Thursday, July 03, 2008

Where did all the dumb money go?

Maybe it’s just me, but at times like this it’s hard to figure out what all the “talent” on Wall St is supposed to be doing. The theory is you take a bunch of really smart people, pay them well, make them mingle and share ideas, work them to death, and they should produce value. Thing is, you look at the markets for the last eight years, the second half of arguably the most booya period for both retail and institutional participation in financial markets ever, and you’re not seeing value add. You probably need to go back 9 years for inflation-adjusted market cap parity.

So all the inflows of this period (like my 401k contributions, for example) have outflowed elsewhere. I have heard this called "dumb money" on the Street.

Controlling for the optical illusion of CNBC and Kramer -- looks as much like the doldrums of 1973-1982 as it does like 1991-2000.* One key difference is that the manses of Greenwich are themselves no optical illusion (would that they were), and that the concentration of wealth they attest to also is not, though my mind runs to such houses as Biltmore, the Tsarist palaces, the Mansion walk in Newport, RI. There’s a historical pattern of excess wealth concentration resulting in unsustainable residences that and have to be turned into museums which themselves cannot break even. Look at the deed restriction on Doris Duke’s estate near Somerville, NJ, which says the house cannot have tours go on. So they move plants inside the rooms and call it an “interior garden tour” to strip twenties off the unsuspecting Martha Steward wannabes just so they have money to mow the grass and run the AC. So even such obscene concentrations of “value” don’t work over time, as first the value dissipates, then the thing itself. Where, then, should Steven Cohen stick his basketball court? I have some ideas.

*One bellwether distinction between the 70s and now is Felix Rohatyn’s activities. Then he needed to swoop in transactionally and save New York City. Today he’s thinking more long-term about rebuilding roads, bridges and the like. I think that shows a little learning.

1 comment:

Steed said...

The growth of hedge funds in the last decade has been a disaster for the American economy and the financial sector. Mutual funds are long stocks. Their directive is to put the dollars to work, because their investors are operating under a premise: the economy and corporate profits will grow, and me and my dumb money want to go along for the ride. After the tech bubble burst, the investing class over-reacted. No thank you, it said, I don't want to grow with the economy. My money managers are so incredibly smart, I'm not simply going to trust them to pick good stocks. I'm going to get them to pile up highly concentrated, leveraged positions! I'm going to fund investment in the good ones by selling the bad stocks short! The benefit of being a wealthy country is that dollars are available for investment. Sure, you can say that most mutual fund managers would do better just buying the indexes and hitting the golf course. I agree with that. But when we replace the benign mediocrity of mutual funds with the hubristic distortion of hedge funds, we get an allocation of resources based on the brain-power of a few individuals, rather than on the collective hunches of thousands of money managers. The result has been much greater volatility generally, and occasional global sink-holes like the one we're in now. Helloooh! Can you hear me? It's cold and wet down here! How about we regulate the financial sector and do something to protect the current and future retirees who made the mistake of trusting in the American economy?