bears, bulls and the strategic necessity of the business cycle by james h. nolt, dean of the nyit-...
TRANSCRIPT
Bears, Bulls and the Strategic Necessity of the Business Cycle
By James H. Nolt, Dean of the NYIT-NUPT International College, Nanjing, China and Senior Fellow, World Policy Institute, New York
Business Cycle Very poorly understood among all schools of
economics and business theory ● Neoclassical microeconomic theory
● Marxian and Neo-Ricardian theories Business Cycle could be tamed by
government regulation. ● Business Cycles has recurred with some regularity
● Even within highly-regulated economics (Japan’s)
Business Cycle occurs because of leveraged finance’s
The irresistible temptation
Competitive power
Vulnerability of leveraged finance
Corporatism
Market power and strategic competition
●Bulls: a leveraged growth strategy Bulls flourish in easy money and credit at the
expense of more established bears
●Bears: slower-growing, less indebted
Often large established market leaders
Government regulation can’t prevent business cycle
E.g. government regulation of derivatives
Temptation of quick wealth Insider information Problem for effective regulation
and risk management
Why are economists so blind about the business cycle?
Use Models based on mathematical elegance rather than using realism
The natural tendencies toward market equilibrium are overstated by most economists
Bulls and bears are not just subjective opinions, but represent objective investment positions
Strategic players ● Bears: expect and promote bust
● Bulls: expect and promote boom Non-strategic players ● Hedge their bets
● Neutral between boom or bust
Bulls and bears can be in any line of business
Scale of organization ● Individual firms ● Informal pools of investors ● Formal consortia or cartels Type of investor ● Financial ● Non-Financial
Rival Interests of Bulls Versus Bears
Most competition is asymmetric (different strategies and capabilities)
Simplest dichotomy: Bulls versus Bears
Why cows would be bears
Strategic Competition ●Easy credit and continuous growth
fuels the fast growth of hungry bulls eager to steal market share from the fat established cows
●How can cows protect themselves?
Inexpensive credit is the resource that makes bulls such fearsome competitors
Bear confront bulls: tightening or restricting credit
Bullish debtor loss, bullish creditors are weakened or destroyed
Revenge of bears: competitive impact of restricting credit The longer and more unrestrained the
growth, the more exuberant and wildly speculative the most bullish investor become
The more risky leveraged investments accumulate in any economy, the more vulnerable those bulls become to a reversal of the business cycle when the bears counterattack
An example: Japan 1927-1932
Strategic competition between bears and bulls
●Intense financial, business and political crisis in Japan from 1927-1932
“Big Four” conglomerates (zaibatsu)
Mitsui Mitsubishi Sumitomo Yasuda (now Fuji)● Zaibatsu also linked to powerful foreign banks
and business firms and strong participants in foreign trade and investment
Japan’s new zaibatsu during World WarⅠ
New zaibatsu enjoyed the amazing growth of Japanese industrial output
These new conglomerates grew with massive infusions of cheap capital
They depended on loans from external financial institutions, mostly government-controlled banks
Japan after World WarⅠ Delays its restoration of gold
convertibility of the yen Wartime inflation Shinko zaibatsu resisted the necessary
deflation and remained bulls The old established Big Four zaibatsu
were bears and insisted Japan return to the gold standard yen
Bears launched a devastating two-pronged attack on bulls
Government banks restrict loans Big Four banks curtail credit during
1927 for the new zaibatsu overnight The Big Four gained control of
surviving companies of bankrupted adversaries
During the next few years, Japan followed a tight credit policy
The bitter revenge of the bulls With the onset of the Great Depression, bears
deflationary policies met growing resistance. Bulls sought revenge by funding underground
terrorist groups, military secret societies By 1932,the military took Japan off the gold
standard, devalued the yen and began pumping government credit bank into the new zaibatsu to reinvigorate them once again
Bulls and Bears Today and the Growing Role of Butterflies
More players who act alternatively as bears or bulls are called butterflies
The U.S. and the world are entering difficult economic circumstance
Many large companies have dangerously unhedged positions in various derivatives markets