A brief comment on Blackrock, groupthinking and ‘secular stagnation’
Two interesting articles on Blackrock, the world’s largest asset manager (here and here) in this week’s Economist. The Economist is right to point out that regulators would be wrong to classify Blackrock as systematically important, which would considerably increase its regulatory burden. Unlike banks, Blackrock (and other asset managers) transfers money rather than creates it. As a result, there is no risk of ‘secondary deflation’, or money supply contraction, during a crisis if the value of its assets under management fall or if Blackrock itself fails. If markets collapse, investors take the hit, not Blackrock or any other asset manager (although they do take a hit to their revenues as assets under management fall). Of course, investors suffering from a fall in asset value can have other repercussions on the economy. But at least the collapse is not made worse by banks contracting their lending or failing, putting pressure on the money supply at the very moment money demand jumps.
The other issue raised by The Economist is about ‘groupthinking’, as many investors now use the asset manager’s analytics platform to guide them in their investment and trading decisions. The Economist is right on that topic too. However, I would say that groupthinking does not only emanate from Blackrock’s platforms… It is probably a topic I’ll discuss more in details another time, but we could argue that financial exams such as the CFA also push towards groupthinking by making it compulsory to follow certain analytical frameworks while not offering any real alternative. Therefore investors end up using the same models. Various investors will evidently come up with differing inputs; but those would then pass through the same machinery and outputs would be only slightly different.
A quick note on the fashionable ‘secular stagnation’, Lawrence Summers’ and Paul Krugman’s new favourite topic (actually, I don’t know). Apparently, there aren’t enough productive investments in the world relative to the stock of savings. The “appetite to invest” (in The Economist’s words) is low.
I found an interesting short video yesterday:
Does it remind you anything? I’ve argued many times over the past few months that there are indeed plenty of productive investments, but that entrepreneurs and investors are too scared to invest due to regime uncertainty and red tape (see also here and here). Let’s name a few: fracking, mobile IT, emerging markets, commercial space ventures, drones, green energy… And I’m surely forgetting a lot. Yet, so many economists try to reach conclusions from analysing a few aggregated macro-economic data while forgetting to take a look at what’s going on the micro-economics side. This is a big mistake.