The mission of Going Global, which appears on MidwestBusiness.com
on most Tuesdays, is to educate and inform Midwest technology companies
on what local technology companies are doing internationally so other
firms can learn from the successes of like-minded peers.
CHICAGO – Though
it’s clear that the origin of our current financial recession has its
roots in the U.S. and in some ways right here in Chicago, I think it
has been fueled and exacerbated by investors throughout the world.
was talk early in 2008 of the rest of the world being decoupled from
the financial problems in America. This has since been debunked. My
contention is there have been profound changes in the train of thought
of foreign investors and that is having significant impacts on how we
come out of this and when.
(a professor of history and business at Harvard) says on his Web site:
“A leading British journalist has asked me: ‘Why should the rest of the
world ever again take seriously the American free-market model after
this debacle?’ This crisis, he argued, was to economics what the Iraq
war was to U.S. foreign policy: a fatal blow to the credibility of
American claims to global primacy.”
There has been
trillions of dollars of new wealth created in the last 10 to 15 years
in countries that have never known such riches. In many cases, these
entrepreneurs invested their earnings in their businesses to help them
grow and they have prospered. But they haven’t invested all their
profits in their businesses.
Much has been
invested in stocks both in their home countries and the U.S. My
impression is that many of these new investors were relative neophytes
in the knowledge of the risks that go along with the potential returns.
As long as you had enough to invest, many have assumed their
investments could only go up.
With the recent
downturns, they learned that their stocks could go down. After a short
while, they saw buying opportunities and brought the market back up.
This is the mentality that has changed.
understand the United Kingdom suffered from the same plight with their
mortgages following the collapse of subprime mortgages in the U.S. and
the subsequent fall of the credit markets, the rest of the world lost
trust in the American financial system and is hesitant to come back.
Some of the
financial instruments in which they invested were created here in
Chicago at the Chicago Mercantile Exchange and the Chicago Board of
Trade. These instruments were too complicated for novice investors to
understand. Now that they’ve been burned, they don’t see the same
security in our securities as they did before.
When I lived in
Poland, many Poles simply didn’t trust the banks. They kept their money
stuffed in their proverbial mattresses. I think that’s what a lot of
the rest of the world is doing with its money right now. I spoke with
Adolpho Laurenti – a senior economist at Mesirow Financial and the
author of the “Themes on the Global Markets” newsletter – who helped shed some light on the subject.
His first thrust
was toward China. In other words, China is our biggest creditor. A big
part of the reason the U.S. government didn’t let Fannie Mae and
Freddie Mac fail is because that would have led to less confidence in
U.S. government securities by the Chinese. We can’t risk that mistrust
because the Chinese in some ways hold our future in their hands.
If or when they
want to cash in their U.S.-denominated assets, we will be at their
mercy. As their biggest customer, it’s risky for them to exert that
power over us. There has been criticism of the Chinese for not
revaluing their currency more quickly. I haven’t heard much of that
the rest of the world remained confident enough in America to prop up
the U.S. dollar. However, those investments seem to have been in
securities from the U.S. Department of the Treasury rather than shares
in equities. While foreigners are confident in our government, they’re
not confident in our business leaders.
Even after the
falls of Enron, Arthur Andersen, etc., Laurenti agrees that the
Sarbanes-Oxley Act hasn’t solved investor confidence problems. Europe
and the developed world still hold most of the wealth. Here in the
U.S., it’s much more common for commoners to be invested in the stock
When I lived in
Germany, much less of the general population invested in stocks than in
the U.S. I think this is common throughout the rest of the developed
world. I think that has changed somewhat since then. Laurenti agrees
that the composition of investor pools varies greatly across countries.
In Europe, my
experience was that shares of firms were cross-invested by other firms
by principals at the top. That said, few pedestrians bought and sold in
public stock markets. Laurenti says the risk and danger in Europe is
European bank duplicity in mortgage-backed securities.
