Although the progress of grief is predictable, it is also slow. Sell on denial, buy on depression.

---

Sell on denial, buy on depression, was my advice to investors last year and it looks still valid today.

In a column last year, I described the evolution of the credit crunch in terms of the stages of grief identified by Elisabeth Kübler-Ross. The Swiss-born psychiatrist’s work was based on studies of terminal illness. But her account of how people react to the news that they would lose their lives has also been used to describe responses to the loss of a partner or a job. It seems equally relevant to the loss of capital or reputation in business and politics.

The Kübler-Ross thesis describes successive stages of denial, anger, negotiation, depression and acceptance. From banks, we have seen the phases of denial and anger. Denial that things were really serious. Anger that the authorities had not acted promptly enough to bail the industry out.

But those days seem to be over. There are fewer attempts to blame the problems on regulators paid five-figure salaries rather than on bankers paid eight-figure ones. The crisis was the result of salesmen on Wall Street promoting asset-backed securities rather than salesmen on Main Street promoting subprime mortgages. Most people now acknowledge that the source of problems was in the banks themselves. Now we have moved into negotiation.

In both Europe and the US, central banks have now given far more support than anyone thought possible, or necessary, a few months ago. But they have also begun to exact a price. The shareholders of Bear Stearns suffered a near wipe-out. In Britain, Royal Bank of Scotland and HBOS have agreed to look to their shareholders as well as the taxpayer for funds. These banks will cut their dividends. That is a big shift from the defiant increases in payouts they announced a very short time ago.

Counsellors handling grief are advised not to be too conciliatory in the negotiation phase. If you have told someone they are suffering from a serious illness, you want to give them all the help you can, but not to the point of leaving them in any doubt about the unpleasant news. I have sat through interviews where anxiety to reassure the sacked employee has enabled the unlucky person to leave the room not understanding that he has been fired. It is premature for the authorities to offer serious help at the negotiation stage. The time to offer support is when reality – and depression – finally sink in.

It is not entirely a coincidence that the grieving of Gordon Brown, the UK prime minister, follows so closely both the timing and the pattern of the grieving of the banks. If you have aligned your fortunes as closely with those of the City of London as Mr Brown did as chancellor of the exchequer, your reputation falls with the market as it once rose with the market.

The British government response to the erosion of its public confidence began in denial and anger. There was refusal to accept that the polls showed more than a temporary blip, assertion that problems were the product of unpredictable and uncontrollable events, and anger at the media for distorting the message. Now we are into negotiation – Mr Brown has promised to go out into the country and listen. He has even come as close as he finds possible to acknowledging that there might have been mistakes.

Kübler-Ross explained that the negotiation phase is followed by depression, its frequent symptoms a combination of lethargy and ineffectual activity. In both the City and Whitehall there will be frequent rearrangements of personnel and functions. The banks, though perhaps not the government, will announce job cuts and disposals of activities. There will be few new strategies, but many announcements of small-scale initiatives. Then, finally, there will be acceptance that the financial and political environment has changed.

Although the progress of grief is predictable, it is also slow. Sell on denial, buy on depression, was my advice to investors last year and it looks still valid today. The credit crunch is not over because it takes time for individuals, or organisations, to move on. But move on they will. These underlying rhythms of human nature seem to imply an eight to 10-year cycle of government, from fresh-faced optimism to electoral humiliation. And an eight to 10-year cycle of financial folly.


John Kay