by Milo Clark
"Hedge funds are the vanguard of a financial revolution. Once little known and secretive fringe forces, they have become leading actors in reshaping the corporate world. As active investors capable of mobilising billions of dollars of capital, these new institutions have become enormously powerful as well as impressively innovative."
—Lionel Barber, Editor, Financial Times, April 27, 2007.
(Swans - May 21, 2007) At the intersection of four very significant business and financial phenomena we find hedge funds. They are like a cosmic whirlpool sucking down equity and spitting it out.
Among the fads sweeping corporate board rooms is stock buy back. Pundits believe that corporation buy back programs have reduced the stock available through markets by as much as $5 trillion. On top of spending cash, which otherwise might fund investments in expansion, growth, and personnel, numerous corporations are borrowing money for buy backs.
By reducing the supply of equities, burgeoning liquidity bids up stock prices giving an illusion of prosperity. Earnings spread over fewer shares provide higher earnings per share numbers.
Second: PRIVATE EQUITY
Through a broad range of corporate and legal gymnastics, publicly held corporations are going private. They are moving from some forms of transparent operations to the murky world of greed, avoidance, and evasion. Arguments for going private feature the reduction in oversight and transparency. Through private equity deals with immense borrowing, otherwise somewhat healthy businesses become highly leveraged and very vulnerable. Surpluses, if any, go to loan providers rather than investors.
The financial matrices surrounding going private, reducing market exposure, and skewing results through buy backs and diverting capital from product or service outputs move companies into the murky areas of minimal oversight and regulation. Transparency goes mythic.
Throughout the post-WWII years corporate managements whittled away at stakeholders. Boards became sycophants rubber-stamping management. Shareholder meetings declined into cheering sessions. Personnel practices fostered turnover and shed longer term employees. Union leaders became status-seekers bellying up to the same bars as management. Wages, salaries, and benefits stagnated or declined in relative terms. Outsourcing took manufacturing and service jobs elsewhere in an endless search for lower operating costs. Management compensation and perks went exponential. Government-backed safety nets developed gaping holes.
Hedge funds were long considered the dirty backroom of investing. Raiders, vultures, bottom feeders, and asset strippers sought legitimization as hedge funds. They served, in one sense, to institutionalize these dark tendencies always lurking in financial circles. Some are now seeking legitimacy through going public, somewhat. Nicer folks making enough money in older forms of investing chose words such as amoral, unethical, unprincipled, and many expletives deleted from polite conversations when describing hedge funds.
With the exposure and demise of Enron, Worldcom, et al., along with the rundown of conglomerate strategies, those darker inclinations sought new channels. Hedge funds evolved to fit.
In parallel, the political world, especially in the once U.S. of A., also cut anchor and went adrift. In a context of floods of money chasing lowering supplies of quality or higher paying investments, hedge funds have gone respectable. They are becoming the only game played.
Presently, we have what was once a terrifying financial spectacle: disintermediation. When short term interest rates exceed longer term rates, a critical imbalance results. Traditional lenders borrow long and low to sell shorter and higher terms. Longer term rates then reflect future expectations of overall financial conditions, one of which is inflation. Longer term rates are assumed to discount inflation and to produce returns in excess of inflation. This pattern is part of the reason why central banks such as the Federal Reserve Banks give priority to fighting inflation rather than creating conditions beneficial to people.
While major keystone segments of the overall economy such as housing and automotive stagnate, the Dow Jones Industrial Average (DJIA), at best a specious indicator of sorts, spurts to new highs over 13,000. Luxury markets proliferate. Everything high end goes higher. The rich are definitely getting richer in absolute as well as relative terms. Corporate and high end personal tax rates yield an ever-shrinking proportion of government budgets. People programs suffer while war budgets escalate.
Middle-class wages and salaries stagnate. Poverty and unemployment statistics are blatantly manipulated to appear less significant or to show improving trends. President and vice president declare debt and deficit are irrelevant. Bankruptcy numbers are reduced through draconian legislation pushed through by bank and credit card lobbyists. The numbers of people worldwide said to live on less than $1.00 a day shrinks under one billion for the first time. Is that result related to shrinking relative value of the now-not-quite-so-robust dollar?
Bubble, bubble, double trouble . . . .
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