New York Magazine: Why Wall Street Will Prevail

Why Wall Street Will Prevail
Things are bad now, but the world will never out-finance us.

http://nymag.com/news/intelligencer/51168/

With the stock market tanking and Wall Street’s top firms either vanished or trembling under the skirt of commercial banks, is finance as we know it over? Will the Credit Crisis of 2008 turn New York dominance into submission—to London, Shanghai, Dubai, or even Moscow?

Not a chance. First, globalization has proved itself out. Some schmuck defaults on his 3,000-square-foot exurban dream home, and Fortis Bank in Belgium gets nationalized. It wasn’t just Wall Street buying stupid toxic securities—everyone was. Right now, nearly $200 billion is trying (unsuccessfully) to prop up Russian markets, hundreds of billions of euros are trying to resuscitate European banks. Wanna bet over/under on Chinese financials next year?

Second, when you think of markets, remember this saying: Money sloshes around the globe seeking its highest return. You would think that it ought to be sloshing away from the U.S. But it isn’t. If anything, it’s sloshing toward us, buying into the safety of U.S. Treasuries. So much so that they’re sold out. Short-term rates are almost negative. The dollar has been on a tear against all but the Japanese yen. Weird, I know, but we are the port in the storm, even though the storm started in this port.

Third, we make valuable stuff. One cause for alarm, even before the financial meltdown this year, is that the U.S. has gone from around a third of world economic output to something closer to a quarter, at the same time that the BRIC (Brazil, Russia, India, and China) have doubled their share to about 16 percent. But that doesn’t tell the whole story. It’s not so much what your output is, it’s how much you profit doing what you do. The Chinese make us stuff at very low profits, while India answers our customer-support calls. Apple makes more money selling iPhones than any subcontractor in these two countries. And a rising Russia was based on over $100-a-barrel oil, probably a thing of the past, with perhaps a similar future for Brazil’s output of less and less valuable sugarcane and soccer players.

Sure, China and South Korea and the entire Middle East sheikhdom community are sitting on trillions of our dollars, from years of reckless trade and fiscal deficits. But it’s not where the money sits that’s important—it’s what you do with it, where you turn it into more. The U.S. is the largest-valued market, with the most wealth: approximately $50 trillion in financial assets vs. $30 trillion in the eurozone and maybe $2 trillion in China. Innovation remains America’s biggest export—in the form of software, network equipment, pharmaceuticals, search engines, and the next wave of funky energy products—and productivity is the only thing that leads to long-term wealth. Wall Street is not the stock market; it is the gatekeeper for great and future great companies that want to tap it for growth capital. Oddly, it’s what happens outside New York that will keep New York the financial capital.

Will the Credit Crisis of 2008 turn New York's dominance into submission?

And finally, the U.S. dollar still rules. Our accounting is legit, more so post-Enron, and years of regulation mean that corporate numbers are, for the most part, transparent. Investors know what they are buying. Not true with Gazprom or even Daimler. Remember all those companies that did their IPOs (initial public offerings) in Europe, on the AIM (Alternative Investment Market)? They all learned their lesson the hard way. They went public in name only. Few shares traded, prices were suspect, and you could never really sell any shares. A word of warning. Policy is the one thing that can screw up Wall Street. Tighter regulation is in the air. Some will be good, like higher reserve requirements for banks, and some will be awful, like restricting short selling or guaranteeing mortgages. New York will remain the world’s financial center—but beware that its biggest risk is just a three-and-a-half-hour Amtrak ride to the south.

Comments

[granitelli]

Thanks for the daily breathe of fresh air.

[Harry]

What transparency are you talking about. You hate to admit that you got it all wrong, because that requires courage - which you are lacking in abundance. Remember - no war has ever been fought on your soil. Your wives and children have not suffered the way you wreck suffering on the others.
The Federal Reserve instead of regulating, unleashed a free style wrestling match. I remember watching Robert Shiller repeatedly saying that there is a bubble in real estate. But Alan Greenspan, while shutting his eyes, says - I see no bubble anywhere. Then what has burst now. You wall street dogs are wild. You should have always been kept on leash. And yes America does make value added products. But how long before China screws you there also. Remember how Japan screwed your auto industry. You will be left with no place to hide. History is witness to the fact that no power how so ever great lasts for ever - remember Roman Empire, Prussian Empire, British Empire. Where are they now. They followed wrong policies and so are you. Why don't you guys turn back to such great people as Robert Shiller, Paul Volcker, Warren Buffett, and send Alan Greenspan to serve a term of 500 years rigorous imprisonment. To be sure, I am a friend and admirer of USA, but for the right reasons. Though, I hate your hypocrisy.

[Brett Owens]

Andy, always love your unique perspective on the workings of the world, financial and beyond.

So is it safe to say you see this downturn as just an average garden-variety recession? After which, we'll clear the excesses and be in position to keep building upon the benefits of globalization...provided our elected public officials don't "help" us too much?