Something has to give

Cross-posted from The price of everything

By Tim Price, Director of Investment at PFP Wealth Management, a London-based fund manager

“More than half of all workers have experienced a spell of unemployment, taken a cut in pay or hours or been forced to go part-time. The typical unemployed worker has been jobless for nearly six months. Collapsing share and house prices have destroyed a fifth of the wealth of the average household. Nearly six in ten Americans have cancelled or cut back on holidays. About a fifth say their mortgages are underwater. One in four of those between 18 and 29 have moved back in with their parents. Fewer than half of all adults expect their children to have a higher standard of living than theirs, and more than a quarter say it will be lower.. for many Americans the great recession has been the sharpest trauma since the second world war, wiping out jobs, wealth and hope itself.”

–       From a Pew survey on the effects of the American recession, cited in the current issue of ‘The Economist’.

“Three years ago, it seemed inconceivable that a country such as Greece would be allowed to default, or exit the euro zone. But back then it seemed equally hard to imagine that Lehman Brothers might fail. Now that Lehman has gone, who knows what the worst-case scenario might be ? Could the euro zone break up ? Could Greece default ? What might happen to other debt-laden nations, such as the US, if the worst case scenario occurred ? The one thing that is clear is that the answers to those questions now depend as much on culture and politics as on macro-economics.. In this new world of sovereign risk, what really matters is a set of issues that cannot be plugged into a spreadsheet. The old compass no longer works.”

–       Gillian Tett in ‘The Financial Times’, April 2010.

“Two prisoners have escaped from a prison in Argentina after guards placed a dummy with a football for a head in the watch tower because of a shortage of manpower.. The source said that the video cameras monitoring the perimeter wall had stopped working some months ago. He said that he hoped the incident would alert the authorities to the problems with lack of resources and that politicians would act to improve the conditions.”

–       ‘Prisoners escape after guards put dummy in watch tower’, ‘The Daily Telegraph’, 21 July 2010.

Why did US stocks crash on May 6th this year ? That date saw the biggest one-day points decline – 998.5 – in the history of the Dow Jones Industrial Average. For a brief period, $1 trillion in market value evaporated. Eight large company stocks, including Accenture, fell to a price of one cent, while others, including Apple and Hewlett-Packard, rose to over $100,000 per share. Having fallen by nearly 10%, the market then largely recovered. The precise cause of this extraordinary intra-day volatility remains a mystery. What seems reasonably plausible, though, is that some form of algorithmic trading, whether executed by hedge funds or investment banks (like there’s a difference), played a role. The ‘essential’ function of the stock market is to raise capital for businesses. A secondary but meaningful function is to assist in price discovery, the more or less democratic process of evaluating those businesses, with capital assessed as votes. What is not a core function of the stock market is to act as a playground for high speed leveraged speculators. As Keynes said,

“When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”

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  1. Tao Jonesing

    “The ‘essential’ function of the stock market is to raise capital for businesses.”

    You lost me at “hello.”

    The above statement is a steaming load of dung.

    The stock market that we know and love is primarily and above all else a secondary stock market. That is, the stock market predominantly trades in existing shares, not in new shares.

    Query: how many IPOs and secondaries this year? And what is the total number of shares associated with the new offerings as compared to the total number of shares transacted. (Hint: don’t waste your time; these new shares are a negligible percentage of the noise.)

    Fact: unless you are participating in a stock offering in which you pay money to the corporation in exchange for newly issued shares, you are NOT raising capital for businesses.

    With rare, statistically negligble exception, when you “invest” in the stock market, you are NOT investing, you are speculating. Just ask the BEA, who does not count this kind of investment as “investment” in calculating GDP.

    Now, you might say, if you place your bet and hold it for a year before making a new one, that’s treated as a “capital gain” so the bet must really be capital investement, right? No. That’s a gimme that encourages capitalists to speculate instead of doing what capitalists are supposed to do, which is to actually invest in creating new production and wealth.

    I will read the full document, but that statement stopped me cold. Apologies.

    1. Tao Jonesing

      Once I got past that one statement, I found the rest of the article interesting, and I absolutely agree with the conclusion that “something has to give.” The only question is when.

  2. skippy

    Sorry folks but the world did not evaluate it self Visa vi the stock market till man came around, its our baby and it likes to cry allot….ummm wonder why.

    Trading makes some rich and others poorer than they were before, this is the world we have built, enjoy living it.

    Skippy…boxing has weight classes, stick to your class please.

    1. aet

      Speak for yourself…jeez some people like to spreads the blame around like manure.
      Trying to make us feel bad about life, huh?
      itching to start another war,eh? “cause that’s why the great recession came: happy prosperous people do not support war: and some “leaders” want a war, very badly.

      Take your cynicism and pessimism, and take a long walk off a short pier.
      WE have work to do, and negative nellies are not part of the solution.

  3. Glen

    Thank God we bailed out Wall St with that $23.7 trillion* from the American taxpayers. It’s not like we had anything real to spend it on like a crumbling infrastructure, green energy, global warming, helping underwater home owners, or just jobs, jobs, jobs.

    * July 2009, SIGTARP report

  4. Toby

    The stock market is a dead military dictator propped up in the castle window, his right armed moved up and down by mechanical means to assure the restless crowd below.

    Don’t believe the hype.

  5. aet

    Hey a buck is a buck: all so-called “capital gains” ought to be taxed as income in the hands of the recipient.

    The non-taxation or favorable tax treatment of capital gains is a purely political sop to the wealthy in our society. And they already have enoughj.

  6. Jessica6

    I suspect bringing top marginal tax rates back to what they were before Reagan (or even DURING Reagan) would put a stop to a lot of this nonsense. There’d be no point in rigging the game in your favour if most of it was to be clawed back anyway.

    Of course, whenever there’s talk of that, out come the absurd Joe the Plumber stooges that only fool people who think employment income is the same as wealth and that small businesses (that employ most people) are all owned by the Top 1%.

    1. NOTaREALmerican

      What liberals refuse to admit about the “Joe the Plumber” people(and the Tea Party People in general) is that they are pissed out of their minds over two things:

      1) “those people” – which is natural for the paranoid peasants (so don’t bother complaining about “why they are that way”).
      2) A large government – with a large pile of loot – run by sociopaths.

      Sadly, liberals should also be worried about “a large government – with a large pile of loot – run by sociopath”. If the liberals don’t deal with this, the “conservatives” will. This is exactly what is happening in Arizona and the “illegal” problem. The paranoid peasants want the government to protect them from “those people”. Liberals pretend an open border – and an unending supply of near-slave labor – doesn’t create a problem.

      All problems are solved. They can be solved with brains or brawn.

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