the win-win game

Clara Figueiredo, the false choice, digital photomontage, 2020


Whether heads or tails, the Minister of Economy and the President of the Central Bank win on both sides of the coin

The first week of October 2021 began with “The World” (sic) without digital communication. Around 2,9 billion people were left without access to WhatsApp and Instagram networks and Facebook due to a failure in routine maintenance on its data center. The volume of monthly users of its services jumped from 5,2% of the world's population in 2009 to 35,9% in 2020, according to data from the consultancy The report of Statista.

The worst blackout in the history of the social network caused a drop of 4,89% (from US$ 343/share to US$ 326/share) in shares of the Facebook on Monday. Equivalent to a loss of market value of US$ 47,3 billion. A big tech it did not fully recover the next day, although its shares closed up 2,06% ($333/share).

Before, its market value was US$ 920 billion or about 2/3 of Brazil's GDP. In a few hours, the personal fortune of Mark Zuckerberg, co-founder and CEO of Facebook, has shrunk by nearly $7 billion. With US$ 120,9 billion, he now occupies the 5th place in the ranking of the world's greatest fortunes, behind Bill Gates, from Microsoft.

The episode, once again, reveals the volatility of the assessment of shareholder wealth by “shareholders' expectations about their own expectations”. Any factoid leads to the activation of the “stop loss”, that is, the loss on the sale of the shares is immediately stopped in order to repurchase them later on at a much lower price, registering a capital gain.

This herd behavior, based on impressions, without further analysis of the company's microeconomic, sectoral or macroeconomic foundations, reveals a fundamental difference between the capital market economy and the debt economy, whether public or private. The possibility of accumulating personal wealth, by leading the herd according to their interests, is much greater in that one.

For example, the total value of global M&A deals ended the third quarter of 2021 at US$3,8 trillion, according to data from Bloomberg. With that, volume in 2021 is just a few hundred billion dollars short of surpassing the annual record of $4,1 trillion set in 2007.

In a context of global crisis, with poor economic fundamentals, transactions based on technology are leading, as companies from all sectors adapt their businesses to the Digital Era. This goal of gaining access to disruptive technology through acquisitions has stimulated activity in the $1 billion to $10 billion range.

Yields on US Treasury bonds rose, with investors anticipating the Federal Reserve (Fed, the US central bank) may raise basic interest rates to contain the year's high inflationary pressure: 5,3% there. When the interest paid on new government bonds rises, the prices of outstanding bonds with lower interest rates fall.

Losses in the two major asset classes (stocks and government bonds) led to a September 3,5 drop of 2021% in typical US investment portfolios, with the ratio of 60% in equities and 40 % in bonuses. The 60/40 mix has not seen such a big loss since the 5% drop in the March 2020 crash, the start of the pandemic.

The 60/40 strategy reveals majority stakes in stocks with exposure to risk in companies with good earnings and dividend prospects. In return for this variable income, a smaller percentage is charged in sovereign risk fixed income. This selection of the asset portfolio acts as a compensatory protection, when the rise in interest rates causes fluctuations in the stock market.

In the 2010s, in the US, the 60/40 portfolio provided an annualized return of 10,2%. Last year, it earned investors a gain of 15,3%.

According to data from Meta Asset, the Brazilian stock market is small, with the capitalization of publicly traded companies representing only 70% of GDP against 190% in the US. However, with the Selic falling to its 2% pa last year, the behavior of a flight herd from fixed income to variable income raised the number of individual investors in B3 from 814 thousand in 2018 to 3,97 million in September 2021.

The value holdings of individual investors increased from 18,2% in 2019 to 21,3% in 2020, but has already fallen to 19,5% in the monthly average for the current year through 30/09/21. On the other hand, those of institutional investors fell in these three years: 31,5%-27,3%-25,6%. And those of foreign investors rose: 45,1%-46,6%-49,5%.

With the management of third-party resources, investment funds add up to BRL 6,8 trillion in equity or 85% of the Brazilian GDP. In January 1995, the volume invested in fixed income funds corresponded to 84% of the total, while the amount invested in variable income funds reached only 2%. Currently, this reaches 10%.

