September 27, 2010
Dial back the investment clock and it’s clear that the markets — stocks, bonds, commodities and a host of acronymic financial assets — are not traded on a level playing field. Think Enron, Madoff, and our current financial crisis. Shadow markets are vehicles for money manipulation, according to Eric Weiner, whose new book, Shadow Market: How a Group of Wealthy Nations and Powerful Investors Secretly Dominate the World (Scribner, $26), exposes the banking underworld and how it has created a powerful network of super-rich investment vehicles, including wealth funds, government-run corporations, private equity funds, and hedge funds while quietly buying up the world, piece by valuable piece.
While the American economy was taking a nosedive over the past several years, cash-rich nations like China, Singapore, Saudi Arabia and others began using their money to grab “geopolitical power,” Weiner says. And now this loosely configured, unregulated market is supplying the money that the world needs to grow. Weiner, who’s covered business and economics for Dow Jones, argues that the rest of the globe will have to contend with this elusive force for decades to come.
The Fiscal Times talked with Weiner about his book and the economic ramifications for investors and the economy.
The Fiscal Times (TFT): How is the shadow market manipulating the economy in a way that investors don’t know about? What makes it so ‘shadowy’?
Eric Weiner (EW): There’s a change in the way capitalism is being used. State capitalist countries are basically controlling liquidity in the financial world. People often ask how this is different from what Japan did in the 1980s. Well, it’s totally different. First, Japan itself didn’t actually buy Rockefeller Center. Mitsubishi bought Rockefeller Center because they thought it would be a good deal for them. It’s a publicly held company closely tied to Japan, but not owned by the government.
Countries are now creating shell companies to do this work for them and control liquidity, and we don’t know what their motivations are. Countries can loan money to African nations in order to gain access to their resources. They could give them non-forgivable loans that are worth more than the land itself. But access to the resources is important to them, and even more important, they want to block other countries from having that access. So something that used to be a fairly predictable private-sector activity is no longer that.
As far as hedge funds and private equity funds, they may be small, but their influence far outstrips their size, as they’re the ones guiding what the shadow market countries are doing. This is potentially dangerous. Money suddenly doesn’t matter, because they have piles of it, but the company matters. So countries can use sophisticated methods for moving currencies, bonds, and so forth. But the real key is that there’s no disclosure whatsoever.
TFT: What does this so-called ‘shadow market’ mean for the U.S. economy?
EW: We must engage with the rest of the world as investors. We’ve got to be aware of these countries and of the U.S. companies that do business with them, and we have to be aware of these markets as investment markets. We also must look at the people who live in these countries as our consumers. The world is our market, and opportunities are all over the place. The world has shrunk from an information standpoint, and we have to be major players in it.
TFT: You’re saying we need to better understand the political power that accompanies money?
EW: There’s a symbiotic relationship between liquidity and power. The Treasury is trying to deal with China’s manipulation of its currency and how to talk to them about that. And they’re getting pushed from the left to be aggressive with them, and pushed from the right to sort of leave it alone, and in between is where things really need to happen. So the question is: Does the U.S. still have the authority and the ability to tell China what to do? Washington has figured out that we pretty much don’t, at least not now. So until we can get a western solution, with many countries involved, and put a lot of pressure on them, China is going to do what it wants to do.
TFT: For the record, your term ‘shadow market’ is not to be confused with shadow banking.
EW: Shadow banking, which is now a term of art in economics is used by the Fed and others to explain how money moves around the U.S. in ways that we don’t always know about. The shadow market is not the same thing. And actually, had I known that term would gain so much currency, I probably would have changed the title of my book!
TFT: Your best-case scenario for how long it could take us to get back to a safe economic footing?
EW: The idea that we’re returning to ‘normal’ any time soon is crazy. I don’t even know what normal will look like. When our economy gets churning again in a year or two, GDP could be back up, and we could appear to be growing. But that doesn’t mean Americans are going to feel that way. And I think that it’s going to take a long time — five, six, seven, maybe 10 years — because you have to erase the mindset that was built up from about 1996 to around 2007.
Psychologically we have to come down from a really high mountain, from the idea that the stock market is going to make us rich regardless of what we do. The market could bounce up and down for a really long time. And as far as home prices go, there’s no guarantee that property values are going to increase. It tends to, but that’s over time. You’re talking 30 to 40 years — decades.
TFT: Let’s turn to financial regulation, such as increased reserve requirements for banks. You say that the inside players have “always preferred to operate with as little regulatory oversight as possible.”
EW: Regulation to me is only good when it’s smart; otherwise, it can just get in the way. And it’s going to be very hard for the world to get its arms around this. There’s no way that China is going to sit there and tell the world, ‘Oh sure, we’ll open our books. No problem. Here you go. Come on in. We’re open.’ No way! And neither would we.
TFT: So financial reform doesn’t really mean anything?
EW: Usually we’re fixing the problem that just happened instead of addressing problems that are still to come. They’re saying that if banks had more stringent reserves in place, they wouldn’t have overextended themselves. But the idea that we’re going to eradicate financial bubbles is a little ludicrous, when bubbles go back to the tulips in the 1600s. There’s always going to be some exuberance in the markets about what the next big thing is going to be. And once people start making money, others pile in. That’s why we need smart regulation to prevent that from getting out of hand.
TFT: Given all your points and even the title of your book, you still have hope for our country, correct?
EW: The great hope for America is that two kids in a garage in Cupertino can reinvent the world as we know it. America’s the place where this happens. And until another economy develops that level of sophistication and entrepreneurship, America is going to have an advantage. We have so much here — Hollywood, Silicon Valley, the financial sector of the world, which still basically runs through us. But we don’t have an idea of how to make it all work. That’s my concern about people in America in general, that we don’t look at the world the way the world is. We look at the world the way we want it to be.
We need to get capital back into our country. People will then see their standards of living rise, they make more money, and eventually, Americans will come in and buy out a troubled Saudi firm. We need to let this happen. If we start throwing up walls in front of this, we’ll miss the point. We need to tap into it.