The current rebound in real estate prices in certain parts of the market in Australia, when immigration, usually a key driver of the real estate market in this country, has plummeted to virtually zero because of Covid, and many people have lost their jobs. This is being driven by low interest rates and government stimulus, combined with a relaxation of lending regulations which reduce fudiciary responsibility of banks.
Reading a great deal about how much of the stimulus money, created to stimulate the economy has ended up in the treasuries of large private companies, which issue massive buy back deals. Creating an artificial profit for the company, both sending the wrong image to the market and the directors cashing in on massive bonuses due to artificial share market rises. More of a transfer of wealth.
Lehman brothers, and other they bankrupted the economy and still left multimillionaires. I feel like they were at the top of the list so figured id point them out. they gave loans away to people who couldnt pay them back to make lots of money. As the saying goes “cheap, easy money creates malinvestment”. and with that they had so much debt piling up but they were making so much money from it at the same time, so when time came they had to pull the plug. they made their money from it and left the world to pay for the damages, and many other companys on wall st did the nearly the same thing if im correct.
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Okay, I have been trying to wrap my mind around Malinvestments and interest rates etc.
I live in South Africa… Uhm… Malinvestments seems to me is just what our government does (would mismanagement of public funds for corruption qualify as Malinvestments? Not quite investments but the accept projects and massively overpay on them and the creates the need to increase inflation and tax rates) … Bailing out government companies (eg. eskom and SAA) that are mismanaged, with Billions of Rands (repeatedly) without solving any problems within the companies. Paying out bonuses to top management when companies are not being managed properly. Placing strain on the countries economy creating high interest rates (our interest rate was reduced down to 7% to help citizens during covid… I have now seen that compared to many countries this is quite high).
Am I on the right train with this line of thinking? Or am I a bit off target on this one?
Saving and holding FIAT is a malinvestment. It decreases in value day by day, that is why it is a misallocation of capital as well.
That Tesla killer - Nikola. It is not malinvestment it is fraud from beginning. Wasn’t that obvious to everyone?
Savings accounts are malinvestments in that if you want your money to grow, you could invest that money into other things, such as Bitcoin. Your investments will grow where as the money you keep in a bank account is kept safe but doesn’t grow. There is always the higher risk, higher reward situation whenever investing money.
Laura Ashley, a UK clothing and furniture retailer in Feb 2020 received a loan from Wells Fargo for £20 million to help address their lack of cash flow. This loan was approved before the Coronavirus became a global pandemic. However, the retailer had a difficult trading year before the pandemic, they posted a £14 million loss the previous year, and a potential bidder dropped out of the opportunity to acquire them. This is all against the backdrop of the continuing debate within the UK of the death of the “high street” (streets full of shops), and how people are buying more and more goods online, and how brick and mortar retailers are closing their stores at an alarming rate, Laura Ashley has 155 stores and 2,700 employees. Several months into UK national lockdowns and new restrictions resulting from the pandemic, Laura Ashley officially called the creditors in, collapsed and went into administration. It could be argued that there was pre-existing data to inform Wells Fargo that their loan would be malinvestment.
I am so excited to share this story because I explained it to a few people… and they looked at me like a weirdo.
I met the CEO of a company called Indemis Inc; it is a company that provides “needed safety solutions to the commercial UAV community”. They were founded in 2005 and claimed to have developed software that allows a drone to recover other drones and deliver packages, and this would change the world with their technology. Over the past 5 years, they have raised millions of dollars in funding but hadn’t released much information about their special technology that was already made. I remember her telling me multiple times she was stressed because she wasn’t meeting her projections. So I asked her why not? She said she was using most of the funding to pay the salaries and office expenses. I thought that’s odd; how is a company sustaining itself if there is no good or service available to sell? I thought, this isn’t a successful company; you’re not doing any business. You’re a fraud. It’s sad because, at one point, I recall being envious. After all, there wasn’t much difference between her and me, but she lived a lavish life. I was exceptionally irritated because it seemed she sucked at business.
Then I realized it was a bubble. That was the first time I truly understood what inflation was, obviously not referring to money here but business inflation. Now I see the smoke and mirrors clearly, but that “ah ha” moment will always stick with me.
