Sunday, April 27, 2008

Blast From The Past - The Malaysian Dilemma Part 6 of 6



by D.P. Pangai


This article conveyed his impression obtained from a meeting of money managers who collectively control several hundred billion (US) dollars he attended.

As he said, "Mainly I wanted to know why such smart men and women--and they must be smart because if they aren't smart, why are they rich?--do such foolish things.

Here's what I learned: the seven habits that help produce the anything-but-efficient markets that rule the world:

1. Think short term. A few people in that meeting tried to talk about the long term--say, about what kind of earnings growth U.S. corporations might be able to achieve over the next five years. This sort of thing was brushed aside as too academic. But wait: Any economist will tell you that even a short-term investor should look at the long run. This year's stock price depends on this year's earnings plus what people think the price will be next year. But next year's price will depend on next year's earnings plus what people next year expect the price to be the following year.... Today's price, then, should take into account earnings prospects well into the future. Try telling that to the practitioners.

2. Be greedy. Many of the people kept talking about how they expected a final "melt-up" in prices before the big correction and how they planned to ride the market up for a while longer. Well, maybe they were right, but if you really think stocks are overvalued, how confident should you be about your ability to time the inevitable plunge? Trying to get those extra few percent could be a very expensive proposition.

3. Believe in the greater fool. Several money managers argued that Asian markets have been oversold, but that one shouldn't buy in until those markets start to turn around--just as others argued that the U.S. market is overvalued, but they didn't plan to sell until the market started to weaken. The obvious question was, If it becomes clear to you that the market has turned around, won't it be clear to everyone else? Implicitly, they all seemed to believe that the strategy was safe, because there is always someone else dense enough not to notice until it really is too late.

4. Run with the herd. You might have expected that a group of investors would have been interested to hear contrarian views from someone who suggested that the U.S. is on the verge of serious inflationary problems, or that Japan is poised for a rapid economic recovery, or that the European Monetary Union is going to fail -- which would have offered a nice challenge to conventional wisdom. But no: The few timid contrarians were ridiculed. The group apparently wanted conventional wisdom reinforced, not challenged.

5. Overgeneralize. I was amazed to hear the group condemn Japanese companies as uncompetitive, atrociously managed, unable to focus on the bottomline. But surely it can't be true of all Japanese companies; guys who managed to export even at 80 yen to the dollar must have at least a few tricks up their sleeves. And wasn't it only a couple of years ago that Japanese management techniques were the subject of hundreds of adulatory books and articles? They were never really that good, but surely they are better than their current reputation.

6. Be trendy. I came to the meeting expecting to hear a lot about the New Economic Paradigm, which asserts that technology and globalization mean that all the old rules have been repealed, that the inflation-free growth of the past six years will continue indefinitely, that we are at the start of a 20-year boom, etc. That doctrine is basically nonsense, of course--but anyway I quickly determined that it is, as they say in Buffy the Vampire Slayer, "so five minutes ago." All the rules have changed again: Now we stand on the brink of a dreadful epoch of global deflation, and despite its previous track record of engineering recoveries, there is nothing the Fed can do about it. You see, it's a new new economy.

7. Play with other people's money. If, as I said, the people at that meeting were very smart, why did they act in ways that seem so foolish? Part of the answer, I suspect, is that they are employees, not principals; they are trying to make money and careers for themselves. In that position, it is hard to take a long view: In the long run, even if you aren't dead, you probably won't be working in the same place. It is also difficult for someone managing other people's money to take an independent line. To be wrong when everyone else is wrong is not such a terrible thing: You may lose a bonus, but probably not your job. On the other hand, to be wrong when everyone else is right... So everyone focuses on the same short-term numbers, tries to ride the trends, and buys the silly economic theory du jour.

Listening to all that money talking made me very nervous. After all, these people can funnel money into a country's markets, then abruptly pull that money out--and create a boom-bust cycle of pretty spectacular proportions. I don't think they can do it to the U.S.--in Greenspan I trust--but I am not 100% sure.

One thing that I am sure of is that the Asian leaders who have been fulminating against the evil machinations of speculators have it wrong. What I saw in that room was not a predatory pack of speculative wolves: It was an extremely dangerous flock of financial sheep."

In this analysis therefore, this was not as much a Zionist plot as a herd-like divestment or flight of investment which realised extraordinary gain for foreign fund managers coupled with a realisation of extraordinary profit from the resulting currency conversions by the so-called foreign currency speculators and left local investors holding onto shares whose values had come way down to earth and local Malaysian Ringgit currency which had greatly diminished in value compared to other foreign currencies such as the US Dollar, Japanese Yen and the British Pound.

