Step aside capitalism, how about leverageism
Our recent post on the End of Capitalism triggered much interest and comment. There were plenty of diverse views, as one would expect. But one thread that came out was that what we are now seeing is not true capitalism (nor, of course, is it old-style communism). Ok, but what is it?
Anthony Conforti suggested in a comment that we need a name for what is happening,:
The first step in defining a new economic paradigm is coming up with the proper terms…new words to define a new economic environment. As words, “capitalism”, “communism”, “socialism” may now be inadequate to describe the emerging economic reality. We need new nomenclature. Any thoughts?
Here’s one suggestion. There seems to have been precious little capital building going on is the last few years, so even in a free market, capitalism sounds a bit inaccurate. How about “leverageism”? Borrowers of the world, unite. You have nothing to lose but your shirts.
Time to pick up the challenge. What should we call the dominant economic system?
Tale of two SWFs
As the world moves closer to the end of the credit crisis, sovereign wealth funds around the world are experiencing mixed fortunes.
Good news comes from Singapore’s SWF Temasek, which springs back into gains with its portfolio climbing 32 percent between April to end-July after a 30 percent loss in the year to end-March.
Announcing its annual performance report (which should please the country’s taxidrivers), Temasek said it is open to investing in financials and resources in the long term and it has bought stakes in South Korea’s ENK, cylinder suppliers, and Brazil’s oilfield services firm San Antonio.
Moving towards the Middle East, Dubai World, a state-owned holding company, is struggling to restructure its subsidiaries.
It has moved several executives to its Istithmar unit, which owns struggling high-end retailer Barney’s New York, from its real estate unit Nakheel, which is trying to refinance $3.52 bln Islamic bonds maturing in December.
Istithmar is seen as sovereign private equity, which takes a high leverage to invest in firms, with some estimates that the capital was levered up up to 7-10 times.
Sovereign wealth tie-ups
Sovereign wealth funds are increasingly working in concert to make joint strategic investments.
China, Singapore, Malaysia, Korea, Abu Dhabi and Kuwait are among those which have recently formed investment partnerships with each other.
Why are they doing this? First of all, by linking up capital and resouces, SWFs can leverage up, optimise local knowledge, spread risks and maximise returns.
An entity with diverse backgrounds can also enhance transparency, which could allay concerns among regulators and politicians who suspect SWF investments are politically driven.
Click on this link to read more.
from Global Investing:
No black tulip bulbs, no black swans
The world has experienced many crises in the past.
In 1636, during the Dutch Tulip Bulb Bubble, the quest for a perfect black bulb had inflated the price of a black bulb by many hundreds. In a different crisis in 1866, a London wholesale bank Overend, Gurney & Co collapsed with a massive debt, after expanding its investment portfolio beyond its means.
What is common in these events and the present crisis is that investors borrowed and levered themselves, and the eventual bubble burst prompted massive deleveraging and contagion, according to Julian Chillingworth, chief investment officer at London-based asset management firm Rathbones (established in 1742 – 22 years after the South Sea Bubble).
“It’s greed, it’s fear and it’s leverage,” Chillingworth told a group of journalists at a breakfast briefing. He says all the risky and highly leveraged assets were dressed up with “pseudo finance” and the likelihood of contagion and volatility was characterised as a “black swan” event – originally a metaphor for something that could not exist.
But black swans do exist. Just as people in the 17th century reached Australia and found black swans, investors have learned the hard lesson this time.
Anon, Glass/Steagall, Breton Woods and other agreement were broken to further capitalist gain. What was forgotten was that this regulatory framework was put in place as a response to a similar crisis that unfolded in the 1930s.
We made the mistake of not regulating and keeping banking separate from investing 80 years ago. We changed that. Shame on the bad bankers. We repealed all of that and the bad bankers went at it again. Shame on us!