Cycles, amplification and greed

Posted: 05 Jul 2007 23:51
Registered User Currently Offline	Posts: 16 Join Date: Feb 2007
Special interest groups create disproportionate or skewed outcomes and influence just about every facet of our economic lives. Take for instance an ideal democratic society, say with a mere 10 political parties vying for votes and the electorate. Naturally the more democratic a society is; conceivably the greater the number of party’s representative of the differentiated electorate. Lets say that the run up to the polls is a close affair for all parties – neck n’ neck. CNN and Bloomberg broadcast the tedious recounting and verifying for weeks on end. But of course one party ultimately wins by a nose or 0.25 % of the vote if you like. Now, with this feather in their cap, they are empowered (democratically!) to go about changing a few laws here and there, increasing taxes and (time permitting) drop a few bombs. So, over time they’re able to subtly change society and influence our way of life. Thus through the miracle of amplification a mere 10.25% of the population is able to influence 9 tenths of the populations way of life who didn’t necessarily agree with the policy. Amplification! The same can be said for special economic interests operating within the investment world. The stock market is said to be a large voting machine; efficient and Darwinian - able to dilute the individual wishes and strategies of the numerous participants. If the market were a pond, no great ripples would occur with all these players casting their own pebbles in. Well with some notable exceptions. Mutual funds, hedge funds, pension funds and private equity funds are an electorate with each of the member of the constituency collectively approving the apparent motives and electing the respective officials (fund management) using each dollar note as counting another vote. Thus the collective power of contributors is concentrated in the hands of a few. These giants in the sand box then make decisions-by-committee and financial moves sufficient to throw boulders and slabs of concrete into pond at a given moment. Thus creating not ripples, but waves sufficient to wet the pebble wielding public standing shore side. Big waves by a few. Amplification! Since the fund “electorate” is large, it is impractical to call for a general referendum on every decision needed to be made on a daily / weekly / monthly basis. So the fund manager is empowered to make is own decisions – within the constraints of the constitution and bill of rights (fund charter and mandate). Thus, he is afforded latitude. But like any constitution the laws may be open to “interpretation” (manipulation and loopholes) – after all, this is the reason for amendments to any evolving constitution. But in due course the fund manger has deviated sufficiently from the original wishes of his electorate, whilst still remaining “true” to his charter. There is even further amplification power wielded by fund managers. They may instead of using there concentrated power on a large battlefield (or a large pond if you like), concentrate it to a smaller point. They may hone in on an individual company, buy sufficient share in the enterprise, get board representation and shift direction of a good company, not to the aims of the original electorate, but to the aims of the individual “politician”. Amplification is part and parcel of the economic world. But amplification only takes us a tenth of the way. Absolute power corrupts absolutely and taste of undeserved power that amplification and collective concentration brings to the fund manager nurtures his greed. He wants more! But how can he possibly gain more power if there are no more electorate voters to cast their dollar votes and elect him to a higher office. Then he stumbles on it. Leverage!! – The evil cousin to Amplification. In true electioneering fashion, he borrows ghost votes and adds them to his roll. He borrows lots and lots of dollar votes, thereby increasing his power base and able to drop ever bigger rocks into the market pond. Larger amplification created by greed, facilitated by enormous debt and leading to excess. The influence of fund representation on company boards, albeit a fact of life, is not necessarily for the benefit of other shareholders. Shareholders care about good management. Good management nurtures good business practice. Good business practice itself yields investment in good assets and staff. Good assets and staff bring and retain customers. Good customers bring revenue and profit. Hence good management brings profits. But fund management influence interferes with the link between good business practice and investment in assets. The nature and level of asset investment is determined by management which in turn is determined by specialist knowledge of the company’s market. Fund managers very seldom have hands on experience with marketing and operations of the companies they invest in. By the very nature of their talent and job description they have experience in finance and investment. Within a business finance and investment function are only tools to facilitate the utilization of assets so Marketing and Operations can delight customers and create cash flow. Fund managers by interfering, meddle with the cash flow of a business. Scarborough