Even if a real conspiracy existed, it would not really matter too much one way or the other. Those who live by the sword die by the sword. Malaysia had embraced an economic system which does not suffer fools and crooks gladly and was made to pay the price for its government’s miscalculations and misdeeds. Will Malaysians learn from this debacle and avoid repeating the mistakes of their present leaders? Only Malaysians themselves will be able to answer this as they prepare for elections in less than 1½ year’s time (or even earlier or not at all depending on Mahathir’s capacity to shock which cannot be underestimated).

It has become clear to all Malaysians that the government is intent on saving a handful of Mahathir and Daim cronies at the expense of the rest of the country. How do they expect Malaysians to trust them any longer?

The bailout involving Mirzan Mahathir’s shipping empire has been the biggest and most controversial deal so far. PETRONAS, which reports directly to Mahathir, announced on March 6, 1998 a complex deal under which it will purchase the state-affiliated Malaysian International Shipping Corporation, which in turn will purchase Mirzan's Hong Kong company, Pacific Basin Bulk Shipping, and part of his Kuala Lumpur-based Konsortium Perkapalan, which does shipping and haulage.

By Mirzan’s own admission the deal will wipe out some USD420 million in debts. What is a young man like him - he’s only 39 - doing with such extensive liabilities? By all accounts he is not the only one, as all of the cronies (and some of his other siblings as well) find themselves in the same predicament. Can or should the government save all of them? If it does, it can only be at the expense of public funds. The Far Eastern Economic Review reported that "several cabinet members are alarmed by the transaction. "I thought such things could only happen in Indonesia or some African country," says an UMNO leader.

Mirzan, for his part, told reporters: "I don't think it is a bailout. It's only a bailout if you say so."" Mirzan, of course, is only the Prime Minister’s son if you say so. And yes, such and stranger things do happen in Malaysia and may continue to happen if Mahathir and his cabal continue to have it their way.

Other strange deals to which the market reacted adversely include a controversial one involving Renong and the purchase by United Engineers, a subsidiary of Renong of an additional stake in Renong itself. The Far Eastern Economic Review states that "Though Renong is controlled by tycoon Halim Saad, many believe he holds those shares as a nominee for UMNO or its leaders -- which UMNO treasurer Daim denies. No Malaysian believes his denials.

The deal was particularly controversial because UEM received a waiver from regulatory bodies that, in effect, shortchanged Renong's minority shareholders. Insiders say Finance Minister Anwar was out of the loop on this rescue, and perhaps on others too. So, who is calling the shots on the bailouts?" Whatever it is, Renong is not out of the woods yet and is still in desperate need of a rescue plan, as are many other Malaysian corporations, connected as well as non-connected to the political leadership.

Malaysians wait with bated breath to see who among the cronies will be rescued next and whether public or government funds will be used. Even the Employees’ Provident Fund (EPF) coffers are said to have dried up in a futile bid to shore up the collapsing stock market, when what the EPF should have done naturally in a falling and extremely volatile market would be to sit it out and wait until the market has reached its lowest level before buying in cheap. However, the EPF was reportedly acting under instructions from the top and wasted billions of ringgit in this manner. One can only hazard guesses as to which cronies’ stocks they bought into and are now forced to hold on to and the extent of the "paper" losses they now bear.

There is a lot more that can be said, but so much for the disease (for the time being), now for the cure.

It is clear that the current riba or interest-based economic system has failed, either because it is prone to abuse whether by locals or foreigners or because it carries within itself the seeds of inequity and injustice.

Malaysia’s whole political and economic system need a complete revamp. Perhaps now is the time to really implement an Islamic system of economy with all its values. In spite of its avowed Islamic aims, the present government has only indulged in tokenism when it comes to Islam and will not implement anything really Islamic, always citing Malaysia’s multiracial society as an excuse as if Islam cannot take care of non-Muslim interests.

There appears to be no other cure except replacement therapy. The cancer has spread to wide and too deep to heal by normal means. Mahathir, Daim and their whole coterie of cronies must go. This evil empire must be brought to an end. Malaysians do not have a choice, even if GRR/PAS/DAP is the only alternative.

In a way, the economic crisis has given Malaysia a unique opportunity to restructure its whole political, economic and social system towards one of greater accountability, no corruption, trusteeship, no excesses or extravagance, more real social justice and not just talk, a truly fearless and independent judiciary, professional and efficient management, less hand-outs, better and more equitable distribution of wealth, a truly civil society. Malaysia can still show how to do things the right way, the Reformasi way.

There can be no doubt. The writing is on the wall. The winds of change are blowing. A new era is dawning. The forces of evil are being dispersed. A kinder and gentler Malaysia is here for the good of all Malaysians.



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