Scavengers developing predatory tendencies

PUBLISHED : Thursday, 10 September, 1998, 12:00am
UPDATED : Thursday, 10 September, 1998, 12:00am

Vultures don't feed on live meat.

(Anon) The stockbroker quoted above wants anonymity because anyone prominent in the Hong Kong investment business who offers a public defence of speculators these days runs the risk of sticking his neck into a political noose. The point is an apt one nonetheless. Vultures don't feed on live meat and speculators don't feed on healthy markets.

They can make money only when markets are inefficient in setting the right price on the underlying fundamentals which drive them.

This in essence is the defence offered by the big American hedge funds for the speculative raids they have made on Asian markets during the past year.

They are quite prepared to admit they are vultures, but they also point out that vultures serve a useful purpose in the wild by cleaning up and recycling carcasses that would otherwise spread disease.

Similarly, they argue, their raids on mispriced markets quickly send prices on those markets to where they should be. This serves a useful purpose, forcing countries to deal more quickly and more fully with the problems that afflict them, thus setting the stage for recovery.

And, they add, if they are wrong about the markets being mispriced, then they themselves will be the ones to suffer, not the markets they attacked. Real value is impervious to vultures' beaks. It will always re-assert itself.

It is an argument that the likes of our own Financial Secretary, Donald Tsang Yam-kuen, must face squarely if he is to win support for his call on governments worldwide to devise mechanisms for cracking down on big international speculators.

From his perspective, tiny Hong Kong, with its open borders and its easily manipulated securities markets, was the victim of heavyweight speculative fund managers who used the enormous amounts of money they controlled to swing markets where they willed and who profited from the foreknowledge of what they would do.

His view is worth considering. If you have ever watched those TV documentaries of wildlife on the African plains, you will notice that vultures don't always perch passively until a doctor has proclaimed the gazelle dead. They take the occasional poke at it to see if it stirs.

Now, imagine that evolution has produced vultures three times as large as they presently are and reduced gazelles to a third of their size. What are the odds the vultures will evolve in behaviour too and will become more pro-active at dinner time? Something akin to this has happened in the evolution of financial markets. It is a process of evolution that has progressed much more rapidly than the one which still applies to the African plains.

Thirty years ago, we didn't worry about billions of dollars flowing rapidly back and forth over international borders at the flick of a single microprocessor switch. It didn't happen.

We didn't have savings aggregated in hundreds of billions of dollars under the control of individual fund-management firms, with traders short on knowledge but long on incentives to stake the money on big bets. Money wasn't managed that way in that size.

We didn't have small countries establishing nascent securities markets to help their economies grow and then opening those markets wide to foreigners because this was what the pundits said was the prescription for stable continued growth. Markets were for fish and money went into banks and mattresses back then. But we have all these new things now.

This is where the sort of comments Mr Tsang makes strike a chord and where the defence of the big speculators falters. The hedge funds must in their turn squarely face the question of whether the size to which they have grown has made them more than vultures.

Value - live meat - is no longer guaranteed impervious to beaks this large. So it's not necessarily a bad idea to put some brakes on the most volatile of international capital flows in this brave new world.