EMAIL FROM AMERICA (10): Hedge fund managers run riot

Tracking the chaos...

A confluence of events in the early 1980's combined to produce an interesting result in the finance sector.

One was technological, in that the innovation in satellites and computers suddenly meant that assets could be moved around the world, virtually instantly. This reduced loyalty to any country or entity.

A second facet was an after-effect of the oil embargoes of the 1970's, which helped to drive up inflation. In those far-off halcyon days, it was common for workers to receive 'cost of living' adjustments annually. For many who were not hit as hard by inflation, this often meant a lot more disposable income, and lots of encouragement to invest that money.

A third was the decline of the unions, which took with them a lot of pension plans. Companies then copied this and replaced many white collar pension plans with 'portable' 401k plans.

Combined, these opened the niche market of investment to a whole new generation of hedge fund and mutual fund managers.

These fund managers (and their managers) have creamed off many of the gains of increased productivity in the past 40 years, to the point where they and their clients in the top 1% gain 60% of the passive gains in the economy, in what the economists call 'rent seeking'.

That group is in a position to completely dominate the economy. Thanks to their rented politicians, those passive income gains are taxed at a much lower rate than regular income. Notably, if the Republicans gain the majority, they have promised to try to eliminate those taxes entirely, as well as estate taxes, thus cementing the wealth into certain families for generations.

The wealthiest managers also have the power to effectively mint money. In a recent case, one of them bought rather a lot of stock in a certain fruit-memed tech company, and used that influence to force stock buybacks and layoffs, doubling their investment, but cutting the company's plans for innovation.

In short, there is a very small set of very rich people who have so much money on paper that they cannot spend it without crashing the market. So, what many are doing is buying massive numbers of assets using those stocks as collateral. The bad part is that they seem to expect those assets to produce income at the same rate as the stock market, which means that they are being pushed to destruction. Purchases include:

• pharmaceutical companies (resulting in huge price increases in many drugs, including insulin)
• restaurant chains such as Wendy's hamburgers
• medical testing facilities
• hospital systems
• medical groups (whose doctors are then reimbursed less and pushed for more 'output')
• dental groups (many of which are 'encouraged' to do things such as unnecessary root canal work)
• trailer parks (where many of the poorest live. They cannot move their trailers, so can be easily subjected to higher rents and maintenance fees)
• homes, especially in the Sun Belt (many are bought sight-unseen the instant that they go on the market, often for tens of thousands more than the asking price, then becoming very expensive rentals)

And the list goes on. All in all, it reminds me of the aristocracy in France and Spain up through the 19th century, for whom things did not turn out so well.