Brazil is far below international standards for equity investment. In Europe, on average, the participation of equity funds in the total reaches 30%, while in the US this number reaches 55%. This country appears to have the only true Capital Market Economy in the world.

Brazilian investors, in general, opt for the accumulation of financial reserves in fixed income, given the absurd Brazilian interest rate compared to the rest of the world. Last year was an exception to prove the rule.

With the signaling of the downward trend of the Selic, the Ibovespa reached 115.645 points in 2019 (a variation of 31,6%), but in the year of the “pandemic pandemonium” it did not rise so much: 119.017 (2,9%). This year, until 01/10/21, it has already dropped to 112.900 (-5,1%).

On the eve of the “Blackout of Whatsapp” was revealed by vehicles such as the magazine Piauí and the newspaper El País, participants in the project of the International Consortium of Investigative Journalists, the ICIJ, the documents of the pandora papers, investigation into tax havens, promoted by the consortium. In 2015, Brazil's economy minister had $9,5 million in one of them. With its economic policy, which provoked the depreciation of the national currency, its bet in dollars is worth approximately R$ 51 million in current values. The conflict of interests is as serious as that of the president of the Central Bank of Brazil (BCB), ultimately responsible for Brazilian exchange rate policy.

In the “win-win” game, they made a currency hedge by being “bought” in dollars and “sold” in reais. “Let's agree”: with the National Monetary Council (CMN), to which the BCB is subordinated, reduced to two, if they decide to raise the Selic, they increase their invested fortunes in Brazil, if they allow the national currency to depreciate, they increase their dollar deposits abroad.

Like financial market speculators, they deliberately keep their exchange positions open: they sell currencies in which they anticipate depreciation and buy currencies in which they anticipate appreciation. Speculation consists of holding foreign exchange in the hope of realizing exchange gains at a later date. Nothing better, for this result, “sacrificing oneself personally in rendering public service for the good of the Country”… (laughs).

A Capital Market Economy, the dream of the neoliberal team of the Ministry of Economy in Brazil, is different from an Economy of Public or Bank Debt. there we States, low interest rates cause an asset bubble and greater concentration of wealth. Here, last year, there was a mockery of that last year. The result: flight from fixed income to risky assets: stocks and… the dollar!

In his recently published book in the US, Engine of Inequality: The Fed and the Future of Wealth in America [Engine of Inequality], Karen Petrou contests Keynesian wisdom: the longer rates remain ultra-low, the economy will not grow again, but social inequality will continue to grow. As of early 2021, the richest 1% of Americans own 32% of the nation's wealth, their highest level since these records began in 1989. The poorest 50%, meanwhile, own just 2% of the nation's wealth .

Since the start of 2020, the poorest 50% of Americans have gained $700 billion in wealth. In the same period, the richest 1% earned $10 trillion.

With facts and arguments, Petrou defended the hypothesis in his book: the Fed controls the flow of money – and it flows to the rich. Assets, withdrawn by the Fed from the economy as part of QE [Quantitative Easing or Monetary Easing], are replaced in working currency: $8,1 trillion or about 1/3 of US GDP.

While the Fed's massive, QE-based portfolio initially averted even worse economic chaos, when the financial crises of 2008 and 2020 hit, its benefits over time were tenfold to stock market prices. Without government projects, they did not contribute to economic recovery.

Ultra-low interest rates are designed to stimulate income and job growth. But they cease to have a beneficial effect when they fall so much as to distort incentives for the poorest to have a financial reserve in fixed income. Instead, they directed the flow of money into speculative investment, such as stocks or Bitcoin. Companies capitalize, buy back shares, but do not invest in production.

Many Americans own stocks, but most shares (54%) are owned by the top 1% and most of the rest by the next 9%. Karen Petrou reports that 86% of them are in the hands of the richest 10% in the United States.

When the Minister of Economy and the President of the Central Bank of Brazil took office, on 02/01/19, the dollar exchange rate was R$3,86. On 01/10/21, before the scandal, it was at R$ 5,39. On the following Friday (08/10/21), it already reached R$ 3,51, that is, in the “heads or tails game”, they win on both sides of the coin.

*Fernando Nogueira da Costa He is a full professor at the Institute of Economics at Unicamp. Author, among other books, of Economic Policy and Planning.

Originally published on GGN newspaper.


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