The Global Misallocation of Capital

Nowadays, global capital flows rapidly in and out of assets around the world. Investment managers, hedge funds, and traders of all types seek to make a buck wherever they can. Today it is oil; tomorrow it will be something else. The point is that greed and profit moves the prices of assets probably more than they are worth, just as fear and losses move prices lower than their “true” value (if you believe in intrinsic and fundamental value).

As the price of oil becomes more volatile, and as trading firms move their capital in a herd like, stampeding fashion, oil will pull in global capital. This will inevitably create a worldwide misallocation of capital. One has to wonder how the global misallocation of capital will affect our future. Companies around the world will have to consider how the recent moves in oil will affect their business. Government policy makers will have to consider the possibility of a slowdown in economic growth, how this will affect interest rates and inflation, and consumers will think twice before purchasing any goods and services. The problem is that the speed which capital moves and the increase in the volatility of prices it brings, will exaggerate the consequences and effects of all the decisions being made today.