The recent purchase of 72,000 bitcoin by Microstrategy could be viewed as a malinvestment. For me, I think it’s great, and I’ve recently bought MSTR stock. But for an average investor, seeing the CEO borrow money to buy a cryptocurrency could be construed as gambling with the shareholders money. I agree with Michael Saylor, and expect (hope) to see more companies converting their treasuries partially to bitcoin as a hedge against losses in the dollar. Bring it on…
Investment in zombie companies because it creates distortions in the market. It makes it difficult to properly read the health of an economy and to really understand where value resides.
Malinvestment into Zombie Companies. i.e. those that cannot stand on their own two feet. Losing share, losing pricing power and being kept alive by debt servicing, zombies ultimately cannot cover their cost of capital. Fundamentally, zombies lack a path to profitability. Examples are found in the oil sector, particularly exploration and production firms, also legacy communications sector industries that are unable to shift to streaming media.
The Federal Reserve deciding to purchase junk bonds in 2020. Not allowing the free market to find a price the actual buyers would want only delays the problem at hand. With more intervention comes a requirement further down the road for more intervention. This is a negative feedback loop.
Isn’t paying rent a constant recurring cost with no returns?
Research an investment (could be a public company, private company, government agency, infrastructure project, etc) that you believe meets the definition of a malinvestment (past or present) and argue why you think it’s a misallocation of capital (3-5 sentences).
- In many countries, governments choose to keep alive companies with hundreds of millions of dollars in state debt, instead of privatizing or closing them. In Romania, the biggest debtors to the state are the state companies themselves. For example, the National Coal Company, which the government wanted to make it part of a new energy company (by establishing a giant conglomerate of companies in the energy sector controlled by the government) is the largest debtor to the state, with total debts of about 15.1 billion RON at the end of 2019, according to Romanian National Agency for Fiscal Administration. The debts were made by selling coal at a subsidized price to thermal power plants that no longer paid their debts. The coal mines were also very inefficient.
Malinvestment would be to put money into the interest-bearing deposit, like a savings account at a bank, earning 1-2% a year. The gains barely cover the stated inflation rate, not even considering what the true inflation rate might be.
I think a investment in South Africa is Definitely Goverment lending money to state owned companies. Firstly these companies mis spend the new borrowed money and the rest gets stolen by corrupt government employees. In the meanwhile we Eskom, SAL are not delivering services we have loadshedding and the airlines retrench people. That is crazy. The tax payer pays for this all.
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A malinvestment would be governmental aid during corona crises that goes to airlines such as Air France who in turn use the money to pay-out bonuses to its CEO and management.
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The two situations that come to mind are the banking bailouts in the late 200X’s because all they did was pay bonuses to CEO’s for crashing the world economy and the second situation is the Dutch tulip trade during the 1600’s because that bubble popped in historic proportions.
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Government intervention into economy is a way, that authorities of power are using, to disrupt natural ability of people, to take care of themselves. In one word, it’s called manipulation.
Communism is a great example of manipulative, centralized model, that obliterates idea of free market and prohibits private activity.
It looks like that many of so called democratic states are functioning, like if they were being led by communist politburo. Money system is centralized and can be printed, when needed, for projects, whose only meaning is to justify printing itself. The outcome is a burden of common people, who have to pay for these crazy ideas of greedy influential people and their twisted views on economy. Common people who are now forced to work 24/7 inside their torn-apart unprofitable economies, have no time to educate themselves and are being indoctrinated through generations, that they need some kind of authority to protect and feed them, even nurse their children.
Example of malinvestment is a government approved project in my country, that was 50% financed, or rather credited by European central bank. This project is worth more than one billion euros and is the result of cooperation between government and so called local municipal mafia. It has to do with renewal of a complex, whose technology is outdated, bad for environment and now year after year produces economy losses. I think that this is prime example of allocation of capital, because it has nothing to do with natural flow of free market, but instead serves corruption, that started in a local bar and went all the way up to “wizard of oz”, who was more than happy to find another money laundering project.
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