Thursday, January 24, 2008

Market behaviour - Is Wealth Concentration a risk?

The world markets have taken a beating for a few trading sessions. We are all confounded by the speed, breadth and uniformity in the correction. As usual, yours truly already expressed it long ago (!) with loads of hypotheses and un-correlated facts. So lets start looking at one out of those - my favourite - Wealth Concentration!

Wealth concentration has increased
The past two decades has created lot of substantially wealthy and globally connected individuals/families. Their numbers were always increasing, but they may have crossed a certain potency threshold in terms of numbers and size of wealth available with each.
And they are connected - creating a super machine!
Thanks to information age, these individuals are now better connected globally. This new found strength enables investors to create companies, investment vehicles, repatriate profits and in general take more risks, faster. This is, in part, the source of complex corporate structure and ever-more complicated investment products.
Financial System, Infrastructure is old
Financial sector infrastructure, designed along national lines in a non-globalized era, is not able to grasp the increasing complexities of the newly globalized investment playground. The regulators still have to develop a "court sense". The current systems cannot control the high velocity international money movements generated by these investors.
The investors themselves don't know the risks
While these investors are (Wall) street smart, they are not the smartest! They are faced with unfathomable complexity - posed by globalization of products, services, capital and concurrent nationalisation of labour, consumption, markets (since driven by national regulators with nation-based systems).
We have just realised US housing markets, Australian banks, Chinese regulators and European central bankers are lot closer than we could have anticipated.
In Sum..
Globalisation has brought forth new set of complexities that are still difficult to gauge. Further wealth concentration have created high mass (volume) - high velocity monetary movements accentuated by innovative structures that can compromise the current financial systems. High velocity, high volume money flow can create "Shock-and-Awe" impact on many asset markets. Consequently, risk has increased many-fold.