The complaint is often heard that instead of investing in the real economy, the economy is being "financialized," ie investment in purely finanical assets. This claim is rarely quantified, however. How much is invested in purely financial speculation? I don't know if there's a technical definition of financial assets, but we can agree that shorting a stock is a purely financial transaction ie not an investment in productive assets. Every short creates a corresponding long, so a heavily shorted stock will have more nominal than real shareholders, if that makes sense. For instance, GMCR may have 1 million shares but there may be 2 million shares ie 1 million real shares plus 1 million shares shorted. So at $10, we would characterize that as $10 million of purely finanical capital. If the total market has value of $15T and 1 percent shares short, that's $150B. Let's just take that as an estimate. Then I'd say, as a quick estimate, there is about $300B invested in purely financial assets ie brokerage firms. That includes about $100B in GS and MS and then another $200B for JPM, C, BAC, etc brokerages. In addition, there is $2.2T in hedge funds, but many of that will be invested in real assets, not financial assets. I estimate that about $300B of the $2.2T is in financial assets, ie cta, global macro, etc. That's a very rough estimate.
So these are the total estimate:
$150B equity shorts
$300B brokerage balance sheets
$300B hedge funds
That's $750B altogether. Some of that will overlap ie brokerages will own the shorts, but this is a very rough estimate. To put it in context, about $15T is invested in total non-residential fixed assets. So the amount invested in financial or speculative assets is about 5% of that.
Now lets say that the stock market capitalization is $15T and market return is 10% and total alpha is 1% ie the amount that flows to speculators vs. investors. (We don't include currency or commodities because there is no net alpha ie all net speculative profit in those markets is $0). That's $150B. So of the $750B of financial assets, the gross return is $150B or 20%. Some of that will take the form of fees, salaries, profit, etc.
So basically, there is some degree of financializaiton, but not a huge amount. The vast majority of capital is invested in real assets.
So these are the total estimate:
$150B equity shorts
$300B brokerage balance sheets
$300B hedge funds
That's $750B altogether. Some of that will overlap ie brokerages will own the shorts, but this is a very rough estimate. To put it in context, about $15T is invested in total non-residential fixed assets. So the amount invested in financial or speculative assets is about 5% of that.
Now lets say that the stock market capitalization is $15T and market return is 10% and total alpha is 1% ie the amount that flows to speculators vs. investors. (We don't include currency or commodities because there is no net alpha ie all net speculative profit in those markets is $0). That's $150B. So of the $750B of financial assets, the gross return is $150B or 20%. Some of that will take the form of fees, salaries, profit, etc.
So basically, there is some degree of financializaiton, but not a huge amount. The vast majority of capital is invested in real assets.
