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.