The 19th century naturalist's statement doesn't apply only to evolution but also to any form of competition. I extend this to corporations and to individual's life in general. Firms that can adapt themselves to evolving global economic scenario and can restructure their business models, will not only be the ones to survive but also generate sustainable risk adjusted returns.
In this context the bailouts by US government is irrational. One cannot get out of recession by pumping money into every unfit corporation. If its that simple, every society across history would have printed away to prosperity. US government crystalizes the essence of american consumerism - "Borrow money that we don't have to spend on things we don't need". They are expanding the liabilities on their balance sheet, against assets they don't have; to bailout unfit corporations the economy and society don't need. Irving Fisher and notable economists would argue that quantitative easing and bailouts prevent a rise in deflation, a catalyst in the great depression of 1930s. But by solving one problem they create another one. Ultimately it is the US government bond holder who will feel the pinch, either through rates or through fx or both. Pimco in their recent investment outlook have also substantiated this viewpoint.
Warren Buffet's adage that when the tide runs out we know who has been swimming naked has never been more true. Madoff's ponzi scandal is an instance in point. Trading and investing is a zero-sum game; somebody wins and somebody has to lose. The ponzi scheme also substantiates my point in the previous article on how regulations and growth in society are orthogonal. The question I ask myself is what has happened to corporate ethics and righteousness. In the light of Enron scandal, corporations seems to have learned what could be done but not what should not be done. Its ironic that the Indian software firm that was involved in fraudulent accounting was named Satyam, which stands for truth in Sanskrit. I believe there are more rats under the carpet and I hope the regulators become more watchful. I would like to highlight two particular cases that caught my eye.
Firstly, the accuracy of the important economic data is under the microscope. The revisions to previous non-farm payrolls numbers have been massive in the last few months. The original release of true numbers would have caused massive disruptions as the market would have realized the depth of the problem. Are the government and policy makers tweaking the numbers to portray a diluted picture of the problem? Many would recollect Bill Gross questioning the validity of the CPI numbers in the summer of 08. Secondly, the nature of profitability of some hedge funds raises my eyebrow. Renaissance's flagship medallion fund open only to employees returned 58% while the funds open to investors are down 20%. I don't need a Kalman filtered momentum based diffusion model to tell me that it smells fishy. In my opinion when market turned rough in 2008, all in-the-money trades were classified under medallion while the rest were borne by investors. I might be wrong on both of these cases, but only time will tell.
In 1968 Sevan Schreiber in his book "The American Challenge" foresaw massive increase in productivity that by 2000, society will be working 7 hours a day, 4 days a week with 13 weeks of paid vacation. What went wrong? If anything the current generation is working longer hours than its predecessors ever did. The challenge for mankind is to get this process of increasing productivity restarted. Its tough, long drawn and requires reshaping the mentality of society. You can leverage up in housing or in credit, but as long as technology and productivity doesn't improve the real growth in economy, there will be bubbles.
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