Juggling Dynamite

Energy investors have found themselves in a nightmare the past few months (black arrow below). It is the same nightmare that materials and mining investors (green, blue and brown arrows) have been living through since 2011 as global demand turned down, excess supply piled up and earnings evaporated.

Now the same nightmare is stalking the last late cycle sectors left hovering at hideous valuations: dividend paying (purple), REITs (orange) and financials (red lines shown below). As these sectors also finally give up on the dream that QE could prop up a sagging economy, the 2009 lows beckon prices, and the broad market TSX (grey line,) back to reality.

GMO’s James Montier slays the ‘shareholder value maximization’ (SVM) nonsense that is widely regurgitated as incontrovertible principles of finance today.

In 14 easy to read pages and charts, Montier examines the shift in corporate culture from an ‘era of managerialism’ (1940-1990) where businesses strove to serve customers, employees and communities and in so doing, build long-term value that delivered a ‘fair return’ to investors, to the present area of SVM (1990-2014) where companies follow the fallacious and destructive belief that they have a dominant duty to shareholders first, and that this duty is best served by increasing share prices as quickly as possible. He goes on to demonstrate that this short-term, extractive mentality has led to reckless use of debt and obscene executive compensation levels, as management has become largely paid with stock and options (especially in finance) while degrading the strength and stability of the host companies, the workforce and the economy itself.

Brilliantly and concisely presented. A must read, must understand. See: The World’s Dumbest Idea

Time to circle back to smarter incentives and practices focused on building long term, sustainable value for all stakeholders: customers, employees, taxpayers and investors–in that order.

Danielle was a guest today on The Financial Survival Network with Kerry Lutz, talking about recent developments in the world economy and markets.  You can listen to an audio clip of the segment here.