For much of the late 1990s, the U.S. economy and many of its investors were on the receiving end of a spectacular wealth transfer.
The Mexican peso's collapse, the Asian financial crisis, the plunge in oil prices, the Russian debt default and other global shocks were terrible news for the economies in which they were centered.
But for America, the net effect was a strong dollar, lower inflation, cheaper imports, subdued interest rates and higher stock prices.
Others' losses were our gains. There's your wealth transfer.
During the last 12 months or so, Wall Street has been the venue for a different kind of transference. This one is a risk transfer within the $13.5-trillion U.S. stock market.
The central element of this shift has been the willingness of individual investors to take on substantially greater risks in their personal portfolios, at the same time that many market professionals have been seeking to lower their risk profiles--the latest in the latter category being George Soros, the legendary hedge fund manager who on Friday announced a broad retrenchment of his speculative activities.
Small investors' appetite for risk has been most evident, of course, in their purchases of technology stocks and aggressive mutual funds that loaded up on those stocks.
On the other side of that equation have been tech company insiders, who have cashed in mountains of personal stock at hefty prices; venture capitalists, who have unloaded their stakes in young tech companies well before the businesses had any shot at profitability; and investment bankers, who are only too happy to feed investors whatever it is they think they want, regardless of the investment merit.
With the tech-stock sector's dive since early March, the widespread assumption on Wall Street was that this massive risk-transference would grind to a halt. Saddled with instant and severe losses in high-risk stocks, the public would not only balk at buying more, but would probably dump much of what it owned in a blanket admission of investment error, many pros feared.
Yet as the stock market's miserable April comes to a close, there are few signs that small investors are rushing en masse to lower the risk level of their portfolios--despite a net 15.6% drop in the Nasdaq composite stock index for the month.
Instead, the evidence suggests that many individual investors have held on tight to their tech stocks and aggressive mutual funds. What's more, other individuals who may have sat out the run-up in "new-economy" stocks in the first quarter appear to be stepping up to buy now that prices are lower--even if, by historical yardsticks, these shares arguably are still overvalued.
Last week, major mutual fund companies reported some surprising numbers regarding their March and April cash inflows. On balance, investors were buying less of the tech-stock and aggressive-growth funds that enjoyed unprecedented demand in January and February. But even with the heavy losses in those high-risk funds since mid-March, many of the funds had net cash inflows even for April.
Janus Capital, the Denver-based fund giant that has become a symbol of high-risk, high-return investing in the last few years, said it took in a net $3 billion in new money in April. That was about one-third its recent monthly peak inflows. But considering that the market headlines in the first few weeks of April were primarily about the supposed demise of the tech-stock boom, $3 billion represents a stunning vote of confidence on the public's part.
Likewise, T. Rowe Price Associates in Baltimore said its giant Science & Technology stock fund took in a net $300 million in new cash in April, and that the fund saw only a few days of net redemptions by investors even during the worst of the tech-stock meltdown.
Now, contrast that experience with hedge-fund king George Soros' announcement Friday that he's scaling back his investment firm's risk-taking activities after decades of adeptly playing wild swings in currencies, bond markets and stock markets worldwide.
"Markets have become extremely unstable and historical measures of value . . . no longer apply," the 69-year-old Soros told clients.
Another segment of the institutional-investment universe also has been pulling back in recent weeks, even as the public has continued to push money into mutual funds: The number of U.S. companies announcing plans to buy back their own shares has tumbled sharply this year.
Just 48 companies announced buyback plans in April, according to Thomson Financial/Securities Data. That's about one-third the level of November and December.
For his part, Soros may have had little choice in the matter. His deputies have been primarily running his money for the last decade (as he has focused on philanthropy), and his two top money managers last week decided to resign.