position if it gets ugly. If you are rich, add a few million in sterling/dollars/euros, a fully fuelled Citation jet filled with 5 years worth of food and a small armoury, along with those gold bars and flawless stones just to be safe.
It's just a question of when and how long the music can continue playing for. I am shorting equities - the explanations from those that remain long are not convincing and sound lazy to me.
James Sanders is a London based trader and investor. He founded the UK’s largest independent derivatives broker in 2001 and left the City in 2009.