They were caught
up like everyone else, and because their reporting structures aren’t as
strict as in the U.S., those exposures are just coming to bear.
Sovereign funds were much more influential in the good-old days when
the price of oil and many other commodities were sky high.
According to Laurenti, the impact on Chicago financial institutions will have a downside and an upside.
Like many others,
Chicago banks and brokerages will feel the pain of the financial
fallout. My impression is that one of the roots of the crisis is the
complexity of financial instruments. These were so complex that
customers couldn’t understand all of the risks associated with
derivatives and swaps. Service providers need to simplify their
products and better educate their prospects on what they’re getting
Traders at the
Chicago Mercantile Exchange don’t care what currencies tank so long as
they’re still buying and selling. However, there is an upside. The
Chicago Board of Trade and the Chicago Mercantile Exchange have vast
potential opportunities ahead of them to provide liquidity for some
markets where they haven’t existed in the past.
They have the
platforms to provide these like few others do. Ferguson also speaks to
the opportunity on his Web site: “The failure of financial firms has
triggered a further crisis in the vast but opaque market for
derivatives and especially credit-default swaps.” They just need to put
them together and present them simply so investors clearly understand
the risk and return tradeoff.
dollar’s recent surge, I hypothesized that the crisis could spell a
move to the euro as a reserve currency. Ferguson chimes in: “The days
when the dollar was the sole international reserve currency may also be
coming to an end. Reserve currencies do not last forever (as the
British pound makes clear).”
that it’s unlikely simply because money holders don’t have as much
confidence in the governments of smaller economies like Ireland and
Greece (which are part of the euro) as they have in the U.S. Federal
Reserve System and U.S. Department of the Treasury departments working
together to solve these problems. Believe it or not, they trust U.S.
politicians more than Europeans.
way to look at this. The U.S. stock markets lost about 40 percent in
2008. As stock markets in some countries lost much more, perhaps those
investors have lost even more confidence in their own local businesses
than in the U.S. Perhaps we’re not so bad off after all.
Michael Muth is managing director of GATA,
an international business development consultancy that helps technology
companies build international partnerships. He can be reached at firstname.lastname@example.org.
Click here for Muth’s full biography.
Previous Columns in 2007:E-Mail This Article to a Friend or Colleague
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Q&A: Intetics Partner Alex Golod on Being a Jack of All Trades (3/31/2008)
Q&A: Motorola WiMAX Director Tom Mitoraj on Unstoppable Freight Train (11/26/2007)
Q&A: Motorola WiMAX Director Tom Mitoraj on Global WiMAX Differences (11/20/2007)
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Q&A: InterPro Translation CEO Ralph Strozza on Translation Tools, Costs (9/18/2007)
Q&A: InterPro Translation CEO Ralph Strozza on Globalization, Translation (9/11/2007)
Q&A: InterPro Translation CEO Ralph Strozza on Intercultural Translation Issues (8/7/2007)
Q&A: Madison Capital Partners CEO Larry W. Gies on Specific Country Issues (7/10/2007)
Q&A: Madison Capital Partners CEO Larry W. Gies Jr. on Cultural Differences (6/26/2007)
Q&A: Madison Capital Partners CEO Larry Gies on International Private Equity (6/11/2007)
Q&A: Scott H. Lang of S.H. Lang & Co. in Chicago on Foreign Deal Making (5/15/2007)
Q&A: Scott H. Lang of S.H. Lang & Co. in Chicago on Middle-Market M&A (5/8/2007)
Q&A: Scott H. Lang of S.H. Lang & Co. in Chicago on Middle-Market Firms (4/24/2007)
Q&A: George Filley of NAVTEQ in Chicago on Data Localization, Reach (3/27/2007)
Q&A: George Filley of NAVTEQ in Chicago on Partners, Personal Privacy (3/20/2007)
Q&A: George Filley of NAVTEQ in Chicago on Digital Mapping (3/7/2007)
Click for 2006 column archive.
Click for 2005 column archive.
Click for 2004 column archive.
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