Exxon and the financial markets purpose

Dear Reader,

We are in the middle of the worst financial crisis since the Great Depression. We listen to companies everyday who blame their poor financial state for it. It is widely used as an excuse to cut back investments and R&D. The naked truth is however companies have to cut back on R&D due to their directors’ stupidity and greed. The fall in R&D will hurt the development and enrichment of society.

The financial sector facilitates the transfer of surplus funds to entities in need thereof. Other than that, it does not benefit the society in general. There were many before the crisis who had forgotten the sectors actual purpose. They saw it as a money machine which paid over 40% of London’s taxes and the generator behind improved living standards. What believers failed to realise is a new fancy name for what was in fact a loan will not improve the life of human beings in general. What does improve our living standards to the greatest degree is research and development of new tangible products and inventions. A new name of a financial paper might enrich the inventor and early investor but not the general public, however a new drug or a new type of building material does. The financial markets are there to facilitate the flow of funds to companies doing this type of research or want to expand. Before the crisis too many industrial companies got caught up in the banks willingness to provide cheap capital for expansion, thus overvaluing acquisition targets and their know-how. Only the smartest and most long-term planning of managers opted out of this buying frenzy. Today they stand not only as the champions, but more importantly as the carriers who will bring development and prosperity forward.

A great example of this argument is the energy sector. Last week Exxon released their results for 2008. It is the only major energy company in the world who is not reducing their R&D budget. In stark contrast it is increasing it by 11.1%. They are able to do it thanks to conservative expansion during the last buy-out boom and long-term planning. The worlds other four oil majors (BP, ConocoPhillips, Chevron and Royal Dutch Shell) however overbid each other for companies leaving little money for R&D in downturn. Analysts also argue Exxon will be able to acquire high margin/high risk assets at step discounts since the other majors have less disposable means to put up a fight. Furthermore, Exxon returned many times more capital to investors than the other majors in 2008. The future in energy looks “Exxonerated” (7/3/08, Lex column, FT).

To conclude I want to emphasise the relationship between debt and wealth. Debt is not wealth, but the exact opposite. Anyone who thinks differently is wrong. It was this relationship that got mixed up before the crisis and sadly to a great extent still is. We are in this mess because of excessive borrowing. More borrowing will not take us out of this crisis. Real and sound economic fundamentals will, in other words, saving and development will.

Note. I apologise for not being able to publish the second article about Hedge Funds. It will be published next week.