Exotic investment Vehicles: An Unproductive Abuse of Capital

Michael Lewitt has an interesting new book out, called "The Death of Capital".

In it, Lewitt attacks speculative investment activities such as private equity buyouts. He notes that such speculation "has been a prime abuser of capital as it has diverted an inordinate amount of capital into unproductive uses while producing (at best) mediocre returns and charging unjustifiably exorbitant fees."

He also cites naked credit default swaps, leveraged buyouts and quantitative stock trading strategies as cases where capital has been channeled into unproductive use.
Surveying the base metals this week, his point is driven home.

The aluminum price ticked up the last couple of days. The reason? A note from Citigroup analysts reporting that an ETF backed by physical aluminum may be in the works.

Citi predicts the introduction of such a fund would drive aluminum prices up 24%. Some buyers appear to be trying to front-run this appreciation the last couple of days.

Certainly there's money to be made in speculating. Surveying the world economy, an investor might reasonably conclude that demand for gold as a safe-haven is set to soar. It would make sense to take a position in bullion and wait for the metal to rise.

But the recent action in aluminum takes it to another level. Betting that someone else will bet on the price. It's the second derivative of speculation.

Investors seem to be pushing the envelope, dreaming up more and more exotic ways to make money. And with each step we take, we get further down the unproductive path Lewitt talks of.

The best way to make money is to create something that adds value. Investing $1 million in an oil company that drills a well producing $2 million worth of crude. Loaning $500 million to build a copper mine that throws off $100 million in yearly cash flow for the next twenty years.

At its root, investing is this basic. (At least in principal. The tricky part is identifying which oil wells and copper mines are likely to make money.) Anything that goes beyond such simple parameters pushes capital to the margins of productivity.

By. Dave Forest of Notela Resources