By FERNANDO NOGUEIRA DA COSTA*
Trend following is an investment strategy with attempts to capture gains by following the current direction of prices
There is nothing more capable of destroying self-esteem than an abusive relationship in marriage on the part of a partner. The unfortunate financialization does not complain about physical abuse, but rather that aggression that is invisible and difficult to identify.
Verbal abuse is not the only form suffered by poor (sic) financialization in the face of its staunch critic: the Manichaean. Initially, to win her over, he appealed to depend on her for his survival as an author. Afterwards, he began to adopt some repetitive patterns in all abusive relationships.
The emotional abuse of those who only show hatred for the poor thing is revealed in several signs: frequent humiliation and shame in the face of other epiphenomena such as globalization, deindustrialization and neoliberalism; threat of punishment against his partner for actions he considers wrong; never give up control, both over her actions and over important economic decisions. He accuses and blames her for things she is not to blame for like globalization, deindustrialization, covid, etc. The Manichaean does not miss the chance to show his disapproval of all her institutional innovations.
The “sorcerer’s apprentice” metaphor to describe how financial development unwittingly turned into uncontrollable and evil financialization is apt. This transformation would have occurred due to a combination of factors, including the lack of complete understanding of financial mechanisms, the search for short-term profit and the inadequacy of regulations.
Many critics of financialization demonstrate a lack of complete understanding of the complexity of financial products. There are modern derivatives that are difficult to understand and not even financial market professionals fully understand the risks associated with them in the future.
The interconnectedness of global financial markets amplifies small local problems into large-scale financial crises, something difficult for the controlling Manichaean to anticipate. It turns financialization into a “scapegoat” for the fact that executives and financial managers are under pressure to present results in the short term. It would lead “the poor things” to take excessive risks and neglect responsible financial practices.
He accuses the seduction of “financialization” of causing excessive speculation and the search for quick profits. Bingeing on it would divert resources from productive investments, contributing to financial bubbles and subsequent crises. Your jealousy is visible!
The fan of the command economy always, even in a market economy, criticizes the inadequacy of regulations, full of loopholes against the free market used by financialization. The rules do not keep up with its continuous financial innovation, creating loopholes that it exploits in order to “jump the fence” and increase systemic risks that cannot be prevented through diversification.
Worse, it is accused of exerting excessive influence over regulatory bodies! It obtains regulations favorable to its financial interests to the detriment of the interests of “good” businesspeople because they are employers…
Its excessive focus on the financial system, captivating all economic agents as customers, would lead to a concentration of wealth and increase inequality. Financialization would increase the volatility of financial markets and the frequency of financial crises, “shooting ourselves in the foot” and negatively affecting the real economy and society in general, accuses the Manichean.
To prevent financial development from transforming, in accordance with systemic evolution, into uncontrolled financialization, his preaching is for the State to adopt a holistic and systemic approach. But financialization itself would be in favor of Financial Education for its offspring, professionals and the general public, to improve their understanding of their financial mechanisms…
The Manichaean believes that proactive regulation capable of restricting all financial innovation and mitigating systemic risks is politically viable. Policymakers would easily create incentive structures to promote sustainable financial practices in the long term.
It is in favor of strengthening institutions such as BCB, CVM and SUSEP, to monitor and supervise financialization, detecting its signs of excessive seductive behavior. By adopting measures of financial repression, paradoxically, the Manichaean would only encourage healthy financial development by supporting the real economy and avoiding the dangers of crazy financialization.
Contradictorily, it recognizes the distribution of dividends to be the most relevant for controlling shareholders because they stimulate the appreciation of shares and capital gains. Even so, it claims that financialization has discouraged the productive sector under the dominance of non-financial companies with public capital…
Controlling shareholders prefer strategies capable of boosting share value. Share repurchases (buybacks) are blamed for increasing share prices by reducing the number of shares in circulation. Capital gains from selling shares are more tax advantageous because they are taxed at lower rates compared to dividends.
Executives and controlling shareholders have compensation linked to share performance, encouraging strategies to increase their price in the short term. Hence the Manichaean accuses the partner of misappropriation of resources, short-termism, speculation, causing inequality and instability, etc. He says nothing about the profits made in his beloved market for goods and services.
The generation of profits from productive activity and the consequent distribution of dividends are certainly fundamental factors in the evaluation and appreciation of a company's shares. A company's performance, recorded in its balance sheet, is a key factor in evaluating its shares.
Dividends provide direct income to shareholders and are seen as a sign of stability and confidence in the company's financial health. Publicly traded companies, when distributing dividends consistently, tend to be more attractive to investors looking for stable income.
From this point of view, the staunch critic of financialization should make the distinction between “following trends” (trend following) and “investing in value” (value investing). These are strategies that can be associated, respectively, with the concepts of financialization and financial development.
Trend following is an investment strategy with attempts to capture gains by following the current price direction. Traders follow trends when they buy rising assets and sell falling assets, basing their decisions on market price and volume patterns.
This strategy involves short-term operations, responding quickly to price changes. Uses technical analysis (chartists) and algorithms to identify and follow trends. It focuses on market behavior and price movement rather than looking at the economic fundamentals of the underlying assets.
Trend following is seen as an aspect of financialization because the emphasis is on short-term financial gain through asset trading. This approach would shift the focus away from fundamental economic development and intrinsic value analysis, prioritizing quick and speculative gains.
Value investing, in turn, is an investment strategy in which undervalued assets are purchased based on a detailed analysis of their microeconomic, sectoral and macroeconomic fundamentals. These value investors purchase stocks trading at prices lower than their intrinsic value.
This strategy would be more aligned with financial development in the long term, as it involves the allocation of capital into productive assets based on fundamental analysis, instead of just seeking speculative gains. Therefore, the Manichaean sees “following trends” as being “evil” because it is an expression of financialization, while “investing in value” would represent a “good” approach based on promoting financial development.
The poor thing about financialization claims, in its defense, that arbitration and speculation play crucial roles in the formation of informative prices. Arbitrageurs eliminate price discrepancies and increase market efficiency, while speculators help with price discovery and provide liquidity in hedging trades (hedge). Both processes benefit value investors with investments based on solid fundamentals of productive companies. The Manichaean doesn't listen to her... sniff, sniff...
*Fernando Nogueira da Costa He is a full professor at the Institute of Economics at Unicamp. Author, among other books, of Brazil of banks (EDUSP). [https://amzn.to/4dvKtBb]
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