I sat near Battery Park on October 27, watching to see how many Wall Street brokers were out on the ledge building up courage to take a dive. There were lots of pigeon droppings and yellowed leaves, if not many dropping traders. Like Edward Gibbon meditating on declines and falls in the ruins of the Roman forum, I pondered: does Wall Street have any effect on the real economy where people make and sell real things, or is it just a more staid version of Atlantic City’s casinos? What does the stock market actually do?
It certainly provides gainful employment for analysts and IR professionals – and even, indirectly, for those of us who write about it. Another thing the market has done is enhance the lifestyles and remuneration of senior corporate officers. The same day the market plummeted, we discovered that the US Treasury was $46 bn better off than anticipated, mostly because of the taxes on executive stock options being cashed in over the year. Judging by those figures, it seems that the average CEO will pronounce, ‘Well done, thou good and faithful market.’
In the same vein, Street watchers suggested that big money managers did much of the dumping that triggered the trading halt, with the purpose of locking in their year-end bonuses. This Christmas spirit did not of course extend to Joe Sixpack, still shoveling his buy orders into the stokehold as the institutions above launched their lifeboats.
One almost longs for the sight of Sixpack and other bulls cruising the streets of Gotham in their pick-ups, sighting their hunting rifles at investment professionals. Instead they saw opportunity in the institutional cast-offs. That could mean they’ll be badly mauled by a big bad bear. Or, alternatively, it could mean that individual investors are the really astute ones while the fund managers are more concerned about their bonuses than the long-term welfare of their clients. Say it ain’t so!
The market is also clearly good for the finance houses. Mergers and acquisitions are launched on a wave of equities, but the talk about shareholder value being released is, once again, a load of bull.
Bull markets jump, friskily rampant, at any news, whether it’s mergers or demergers, downsizing or upsizing. The finance houses, which employ all those analysts to cheer the news of any change of corporate shape, do not give out their advice and services for free.
Of course, the official function of stock markets is to reward entrepreneurial success and punish failure. Investors, flapping their gills in the free flow of information, make decisions about companies based on their performance – past, present and future. Even in the best of times, a ‘sell’ in an analyst’s report is as likely to be the result of a personal feud as of any serious research. ‘Hold’ you may get, but ‘sells’ are as rare as a steer struggling against the flow in a stampede.
As one aggressive trader proclaimed on October 27, ‘Fundamentals are for sissies.’ Irrational or otherwise, bull markets represent a rising tide of testosteronic exuberance that floats all but the very worst and leakiest of corporate bottoms as it rises. They have little to do with actual economic growth and everything to do with perceptions – mostly of what other people perceive. This is also known as the lemming effect. It works best when you sit in the middle of a crowd and check out which way everyone else is going.
In the sense that modern economies need this general wave of self-satisfaction and good feeling to induce investment, the market has done good work. But it may be cheaper to prescribe Prozac for everyone. It is, after all, a dangerously double-edged dose. As the small print in the prospectus says, equities can go down as well as up, and a bear market could produce a recession even if it had no direct effect on investment.
That is perhaps the most surprising thing about the stock market. There is only very tenuous evidence to suggest that it has anything to do with physical investment. Recent economic growth in the US has not depended on equities; investors have been buying shares, not because they expect corporate profits, even less dividends, to rise, but because they expect other people will shortly buy the same stock back from them at higher prices.
If American industry needs capital, why are so many companies either sitting on cash mountains, or buying back their stock? Ah, you may say, but what about the IPOs – all that money being pumped into cutting-edge scientific and entrepreneurial enterprises? Maybe so. But the really hot picks are the companies that have already raised venture capital elsewhere and deployed it to successful effect. That’s why people want to buy into them – and why their original investors and inventors want to cash in their chips.
But in the real world, the October correction has produced at least one salutary effect. According to chaos theory, the flap of a butterfly’s wings in Siberia could cause a hurricane in Florida. The stock market reverses the effect. Chaos in October introduced a certain order in the ‘butterfly’ flap. At least it induced Alan Greenspan to maintain a gossamer touch on interest rates and not nip the blossom of economic growth in the bud. But, once again, it seems an expensive way to do it.
The Speculator
