American Optimism

Many times I've been asked what people in other countries think of the United States and I have always struggled with how to really answer that question without having an hour long conversation. Last night on Bill Maher show NY Times columnist Thomas Friedman answered that question in the most eloquent way that I have heard so far:

Faith in market forces--root cause for current economic turmoil?

As the whole world is concerned about the global slowdown and the leaders of various countries work to weather the recent crisis that sent stocks into a steep decline, billionaire investor George Soros blames the turmoil on the faith in market forces. He believes that “the notion that markets are self-correcting is what led to the massive expansion of debt financing that culminated in sub-prime mortgages that epitomized the easy-money mentality at the root of the disaster.” He added that that this whole notion is built on false conceptions. According to Soros, it is this belief that became the dominant creed and this then led to the globalization of markets, the deregulation of markets and the increased use of leverage and all the financial engineering.
I think Soros’ opinion is a very extreme one. I feel like its not so simple to question the whole concept of markets being self-correcting. I would like to believe that the markets are what have the power and that it is the market forces of demand and supply that guide the economy. I wonder what everyone else has to say about Soros’ stand.

the middle market is doing suprisingly well

So i spoke to my old boss today, who owns a small investment banking boutique firm in Philly, and the news wasn't all bad.. 

The credit crunch and all its related problems have surprisingly affected only the top tier of companies, companies that are huge in relative size and are highly leveraged up. This firm just recently closed two deals, and have been able to secure reasonable financing for these mergers/acquisitions. Ofcourse, these companies are smaller in size, with their estimated value ranging from $30 mm to $200 mm. 

So what I took from this conversation with him was that there is a sizable amount of capital in the market. Private equity firms are flush with new capital, cuz investors have removed chunks of capital from the stock market, and are investing it with these private equity firms, which are not publicly traded, hence not affected by SEC disclosure regulations; maintain a healthy investment portfolio with companies that they directly control, and have enough clout in the banking industry to command good financing rates. 

Its amazing. My boss tells me his business is doing better than ever, while the market tells me that business couldn't be worse. 

Contrary to my prior held belief that as big firms have lower risk and greater access to financing, they are a better investment choice, I now am leaning towards the belief that smaller, better managed firms with private equity investors at their helm are a better investment choice. 

At least in this market, atleast for the next 2 years..