Doctor, Doctor, Give Me the News: the Decline of Finance
As if the stalemate in the Super Committee weren’t enough to worry U.S. investors, speakers at the recent Investing Conference held at the University of Virginia Darden School of Business (co-sponsored by CFA Institute) were abundantly clear that this is just one of many problems threatening the global financial system. Debt crises in Europe and Japan, not to mention demographic and loan problems in China, all were creating a systemic vortex that might be worse even than 2008. It was not a conference for the easily depressed.
Presentations by luminaries such as Paul Singer (Elliot Management Corporation), Vincent Reinhart (Morgan Stanley) Steven Galbraith (Maverick Capital), Peter Fisher (BlackRock), and Kyle Bass (Hayman Capital Management) offered unsettling assessments of where we stand — both as a nation and as a global participant in a financial world that appears to be disintegrating as we know it. As one speaker reminded everyone, the U.S. just experienced the ninth-largest contraction in the last 100 years and just finished the “second-worst decade ever” for stocks. All this as Greece teetered, and Italy’s bond yields floated to new heights.
Given the intricacies of the current financial situation both in the United States and in Europe, conference presenters addressed issues ranging from a global historical perspective (the regularity of a 40-50-year fiscal cycle, with a decade of volatility usually following an economic crisis) to the socio-economic (the challenge of implementing stimulus and austerity measures at the same time). Dodd-Frank was declared a failure, with at least one speaker predicting that, because of it, the next crisis will be “faster and much more intense.” And policies focused on raising bank capital requirements in the middle of a financial crisis were resoundingly criticized.
What lies at the bottom of the rubble? Certainly there appears to be a loss of confidence among investors in the U.S. that anyone in public office knows how to, or can effect, a solution, especially given the current political polarization in the U.S. Congress. Investing has become dramatically short term (four months on average, in some sectors, prompting the “rent” vs. “buy” label). The corporate culture has disintegrated as top executives are paid to jump firms and the board-of-director model is “utterly broken,” evidenced by the lack of knowledge of, and involvement in, company practices prior to the 2008 meltdown. And that’s just in the U.S.
But it is no longer just what the U.S. must fix these days, as most experts agree that no one country can go it alone. As former CIA Director George Tenet—now managing director at Allen & Company —reviewed major country/continent developments and their effect on the current situation, it became patently clear that we share a tenuous web of interdependency on many levels.
So what does the future map look like? The Eurozone is not predicted to last, with Portugal, Italy, Greece, and Spain cited most often for imminent leave taking. Europe has “no chance of avoiding” a recession, Japan teeters as it struggles with its debt, and Spain struggles with youth unemployment numbers hovering at 40 percent.
Where, oh where, is the silver lining to this period of fiscal and political unrest in which we live? Emerging markets, for one, are “no longer the fringe” as they do not have to recover from the economic crises of more established economies. And as some countries are forced to embrace austerity measures, perhaps others will volunteer to shave excess debt and spending before being forced to. Not likely, advises one speaker, given the human nature instinct for “magical thinking.” Harsh medicine. But then again, these are unprecedented times.