From: glevy@PRATT.EDU
Date: Wed Nov 15 2006 - 11:09:54 EST
---------------------------- Original Message -----------------------
Subject: Fw: tratto da hot money
From: "Antonio Pagliarone" <antonio.pagliarone@fastwebnet.it>
Date: Wed, November 15, 2006 10:55 am
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----- Original Message -----
From: Antonio Pagliarone
Cc:
Sent: Thursday, October 19, 2006 11:44 AM
Subject: tratto da hot money
In my opinion, globalization is a financial accident waiting
to happen - in the form of a global meltdown. The only unknown
is when. The basic problem can be understood by the following
six aspects:
1.The free unhindered flow of capital across the world
2. The concentration of hundreds of billions of dollars in the
hands of very few large funds looking for maximum short term
return
3. The lack of liquidity in many of the markets that are
attracting this money
4. The herd mentality of these investors
5. Market linkages.
6. A systemic need to increase the volume of speculative
investments as opportunities for easy profits decrease.
Let us look at these six factors more closely.
(1) Free global capital flow is a completely new concept, only
a few years old, never seen in previous times, and completely
contrary to the ideas of classical economics. It is a concept
designed to enrich the forces promoting globalization, which I
call "shareholder protectionism", primarily the owners of the
transnational corporations. A key concept is that no demands
are made on investors. All the advantages accrue to the
shareholders. All the problems accrue to everyone else.
(2) Specialization in the intricacies of international
investment has resulted in available investment capital
flowing to a relatively small number of enormous specialist
firms, over 3000 so-called "hedge funds" that invest in
"anything that moves" as well a number of gigantic equity
funds and pension funds, mostly American, and a few very large
international banks. They tend to think alike. They are all
looking for the maximum short term return on their funds,
wherever that may be. In practice, this means primarily
looking for the most attractive equity markets anywhere in the
world, and getting the "hot money" out when something better
appears on the horizon. They have no loyalty to any country,
to their employees, nor to the local communities where they
operate, nor do they have any regard for the cultural
traditions of their host countries, for the environment, nor
to anything else besides money.
(3) These investors insist on free capital movement so they
can extract their capital quickly when they see a more
advantageous opportunity elsewhere. In theory. In practice,
only the largest and most liquid markets can absorb the kind
of short term pressures on stock prices and currencies that
can result from such a decision to suddenly pull out of a
market. They tend to get in slowly and get out all at once.
This is the crux of the problem. Furthermore, in a panic
situation, even the largest markets, USA, Japan, and the new
Euroland will probably not be able to handle the pressures of
a sudden repatriation of funds.
(4) The herd mentality is a critical part of the problem also.
A fundamental axiom of the managers of these mammoth funds is
that you don't get fired for doing the same thing as everyone
else. This becomes the single most important investment
criterion - not expected return, not risk, but doing what
everyone else is doing. We see it at work in the way they all
herd into Mexico, then Russia, then China, then Brazil, then
Korea, then Malaysia, etc. etc. We see it at work the way the
US stock market reaches unrealistic heights because no big
fund manager is silly enough to risk his job by going against
the crowd, and all hope they will be among the first to get
out when the panic selling starts. We see the problem on the
front pages when they all try to rush out of some market at
the same time. That is when the risk of meltdown comes nearer.
(5) It used to be a prudent dictum to diversify your equity
holdings by investing in many different stock markets at the
same time, because they were relatively independent. That was
true in the good old days when I was advising these same fund
managers - about 20 years ago, before the free capital flow
regime of the 1990's took firm root. It is no longer true.
Today all markets are closely linked, as anyone who follows
the markets must have observed. They are now highly
correlated. This has dramatically increased the risks of
global equity investment.
(6) One of the effects of globalization is to decrease the
buy/sell spreads in many markets due to the sophisticated
arbitrage between markets made possible by the latest
information technologies. This has the effect of transferring
profits from inefficient local monopolies to the TNCs - not so
good for the local financial community, not a bad thing for
the small local businessman, and great for the TNC
arbitrageurs, at least until the game becomes known to
everyone. However, as arbitrage opportunities are eliminated
one after one, where will this kind of speculative money go?
The answer is that it will go to lower margin, more
speculative, larger and riskier operations. And that is a
recipe for disaster. Nasser Saber makes the interesting point
that there is a systemic need for speculative capital to
constantly increase in size in order to maintain profit growth
in an environment with falling spreads - very much in line
with the claims of Karl Marx, as he points out.
We saw a prelude to the "hot money" phenomenon in Mexico in
1994. We saw it again in Asia in 1997-98, where Malaysia and
Indonesia were hardest hit. I believe it is inevitable that
such a crisis, sooner or later will lead to a total meltdown
unless fundamental reforms of the globalization paradigm are
made. In a meltdown, everyone gets hurt, including
shareholders, as stock and bond markets crash across the
world. A meltdown means, in practice, very widespread
bankruptcies of many major companies and even nation states,
and of course many smaller companies and individuals as well.
It may even mean issue of a new currency in some countries.
This will be followed by global depression, and many countries
reinstating foreign exchange and investment controls, as
Malaysia did in the 1997-98 crisis.
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