Who’s the most important economist on earth?
The answer to that question used to be simple – Alan Greenspan. God created heaven and earth. But Greenspan created the Great Bubbles – first in stocks… then in housing…and now in art, watches, private aircraft, yachts, commercial properties, emerging markets, hedge funds, derivatives, private equity… and much, much more.
But now Alan Greenspan is out making speeches… and Ben Bernanke has to tend the bubbles, sweating what to do to keep them from blowing up.
So, who’s the most powerful economist now?
Zhou Xiaochuan, the head of the People’s Bank of China, is the man to watch. China is the world’s fastest-growing economy. It has the biggest pile of dollars in the world – more than one trillion of them. It also has the world’s most go-go stock market.
Friday, the Chinese stock market fell again. Zhou Xiaochuan and the People’s Bank had been warning The People that they were getting a little carried away. It has gotten so feverish in Chinathat postings on tips and rumors on online chatrooms are driving millions of retail investors. The central bank tried various measures to cool them down. But nothing seemed to work – until last week. Then, after they bank imposed a couple of more restrictions on stock trading, all of a sudden, The People caught a chill. The CSI 300 Index hit an all time high on May 29 – at a level 200% above where it was 10 months ago. Since then, it’s gone down 15%.
Looking back four score years, we wonder at the similarities. Then, the United States was the world’s most dynamic economy. And then it was the United States that had the biggest pile of money; it had half of the entire world’s central bank gold. And then, it was the United States that was eager to boost up the currency of the world’s aging imperial power, Britain, by providing additional dollar liquidity. And then it was this liquidity, which U.S. central banker Ben Strong had called “a little coup de whiskey,” that had sent the U.S. stock market soaring. And then the U.S. central bank tried to put the brakes on…and the whole system swerved out of control…ending in the Crash of ’29 and the Great Depression.
Now, we are absolutely sure – after spending Sunday afternoon in meditation on this subject – that Zhou Xiaochuan is a smart guy. He’s not going to do anything stupid. After all, he didn’t get to where he is by being dumb. True – Ben Strong was not exactly an idiot, either. And the fellow running British financial policy back in the ’20s was none other than Winston Churchill.
But we are all so much smarter now than our grandfathers were. The poor old coots thought the way to wealth was by working hard and saving your money. Today, we know that only saps would try to get rich that way. Now, we know better. Now we know the way to get wealthy is to buy something. A Chinese stock, for example. Or a painting by Francis Bacon. Or, almost anything. The thing in question inevitably goes up in price – 100%…200%…300%…and we’ve made some money.
Not to be too greedy about it, but the smart way to wealth is to leverage the purchase. Don’t put your whole wad down to buy the thing. Put down only, say, 10%. Borrow the rest of the money. So, when your Chinese stock triples, you don’t make 200% on your money…you make 2,900%. Now you’re talking!
As we were meditating on all this, a dark thought crossed our mind. How did we get so much more intelligent than our fathers and grandfathers? How come they didn’t invent the things that make our civilisation so comfortable and so productive – automobiles… internal combustion engines… telecommunications… airplanes… painless dentistry…globalization… electricity… air-conditioning… central banking… nuclear weapons… skyscrapers… TV… crispy duck… barrel-cured whiskey… the semi-colon… cotton underpants… or penicillin?
Oh… they did invent those things?
Okay, well, maybe they invented all the basic ingredients of modern life… Still, they didn’t invent YouTube! So you see, they must have been morons.
Then, another dark thought came upon us. If we’re all so much smarter…who is doing the SELLING? You get my meaning? If the smart people are all getting rich by buying things… from whom are they buying them? Don’t the sellers know what is going on?
We read in the paper that another huge hedge fund is biting the dust. The report had far too much detail for us, but what we were able to get out of it was that UBS put up a few billion dollars and set up a group called Dillon Read, with 250 employees, to do the trading. Then, this hedge fund company charged clients 3% of capital, plus 35% of performance. Typically, hedge funds charge “2 and 20” for their services. But these elevated fees helped the company pass out average annual bonuses of more than $1 million per employee.
The fund is now being closed down… after a bad month of trading left the group with millions in losses. When you have a group of 250 people trading… you will have losses. Sometimes, substantial losses. Even the alpha hedge fund – Goldman’s Alpha fund – lost money in the first quarter of this year, down 3.4%.
But what must investors think? They must believe that these new money shufflers are smarter than their grandfathers. Back in the days of our grandfathers, a person managing other peoples’ money could expect to earn a decent salary, and maybe even a small incentive bonus. But we’re all so much smarter now. We know how to manage money so much better… and how to charge clients for it. The financial world is now full of smart people in hedge funds… mutual funds… managed accounts… private equity. Every pool of money – including China’s Yangtze of cash – has to be managed by someone. And every manager is now a genius, who buys and sells and earns a fortune.
But who is on the other side of these trades? Who are the idiots they are trading against?
Markets and Money