Thursday, July 25, 2019

The Tyranny of the Investor Class

Definition: Dominance through threat of punishment and violence.

Well, I guess we’ve all seen some of that, through an aggressive boss, a relationship gone to hell of that old standby, bad parenting.

But this is different, a practical and greedy move by the investor class to put us all in a secondary position investment-wise. To say it threatens what we choose to call capitalism is to put it mildly.

There’s a story here and it’s an interesting one should you care to read it and see how we got here. There’s a plot-twist or two along the way to keep you awake. We all like a story, no?

This one begins with post WWII in America, a heady time of jubilation when the world was ours.

We were kings of the mountain, with most foreign industries in shambles and our own intact. We made cars, trucks, appliances, ships, planes and an array of material goods that would make Wal-Mart shiver in its boots today. The factories roared, the steel mills poured what might as well have been molten gold and everyone needed our stuff.

Stuff we had aplenty, but plenty dials down and in our euphoria we neglected to modernize. Who needed it? We were all fat at an aging dinner-table.

So, if it doesn’t actually twist, the plot changes a bit and we found a way to profit without all the work of modernization. As our former enemies tooled up on Marshall Plan money, we found the magical effect of diversification. General Electric showed the way and got out of making toasters and TVs and into the finance business.

Jack Welch saw finance as easier and more profitable, growing the company by 4,000%. Along the way, he instituted a policy of each and every manager firing 10% of his workforce each and every year. Those who remained kept their heads down and America’s most innovative company became less and less innovative.

In the aftermath, Welch said it was the dumbest idea he’s ever had, but he’s still number one on the business guru Hit Parade.

So diversification wasn’t the complete answer it had promised. The banks and Wall Street were more clever and a whole lot more powerful in that business. Next, big business turned to corporate take-overs.

With foreign competition weakening our stranglehold on worldwide markets, everyone was for sale at a price. What the hell, business was business and if you had the staff to run a core business, they could certainly run another. Every acquisition was trumpeted by the enormous cost savings in staff.

Loews Theaters bought a cigarette company, Singer Sewing Machine bought a space technology manufacturer, Phillip Morris bought Seven Up and then Kraft Foods. What could possibly go wrong?

Well, movies are not cigarettes, sewing machines are not space tech and cigarettes are not food products.

The best innovators among the acquired companies took off for greener pastures and takeover staff had no idea of how to run the conglomerate. So the stronger of the two got rid of their bed-mates and looked elsewhere to survive.

It was like watching bad marriages fail, only to marry again too soon and get kicked in the financial pants at every divorce. If Johnny Carson had been a corporation, he’d have fit in perfectly.

In a plot-twist, investors didn’t know what the hell to do, so they stopped looking closely at companies and made decisions based on quarterly earnings.

It made survival sense. If you couldn’t tell who a corporation might be tomorrow and most of the marriages failed, hang on to your pants and rely on earnings. Quarter by quarter earnings. You might at least get in and out again before disaster struck. Even a bad marriage has a honeymoon period and when the husband (or wife) takes a lover, it’s time to re-arrange the Christmas Card list.

Of course being judged solely on quarterly earnings made it hard to run a company. Expenses like wages, retirement plans, research and development and long-range planning all have their costs and are likely to shave earnings in the short run.

But the short-run was all there was. Increase earnings by the quarter or lose your investors. That fact wasn’t lost on boards of directors. Thus the Rock Star CEO was born. These dudes were hired guns and they shot from the hip.

Compensated largely with stock options based on an increase in market price, their allegiance was with making that happen. If there was an ethical problem here or there, what the hell, everyone made money. Wasn’t that what a corporation was for? Economist Milton Freedman had declared it so.

The little guy is out now. You and I can’t compete. The best we can do is own shares in a hedge fund.

The Rock Star CEOs delivered and moved on, cutting employees, raiding the pension cookie-jar, halting R&D, fucking over the unions and scaring the shit out of everyone in Tombstone.

Any company can coast for a while under those circumstances and during the coast (call it a honeymoon) profits soared. Right on cue, share-value soared and everyone from the CEO to the board laughed their way to the bank to cash out.

The really smart and really greedy bought company shares short and profited again on the way down.

So, if quarterly earnings were a good (and only) way to judge, wouldn’t monthly, weekly or even by the minute statements be better yet? The plot thickens…

Of course there was no way to do that. Or was there?

No human could possibly run numbers in that quantity and time-frame. But computers could, if only they had the language to understand. If only there were a precise rule (or set of rules) specifying how to solve the human shortcoming.


Turns out there is and it’s called an algorithm—a set of computer programming codes that do just that, in hundredths of a second. It’s called flash-trading.

If you hope to make millions on Wall Street, don’t bother to get an MBA. They’re yesterdays news and we all know how fast the news-cycle has become. 

The hottest prospects are computer programmers and they’re rock stars as well. All nerdy quiet types with enormous bank accounts and the best of them moving around to the highest bidder.

Investors love programmers. They take all the drudgery out of investing and allow profits to accumulate while your toes are dug into a beach in Bermuda, visiting your tax-free haven with a lady your wife knows nothing about. At long last, the perfect marriage, programmer to investor.

But there’s a catch. Damn, there’s always a catch, even in never-never land.

They’re expensive, much in demand and it’s a yearly bidding war for their services. Further, they can’t write a program and leave. The program war is like Afghanistan, it just goes on and on. Everyone is in the game and you must keep up or lose out.

There’s another problem.

Oh shit, I just knew there would be. Your computer is up against other computers and every once in a while they lock horns.

(Wikipedia) The May 6, 2010, Flash Crash, also known as the Crash of 2:45, the 2010 Flash Crash or simply the Flash Crash, was a United States trillion-dollar stock market crash, which started at 2:32 p.m. EDT and lasted for approximately 36 minutes.

That can simply ruin a sunny morning on a Bermuda beach.

End of story, but it’s been fun.

Sleep well, your money is in unknowable hands—or maybe not in human hands at all.

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