At a speech today in Washington, Greece' Prime Minister Papandreou said
"Europe and America must say ‘enough is enough’ to those speculators who only place value on immediate returns, with utter disregard for the consequences on the larger economic system. An ongoing euro crisis could cause a domino effect, driving up borrowing costs for other countries with large deficits and causing volatility in bond and currency rates across the world.”
Why of course, it must be Wall Street causing Greece's problems! Greece would never fail to mismanage its finances all by itself. There are never any real consequences to recklessly running the country into the ground. The only reason this is a problem is because of "those speculators". [end sarcasm]
Dear Prime Minister, speculators have not caused your woes. Speculators are honestly and transparently trying to profit from the likely outcome of your mismanagement. Others are simply buying insurance of sorts to protect their investments in your country and perhaps the EU in general, but are no doubt being lumped into the "speculator" category anyway. Just as "everyone" sought non-US assets and investments over the past half decade on the notion that the American trade deficit was unsustainable, investors are doing the same with Greece and Europe. This is not some evil, unnecessary, unproductive speculative orgy. Rather, it is the prudent allocation of capital. Your country is currently not fit for investing capital and thus investors (and yes, speculators too) are seeking ways to adjust and profit rather than fund your mismanagement.
Furthermore, you have cause and effect reversed, dear Sir. Investors are seeking to protect or profit from fundamental events; they are not causing the fundamental events to occur. The fundamentals were under your control and trying to regulate other parties into supporting your failed policies won't work. Just as a falling dollar was part of the "fix" for the U.S. trade deficit, an inability to borrow more is part of the fix for your profligate spending. This is how market based capitalism works.
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Yet Europe is not alone in its illogical indictment of "speculators". The U.S. Justice Department is investigating "whether hedge funds might have banded together to drive down the value of the Euro" according to the WSJ. The investigation began immediately after the Journal published an article on a group of hedge funds that discussed bearish Euro bets at an "idea dinner". Such a gathering is where investors get together to discuss, you guessed it, potentially good investment ideas. To better frame this, I'll quote from the WSJ explanation:
"whether such information-sharing constitutes collusion...Charges relating to collusion on Wall Street have been a rarity because of the difficulty of providing that firms intentionally sought to act together and acted nefariously."
Now, I used to go to investment conferences all the time. Along with 500 or so other investors, we would listen to industry experts, analysts and management present on their companies. The whole idea of these conferences is to provide investors with investment ideas. Was that collusion? How about when an investment letter advises all its readers to buy a certain stock. Is this nefarious too?
Perhaps the biggest reason this investigation is complete nonsense and a total waste of taxpayer money is that the Euro is one of the largest and most liquid markets on Earth (but I hear that trading in catastrophe derivatives hits a feverish level on Jupiter when great red spot activity is pronounced). The Euro trades some $1.1 trillion per day. Yes, that is per day. How could any group possibly be significant enough to make the slightest dent in such a market? Let's say the hedge funds involved manage $100 billion. And let's further say they decide to commit 100% of their capital to this trade, which would never happen in any circumstance (it would probably never exceed even 10%, but play along...) Finally, let them leverage that trade 20:1. Such a massive bet would result in just slightly more than two days' worth of trading in the Euro. That's it. Hardly enough to move the needle. This is a little like saying your toddler should be investigated by the EPA for dumping because they urinated in the lake.
Brilliant post, Brett! Where DO you get your ideas?
ReplyDeleteA little bird whispers them to me :-P
ReplyDeleteJust because speculators get scape-goated, it doesn't mean they aren't the cause of problems in some other markets. Take energy futures for instance. Speculators in energy futures have no actual ability to use the the energy they are purchasing and so their trading destabilizes the market as they create bubble after bubble.
ReplyDelete"some other markets" is indeed right. Energy- specifically recently deregulated California and Enron's involvement- is a VERY illiquid and inefficient market. The deregulation was highly flawed and the structure of the market was conducive to abuse. However, the Euro and currencies, the general stock market, bond market, etc are plenty capable of accommodating speculation. You have to distinguish between oceans and ponds (or bird-baths as in the CA energy market debacle).
ReplyDelete