A Systemic Capital Redirection Strategy Is Our Only Hope

Three years into this epochal crisis and still not much light at the end of the tunnel. The “advanced economies” of the Western world have imploded. The celebrated concept that market forces would balance things out, the “efficient markets hypothesis”, is no longer working and proved to be unsound. Same for the other pillar of most modern economics: the rational expectations theory. It was devastating to believe that globalization would strictly favor the West: the opposite took place. The world has entered uncharted territory and needs new economics. Yet, it has difficulty in admitting it and is resisting necessary and inescapable changes.

Most Wanted: Leadership and Courage

Three years into this epochal crisis and still not much light at the end of the tunnel. However we can now see what has worked – or at least taken the pressure off – and what still needs to be done.

Beyond Short Term Emergency: A Risk Strategy for the Future

The world seems to have lost its ability to reason and to gain a sensible perspective in several sectors of human activity including world football tournaments. Recent events of the latter became leading indicators of what is happening in the global economy.

So, with cameras placed all around the world in their millions, on sport pitches, and in our cities, with London now placing them at every possible corner and street (bye-bye to English privacy!), we instead allow world football games to disregard simple technology (which by the way is already there) generating transnational upheaval.

Time Horizon and Capital Flows Redirection for Growth

As recent events demonstrate, the world is still in crisis and having to deal with recurrent emergencies.

I summarize here the logical sequence for developing the instrument to re-establish a sustainable economic growth path: “Operation Direct Growth”.

This is the umbrella term definition that I use to identify a variety of capital redirection schemes necessary to reverse the current spiral downturn.

Operation Direct Growth: The New Avenue to Redevelop the Real Economy

The historical opportunity for principled investors to take the leadership and the blueprint to reform the world

How to regenerate a Wave of New Prosperity: The fundamentals

Notwithstanding the rebound of the world markets, the current structural global crisis is far from being over. Furthermore, it seems that new distortions and “asset bubbles” are being recreated. Commodities and oil prices are dangerously inflated. While governments and public institutions continue in their struggle to support the financial system and to avoid an economic catastrophe, there is a huge gap and an opportunity for investors with integrity and high ethical standards to take the lead. These are Pension Funds, Endowments and Foundations, Sovereign Wealth Funds, Supranationals, Central Banks, cash rich councils, and institutional investors.

Two fundamental factors emerge clear and assume critical relevance.

The first one is the “cash constipation” of such institutional investors with free capital. Their problem is how to protect their declining assets and to identify new sources of yield and diversification to preserve their goals. Their risk is failing in their fundamental scope.

The second is the “capital starvation” of the real economy. i.e. the persistence of a deteriorating environment for “sound” enterprises and infrastructure projects, because of declining demand, fall in the level of confidence and trust, withdrawal of the banks’ support, etc… These companies and infrastructure projects now need resources, a strategic support to embrace new business models, to produce new sustainable offerings, and to insure long-term operations. Their risk of failure would further delay any form of possible recovery and deepen the current economic depression.

The legacy intermediaries, that traditionally favored the exchange and flow between those who had free capital and those who needed it, are frozen, technically in default and not in condition of providing such vital function. Furthermore, their business model is in tatters.

Hence, the strong players with long-term views and objectives find themselves not only in a highly superior and privileged position for the extreme widespread scarcity of capital and absence of willingness to invest it. These institutions face now a heavy responsibility and an opportunity: to take on the task of “financing” directly those meritable enterprises and projects with sound credit worthiness in their endeavors to respond to the challenges of a more balanced and sustainable development.

“Direct Investing”: a New Asset Class

I am proposing what is effectively a new investment category, which does not exploit the owner in terms of fees, governance, control and transparency.

This new asset class is necessary and made possible because of the dire unprecedented circumstances, and it is facilitated by technological and informational advancement.

“Operation Direct Growth”, is a strategic plan that focuses on the “direct reallocation of capital use” between long-term investment institutions with surpluses and real economy firms in sound conditions and prospects that yet need further resources and support.

There will be no intermediaries in the exchange. The main actors of this scheme will be a consortium of institutional investors, among Pension Funds, Central Banks, Endowments, Sovereign Wealth Funds, and Supranationals. The savings and efficiencies of this new “Direct Investments” will be considerable. This will regenerate a new wave of real economic growth and at the same time produce better guarantees of returns for the investors. It will ignite a virtuous circle, a return to hire people, reestablishing a circuit of confidence and trust, and the opportunity to stimulate a sustainable balanced and ethical growth. 

How to Generate a New Wave of Prosperity. The formula of mixed government and private investments to reform the world, Part III

Average Shortfall and downside risk analysis: basic tools for a new enterprise model

The further deepening, spreading and the intricacies of the global financial crisis, show the catastrophic consequences of an over excessive use of short term statistical yardsticks of return and of single models to evaluate investments, economic activity, and to be de facto the pillars and lighthouses of our economies, political and social systems.

Financial risk management should instead involve avoiding adverse performance over a specified time horizon rather than maximizing short term returns.

How to Generate a New Wave of Prosperity. The formula of mixed government and private investments to reform the world, Part II

This article is the continuation of: How to Generate a New Wave of Prosperity. The formula of mixed government and private investments to reform the world.  RGE Monitor, 26 Nov 08 Never in the Dark Again.  Central Banks face the challenge of recovering global financial stability. Their opportunity is to gain a higher information level, […]

How to Generate a New Wave of Prosperity. The formula of mixed government and private investments to reform the world

Can we learn from the “Italian Miracle” Formula?

In the 1960s, while the Italian economy was booming, such to talk of “The Italian Economic Miracle”, IRI – Istituto per la Ricostruzione Industriale S.p.A. – was among its most important factors[1].  The IRI, (Institute of Industrial Reconstruction) was a conglomerate owned by the Italian government and inherited by the Great Depression period.  By the 1960’s it was growing at rates that were more than double those of the national economy and it was once the largest non-oil producing company in the world outside the United States. It had stakes in a multitude of sectors of the Italian economy, ranging from infrastructure and manufacturing to telecommunications.