Mysterious are the ways of the stock market. Defying reality, it surges with unemployment figures, drops with good news, and most people pretend this is normal and rational.
My favorite fairy story is not the one about the bull market continuing forever. It’s about the little boy who pointed out that the emperor was, in fact, starkers rather than togged up in his best Ralph Laurens. I suspect the angry crowd promptly committed him to a child psychiatrist, at the very least.
Sergei, a Tass correspondent I once knew, admittedly did not meet the age criteria for the tale, but he was otherwise well-qualified to play the leading role. Just before the triumph of capitalism and the mafiocrats in Moscow, we were taking a press tour of the NYSE to learn the finer details of futures trading. Aflame with enthusiasm, our guide waxed rhapsodical about straddling, shorting, hedging and all those Kama Sutra sounding things you can do to a barrel of oil with the wonders of modern finance.
In this ceaseless churning of ownership, occasionally there is a crystal ball of opportunity through which to get a peep of what is going on. Referring to a recent court case that had frozen a set of North Sea oil contracts, I asked how many were involved between the well-head and the shore.
Our guide admitted that there were some 50 Brent sour crude futures contracts frozen in the case, which amounted to about one new owner per gurgle in the pipeline. Sergei, our man from Tass, looked distressed and, with a say-it-ain’t-so look, asked, ‘What’s this about Sauerkraut futures?’ Our guide may as well have been in his birthday suit for all the sense he was making to Sergei.
But why not Sauerkraut? In the futures markets, Adam Smith’s invisible hand becomes even more inscrutable than usual. Sauerkraut to go with those pork belly futures would surely constitute a balanced diet, if ever an unfortunate trader were to find himself lumbered with the actual commodity.
But that’s unlikely, since the whole point of these markets is their ethereal disconnection from the sordid cis-lunar world. For example, in his slightly less ‘New Labour’ days, Robin Cook, just appointed Britain’s foreign secretary, used to reminisce that the London International Financial Futures Exchange had to get a legal opinion on whether it needed a casino license before it opened. Apparently it was almost the toss of a coin that decided the dubious battle.
In short, my Russian friend had every reason to be perplexed. What is it all about? Every day more than a trillion dollars are changed on the world’s currency markets, purportedly to finance international trade. But the actual foreign trade in physical goods, worldwide, is only (see what writing for Investor Relations magazine does for ones perspective!) about $3 trillion a year. So for every dollar’s worth of grain, oil, compact disk or marital aid that is traded, the financial institutions revolve a hundred dollars.
Forgive my naivete, but this doesn’t seem efficient, unless it is considered a public good to keep currency traders off the streets, or in Porsches if they are on the streets.
The system’s adverse results are very visible. Countries and governments can go to the wall. Companies find their foreign earnings skewed as currencies trip the electron fantastic over the Pacific and Atlantic. Central bankers get dyspepsia. But how much value does this electronic shuffling add? It almost makes one long for the good old days of the gold standard.
At least we know the stock markets do a wonderful job of raising capital for investment in real industry, don’t we? Well, no. In fact from the first snort of the bull, the percentage of capital expenditure shrank as shares soared, only to begin climbing – slightly – in 1992.
Last year, non-financial market shares were valued at some 85 percent of GDP, and capital expenditure at just over 25 percent. Apart from the not inconsiderable fees and commissions going to bankers and brokers, it seems the cash is used to pay off the original entre-preneurs or to finance stock options for executives. It all seems an elaborate apparatus just for that.
It’s fashionable to sneer at the Japanese ‘slump’ but most countries would give their crown jewels for a slump like Tokyo’s, which was caused by the funny money of inflated land prices being used as collateral. The ‘readjustment’ did little harm to the real economy.
So what will happen if a bear market rears its ugly fangs, even if we call it a readjustment, so that stock prices reflect revenue and profits more closely? There seems to be a growing suspicion that it wouldn’t have too much effect on the real economy, but it might effect some of the details: companies might have to revert to dividends instead of share buy-backs to persuade shareholders that they were worth investing in; there might be fewer lemming-like rushes after high tech stocks. And a lot of people in Wall Street would indeed be very unhappy – and unemployed.
But with investors’ propensity for cheering when unemployment goes up and salaries and wages go down in the productive sectors of the economy, there would not be too many tears shed. And with air-conditioning and sealed windows, they can’t even get on the ledge to jump, so our compassion would not be tested too much. We can live with a bear.
The Speculator
