The price of everything

The merits of a slowdown

“Cheaper toys ‘are Christmas hits’ ”

 

-       BBC News website, 28 October 2009.

 

Stop all the clocks, wrote W.H. Auden once, and he had the right idea. One of the irritations of modern western society is an always-on consumption culture that lives not so much in the here-and-now but in the tomorrow-reported-as-yesterday. Or perhaps, in remembrance of George Orwell, we should allude to his definition of advertising: the rattling of a stick inside a swill bucket. Consumer time, in any case, now moves at an accelerated rate, especially when the forces of retailing, in ever more urgent pursuit of the almighty trading dollar, overcompensate for an economy debilitated by a banking bust. So we have to tolerate Christmas lights going up in Oxford Street before Halloween; newsreaders and politicians vying to be the first to wear their poppies with pride (Armistice Day, commemorated as it always has been, on November 11^th); and toys reported as Christmas hits before the end of October.

 

Markets are not immune to this sense of temporal acceleration; they have always tried to anticipate the future and price it in. But how much future, and what kind of future, is priced in now ? GMO’s Jeremy Grantham, who pretty much nailed the March equity lows, now reckons the US market is around 25% overpriced. Pimco’s Bill Gross reckons the six-month rally in risk assets (and not just equities, or bonds) “while still continuously supported by Fed and Treasury policymakers.. is likely at its pinnacle.” “Doesn’t it seem odd,” asks Grantham, “that we would be measurably overpriced once again, given that we face a seven-year future that almost everyone agrees will be tougher than normal ?” We can only shrug our shoulders and agree, drawing discrete attention to the new purveyors of moral hazard extraordinaire, namely the western governments that, acting through nominally independent central banks, have engineered interest rates down to zero, and are busily setting up government bond markets for a bust of biblical proportions once the market manipulation known as quantitative easing finally ends. Any individual investors currently being semi-officially ushered in to the stock market given the lack of credible alternatives by way of deposits or government bonds may have cause, in the fullness of time, to ask precisely whose wealth all this unprecedented monetary support has actually protected. Probably not their own, as we may yet see.

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Rage against the machine

 

“John Meriwether.. is in the process of setting up a new hedge fund – his third.”

 

-       The Financial Times.

 

“Fool me once, shame on you. Fool me twice, shame on me.”

 

-       Popular saying, though probably not in Greenwich, Connecticut.

 

 

A recent posting on the consistently excellent Naked Capitalism weblog (“Mainstream Media Reporting as Propaganda”) touches on one of the more frustrating aspects of the financial crisis – why have the media been so supine in the face of wholesale abuse of the public purse, and why have the bailouts not triggered broader social disquiet ? In both the US and the UK, money is being distributed to banks from taxpayers – involuntarily – then passing straight through those organisations and speedily excreted out the other side in the form of bonuses. On the former topic, journalist Matt Taibbi (of “vampire squid” fame) commented that

 

“It’s literally amazing to me that our press corps hasn’t yet managed to draw a distinction between good news on Wall Street for companies like Goldman, and good news in reality.

 

“I watched carefully the reporting of the Dow breaking 10,000.. and not anywhere did I see a major news organization include a paragraph of the “On the other hand, so.. what?” sort, one that might point out that unemployment is still at a staggering high, foreclosures are racing along at a terrifying clip, and real people are struggling more than ever. In fact the dichotomy between the economic health of ordinary people and the traditional “market indicators” is not merely a non-story, it is a sort of taboo — unmentionable in major news coverage.”

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Show me the (real) money

 

“And you thought you had broken even. If investors had bought gold when the Dow first closed above 10,000 in March 1999, they’d be up almost 280%. Put another way, Dow 10,000 a decade ago “cost” 36 ounces of gold, treating each Dow point as $1. When the Dow revisited that level Wednesday, it was worth only 9.276 ounces of gold. In oil terms, the Dow has gone from 609 barrels to 133.”

 

-       The Wall Street Journal on ‘Dow 10,000’.

 

 

There were somewhat half-hearted celebrations last week when an antediluvian stock index representing 30 companies selected by the editors of the Wall Street Journal crossed the 10,000 level. Again. This stock index, which is most affected by the change in the share price of an 85-year-old computer company, because it’s a price-based and not value-weighted index, has been here before – as the graph below shows:

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Here is Wisdom

 

“Another flaw in the human character is that everybody wants to build and nobody wants to do maintenance.”

 

-       Kurt Vonnegut.

 

 

The revelation came sometime during early 2000. It was in the form of Peter L. Bernstein’s “Against the Gods: the remarkable story of risk” (John Wiley, 1998). Sadly, Mr. Bernstein is no longer with us – he died during the summer – but his legacy is likely to outlive most of the financial institutions who never woke up to his message. Hidden within the pages of this outstanding book is an equally remarkable quote from another ‘Renaissance man’, Daniel Bernoulli. In 1738 Bernoulli effectively launched the science of behavioural finance with the following insight:

 

For a wealthy investor, the practical utility of any gain in portfolio value inversely relates to the size of the portfolio.


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Doing business the Puritan way

 

“Astrology developed into a strange discipline – a mixture of careful observations, mathematics and record keeping – with fuzzy thinking and pious fraud.”

 

-       Carl Sagan, from the TV series ‘Cosmos’.

 

 

The late Carl Sagan was talking about astrology, but with those references to observation, mathematics, record-keeping, fuzzy thinking and outright fraud, he might just as well have been referring to economic theory. Or banking, for that matter. Magical thinking masquerading as knowledge – with hypotheses stolen from the physical sciences – is just one of the factors behind a financial crisis that, contrary to popular opinion, lives with us still, slowly continuing to drip poison into the real economy.

 

Another factor, which we suggest has been less closely examined, is the role of ownership and management. In an outstanding book (“The Puritan Gift – reclaiming the American dream amidst global financial chaos” by Kenneth and William Hopper; I.B. Tauris & Co, 2009) the authors make a convincing case that it was bad management and deviation from the long-established principles of innovation and discipline that were / are really at the heart of the banking crisis. The Hoppers define the Puritan Gift as “a rare ability to create organizations that serve a useful purpose, and to manage them well.” As opposed to organizations that serve no useful purpose, and managing them into the ground. Lehman Brothers, anybody ?

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