Monday, May 11, 2015

Parasite Capitalists

Once again, someone realizes that the Farmer's Alliance, the Populists, Thorstein Veblen (and about a million others who watched in horror and fury at the drooling Predators of industrialization who were looting the greatest burst of human genius in recorded history) were spot on in their critique of the Leisure Classes.  I know when it happened to me, the revelation just stunned me.  I mean, if someone compares the activities of an Elon Musk or a Steve Jobs with a Jamie Dimon or a George Soros, one could wonder how such different people could even be of the same species.  And yet, there are whole schools of thought with enthusiastic and loyal adherents who lump such completely different people with such different motivations under the heading of "Capitalism."  This intellectual laziness is mostly traceable to the musings of Marx but this foolishness lives on because unless one is exposed to the complexities of high-end production, there is little reason to suspect that banksters and integrated circuit production engineers are not in fact interchangeable.

So on this Monday in May, we should celebrate that one more person has seen the light.  And yes, Moore is absolutely correct—hedge funds are a pluperfect example of Leisure Class uselessness.  Worse, these thieves are sucking the very vitality out of the society that has made them "rich."  Yes indeed, the parasite can often kill the host.

Hedge Funds Aren't Casino Capitalists. They're Parasite Capitalists

James Moore, May 7, 2015

Adair Turner coined a neat phrase for many of the banking industry's activities during the financial crisis. In a biting critique he opined that they were "socially useless".

He was right. But it's not just banking at which his criticism could be aimed. Consider the bastard child of investment banking and asset management: the hedge fund industry. It is a place where a portion of the elite of both have found homes. Multiple homes, in fact, funded by salary packages which make even the dizzying rewards on offer at the height of the big investment banks' insanity look modest.

According to a list published by Institutional Investor's Alpha magazine, the top 25 collectively gorged upon $11.62bn (£7.6bn) in 2014. Their bumper paydays came in a year when the industry produced returns averaging in the low single digits, even though the S&P 500 stock market index - the most reliable US benchmark - would have produced nearly 14 per cent in dollar terms had you tracked it. The New York Times reports that just half of the top 10 earners managed to beat it.

These massive rewards for mediocre performance were in part due to the industry's structure: typically managers skim 2 per cent of their investors' funds every year and 20 per cent of their profits. So when they do well the rewards are staggering. When they do less well the rewards are staggering. Just a bit less staggering.

It might not matter so much if what these funds did was socially useful. But it is not.

It is true that some provide a certain Darwinian screening process by attacking under-performing companies and their complacent boards. Elliott Advisors' assault on Alliance Trust is an example that may ultimately prove to be of benefit to a legion of small investors.

However, for every Alliance Trust there is an ABN Amro. Activist funds delivered the Dutch bank to a consortium made up of Royal Bank of Scotland, Fortis and Banco Santander in a transaction which left only the latter unscathed and the taxpayers of three countries to pick up the pieces.

The activists also represent only a small sub-group within the hedge fund industry. Much of which does what serious punters do during the Cheltenham Festival: they make bets. Not blind gambles, by any means - they study the form. Their bets are sophisticated, complex trades, often guided by programmes cooked up by the best computer science graduates the American university system can offer. But they are bets all the same.

Hedge funds are about as far removed from long term investors, as it is possible to get. They are not so much casino capitalists as parasites on the back of capitalism and, as anyone contemplating a trip into a malarial zone should know, parasites are dangerous. So this is a sector that merits very careful scrutiny. Is it getting it?

There is more regulation now than there was in the industry's infancy, but that's not saying a great deal. Much of the watchdogs' attention and energy remains focused on the banking industry.

Meanwhile superstar hedge fund managers are increasingly deploying their wealth to buy influence in the political arena. The banking industry did this with great success in the 2000s. The pay off was the disastrous "light touch" regulation that prevailed at the time.

Mercifully that has changed, and it is unlikely that the next crisis will vent forth from the banks. But the hedge fund industry? It's certainly a candidate. Before the banking crisis, one of its members, Long-Term Capital Management, became so systemically important that its collapse very nearly dragged the financial system down with it. We should remember that.  One or two bad bets and this "industry" could yet cost us all far more than merely a few inflated fees paid over by credulous pension funds.

Sainsbury's isn't doing too badly, all things considered.

When he's not fighting jail sentences in Egypt - it related to Sainsbury's attempt to open stores there in 1999 - the grocer's chief executive Mike Coupe has been running a surprisingly successful business.

No, really. It's true that Sainsbury's has just reported its first loss since … well, forever. But when you strip out the write downs on the value of its property and various other non cash items, it made a decent enough profit at the operating level, given the current climate.

Moreover, the latest batch of figures from industry analyst Kantar appears to show that it is holding up better than most of its rivals when it comes to sales (more or less flat) and market share (steady). Those figures have also suggested that the growth of discounters Aldi and Lidl, the cause of the ructions reverberating through the food retailing industry, is slowing.

It is far too early to say that the established supermarkets have reached a point of equilibrium with them. But it might be that the efforts they have made to cut prices and up their games have at least stemmed some of the bleeding.

Which raises an interesting question: was the sector truly competitive before the discounters' reached critical mass? Or had it been operating for years as a cosy oligopoly to which competition regulators paid too little attention? Adam Smith's disciples would argue that the market has corrected itself.

Meanwhile, the consumer is partying on cheap food so everyone's happy, apart from the supermarket bosses and their shareholders. So nobody really wants to debate the issue. Pity more

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