“The illusion has become real…capitalism at its finest.”
Oliver Stone penned this indictment of capitalism in Wall Street way back in 1987. But I doubt whether even he could have imagined how prescient this notion would become in today’s world where anyone with a smart phone and a social media following has the potential to conjure millions of dollars of investment gains and losses.
These are treacherous days for Israel’s economy.
The warning “where there’s smoke, there’s fire” has become helplessly antiquated. Few are interested in doing the research to verify the fire, and most don’t even investigate whether the smoke is simply harmless vapor. Buy or sell the rumor – but, at the very least, make sure to get out of the way. And the less liquid or thinly traded the asset, the more vulnerable it is.
For portfolio managers at some of the most consequential investment funds in the world, including sovereign wealth and large state pension funds, their career risk of being wrong (underperforming their benchmark) is significantly worse than their personal upside for being right. The same goes for the consultants and OCIOs who act as gatekeepers for these funds.
Global rating agencies such as Fitch, Moody’s, and S&P are governed by similar risk aversion, especially following their universal lambasting during the Great Financial Crisis.
For the past thirty years, and accelerating over the past decade, institutional investors have flocked to Israel despite the country’s obvious idiosyncratic risks as a small, singular, Jewish democracy surrounded by hostile neighbors.
For the most part, investors’ faith has been rewarded. Today, the enterprise value of Israel’s technology ecosystem is second in the EMEA region, just behind London. Israel has the fifth-most tech “unicorns” in the world. More broadly, Israel has paced economic expansion within the OECD since it joined the group in 2010, with the strengthening Shekel a reflection of this growth.
And, while all investments endure downturns, Israel-based asset drawdowns have not been correlated to incidents of war, terrorism, or similar non-economic threats. Rather, they’ve been tied to recessions, etc. along with other global indices.
These are remarkable statistics for a country with a population that has not yet reached ten million. Ready access to global capital has certainly been a vital component of Israel’s success.
It would be a tremendous mistake for Israel’s entrepreneurs, fund managers, and especially its government to grow too confident that this fortune will continue, unquestioned. The competition for global investment dollars is fierce; it doesn’t take much of a red flag for decision makers to move on to the next idea across their desks.
Now certainly, long-term fortunes have been sewn from turbulent times, and the fundamentals behind Israel’s economic success remain strong.
But confidence in Israel’s rule of law has been one of these pillars. So, while perhaps not a full-fledged conflagration, there is some smoke here. And the fact that this damage has been self-inflicted is all the more troublesome.
Without delving into another debate regarding the prudence of the government’s proposed reforms, the implementation process has certainly been alarming:
Entrepreneurs are making new plans.
Leading venture capital firms are concerned.
Respected global economists are urging the government to rethink.
The sirens signaling incoming missiles didn’t scare investors away from Israel. I worry that this current chorus of warning bells could have a much deeper impact.
I hope this post will prove to simply be a cautionary reminder, and that the de-escalation we witnessed this week will be first step in a more integrous reform plan. Investors are watching.