“Two sugars in mine please. Did you see David Beckham's new haircut? What time is Big Brother on? Are you as suspicious as I am about the accounting procedures at Enron and their potential impact on our long-term savings?”
At breakfast tables the length and breadth of Britain Enron is not a topic of conversation. Why should it be? The everyday family has close to zero knowledge of the workings of financial markets.
In this summer of 2002 the current financial markets and Enronitis present a major challenge to the Government, the investing public and the investment community.
We are entering a third year of declining stockmarkets. Over the next few months many families in the UK will capitulate and sell out of their unit trusts, Oeics and Isas. The oft-repeated mantra of investing for the long term and buying more when markets decline is being put under severe strain.
More worryingly, this drop in stockmarket levels comes at a time when our savings are being battered from other directions. The outrageous tax grab by the Government on pension funds plus highprofile disasters such as Equitable Life will continue to cause a dwindling of confidence in suburban Britain. The real threat is that investors will take the very worst option, which will compound their problems. This would be to sell out of the stockmarket and to invest in buy-to-let property.
Two and a half years ago the boom in technology shares went further than any sensible prediction could ever have envisaged. When the decline came, some managements took a very creative view of accounting and were found out. The sell-off has been spectacular and we have a generation of investors who are starting to question whether the equity market is the place to be.
The Enron debacle has added another layer of cynicism and disbelief from the investment community. Most investors have become used to coverage about “fat cats” over the past few years but those news stories were largely based on envy and greed while stockmarkets were rising.
What we now have is real doubts about whether we can believe the numbers that we are being given by some of the world's largest corporations. This suggests that we will have another wave of re-stated profits and re-stated losses still to come. A further lurch down in share prices is likely to shake out more savers and many of these will be lost to the equity market forever.
The Government faces one of its greatest challenges this summer as the Conservatives have finally found a subject on which they can make serious attacks on the Labour party's record. The historical lows in the savings rate and the current culture of excessive borrowing are leading to a “live for today/forget about tomorrow” culture.
As a nation we were not saving enough anyway, even before Gordon Brown's aggressive taxing of pension funds. Add to this the decline in stockmarket levels, the dramatic collapse in values of so-called low-risk and cheap tracker funds and the evaporation of gains in technology funds and you end up with a population who will be looking to somebody else to make up the pension shortfall in their old age.
A general public that has always been suspicious about the workings of the City is not likely to be interested in the next Enron story specifically. What bothers them is the declining value of their equity investments. In a rising market, investors will forgive high profile intrigue, insider trading and fat cat share option packages. In a declining market, cynicism leads to encashment.
Many of those who should never have bought technology funds will think that the next easy killing is to be made in the buy-to-let market. It will not be long before tenants will be able to dictate bargain rents from a new generation of over-extended landlords.
Ian Chimes is managing director of Credit Suisse Asset Management