Taking Stock / Dictatorship on the Capital Market

At a mass at St. Peter's Basilica prior to the cardinals' conclave, a few hours before his transformation into Pope Benedict XVI, Cardinal Joseph Ratzinger delivered a speech.

The Catholic world is in throes of a "dictatorship of relativism" that "does not recognize anything as absolute and leaves as the ultimate measure only the measure of each one and his desires," the cardinal lamented.

Perhaps Ratzinger does not follow the global capital markets. If he did, he'd have known that the despised "dictatorship of relativism" won the battle long ago. In stock, bond and commodities markets, the dictatorship rules from high and few challenge its supremacy.

Yesterday in this column, we expressed astonishment at how Israel's institutional investors - provident and mutual funds, pension funds, insurance companies - are merrily pouncing on securities being issued by new companies, including plenty owned by people who did terrible things the last time they raised money. They defrauded investors, mocked them, squeezed them dry, squandered the investors' money, stiffed creditors and bondholders, and this wasn't in the dim reaches of history, it was two or three years ago.

Another whole subsection of companies is tapping the markets even though their financials are ludicrously inadequate: they have a very short record of profits, for instance, or sport business models of dubious sense. Why are managers of other people's money yet again lining up panting to throw it at trashy securities?

Inane, or relatively so

One answer could be that investors, and investment bankers, come in two types: those with short memories, and those with no memories at all.

Another answer is that a "dictatorship of relativism" is ruling the capital market, a dictatorship served by analysts, investment managers and funds, a dictatorship that crushes rebels like nasty little beetles.

The "dictatorship of relativism" on the capital market was the pump that inflated the Internet-telecommunications bubble in 2000. Investors judged companies, projects and share prices solely on the basis of their relative prices and performances, utterly ignoring absolute values.

The "dictatorship of relativism" led droves of analysts to recommend companies with almost no income, that were trading at stupendous valuations in the hundreds of millions and billions, solely because their shares were "cheap relative to their peers".

That "dictatorship of relativism", also known as the test of comparables, distracts from the genuine, clear-cut economic values by which people, and analysts, are supposed to measure companies and projects.

The capital market "dictatorship of relativism" is the reason some new fad overcomes common sense every now and then. People scorning the fashion are in turn scorned as behind the times, irrelevant, fusty.

How uncouth

Ratzinger, who protested against the puling relativism pervading Catholicism, is considered to be an extremist in some circles. The capital market also has its set of fundamentalists, people who try to ignore the fashions, to adhere to the basic values of assets and their proven ability to generate cash flows.

When the inevitable bust arrives, the fundamentalists are suddenly, albeit briefly, restored to favor. But soon enough the positive sentiment is replaced by pity or disdain, as the markets rally and hare after the latest vogue.

The dictatorship of relativism is the real reason people whose names were anathema in the marketplace two or three years ago are again raising billions, this time for a new set of companies.

The dictatorship of relativism has infiltrated every last nook and cranny of the capital market. Try to rebel and you'll probably find yourself underperforming your rivals. You may be righteous in your philosophy, but you'll have to pat yourself on the back on the sidelines, because there's no room for heretics in center stage when the markets are frothy.

Take comfort in this. You rebels against the dictatorship may or may not earn a place in heaven, but what's more likely, is that you have a much better chance of preserving your pension money and living decently until you pass on from this vale of tears into the next world.