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.
Bingo!
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.