Wall Street’s puppet masters

Last month I wrote how the oligarchy stays in charge. At the time, the Occupy Wall Street movement was nascent, so nascent that not even I was blogging about it. Since then it, everything has changed. It used to be that the headlines were full of stories about how we need to cut the deficit and lower taxes. Thanks to OWS, the story is now about the chronic lack of jobs, sinking standards of living that seem unstoppable, and a generation of mostly twenty somethings with no real job prospects on even their most distant horizons. They are joined by other large groups of unemployed people who happen to be over fifty, and thus become something like untouchables. Unemployment is a problem at all levels of the workforce. The OWS movement is finally giving it the focus it deserves, and rightly raises the question: why did we bail out Wall Street when none of it trickled down to the unemployed who needed it most?

The OWS movement has at least made me do more pondering about how the wealthy stay wealthy and how the rest of us take it on the chin. There are the obvious strategies that I mentioned in the previous post: the moneyed and Wall Street buy the influence they want. Then there are less obvious strategies: such as using inheritances to pass unearned income to the next generation, wealth that is arguably put to unproductive uses. Then there are the strategies that most people don’t think about.

For example, there is snuffing out potential competition. The oil companies, in spite of their profits, are running scared of the clean energy industry. Oh sure, they are spending lots of money with newspaper advertisements touting how they are going green by doing solar energy projects and the like. This is ninety percent setting expectations and one percent doing something tangible. It’s a try to set up a meme with the public that, “Well, they really aren’t entirely evil just because they want to rip up Alberta’s tar sands.” Those with the money, at least if they are savvy, will continue to spend significant capital to make sure competitive markets don’t emerge.

It’s not coincidence that the oil industry contributes disproportionately to Republican candidates, for instance. This behavior is not seen as anticompetitive; it is seen as pro-business. It’s easy to win the competition when you can use money to set an uneven playing field from the start. Thus money buys not just political power, but the ability to have your message drown out the competition’s. In many cases, you can buy out these threats with your ready capital, often ostensibly to build market share in an emerging industry, but more typically to quietly kill them so business as usual can continue.

This happens all the time here in American but we rarely notice it. Why are there only three major ratings firms on Wall Street? It is in part because the big three have the capital to squash any competition. The government rarely breaks up companies anymore, even after the Great Recession. In fact, despite the lessons of the Great Recession, the trend is just the opposite. Thus, as one example, Bank of America swallows up Countrywide Mortgage and everyone yawns. Money gives you this sort of power. Unless you have an administration and congress full of trustbusters, abuse simply leads to more abuse.

Perhaps the most insidious way to stay in charge is through financial obfuscation. A good example is derivative stocks. The more complex you make a financial instrument, the harder it is to figure out what is really going on. Only experts can really understand how these instruments work, and then only dimly. In all likelihood the only ones who really understand them are those who create and manage them.

That leaves us poor individual investors pretty much baffled. We know we need to invest money for the future but unless the financial entity is incredibly simple, like simple shares of a blue chip stock or an index fund, we are baffled by how it works or how to fairly value them. Instead we turn to so-called experts to give us advice on what represents good investments, for which usually they have a vested interest that disproportionately lines their pockets. To really understand our financial world, you need a PhD in finance plus you have to keep up on the minutia of markets. If you can do this, you can be bought off. Wall Street will hire you for seven or eight figure incomes to manage a fund. Unless you have missionary zeal, you won’t be an Elizabeth Warren trying to simplify things for the average consumer. And if you are Elizabeth Warren, you will find out that politicians have been bought off specifically to keep you out of a position of power.

Yes, obfuscation is profitable, at least for those already in charge, and it effectively drains wealth from the rest of us. We think that to make money we must do it through specially trained intercessors on Wall Street. What we really need are simplified rules and financial instruments that the average person can understand, which implies that many “innovative” financial instruments should probably be outlawed. As we have seen, many were engineered without real failsafes and have cascading effects when they fail that drain wealth principally from those who never directly invested in these instruments.

No wonder Republicans are dead set against a consumer protection agency. They realize that if such an agency were effective, it might level the playing field. And what that really means is that wealth generated through third parties and financial obfuscation might return to where it rightly belongs: to individual investors.

Maybe it’s about time for a little class warfare

It’s too early to say whether the Occupy Wall Street movement will have long-term legs. A group of a few hundred people has spent the last two weeks or so occupying Wall Street day and night. They are protesting many things they do not like about that street and the moneyed class that inhabit it. Yesterday, they moved uptown to the Brooklyn Bridge, occupied it, shut a span down and over five hundred protesters were arrested. However, the protest has mostly been lawful, if not more than a bit noisy, and mostly centered on Wall Street. Some on Wall Street look down from their balconies in bemusement and brazenly raise glasses of champagne at the protestors, while other traders try to tune out the commotion on the street.

Occupy Wall Street looks like a new phenomenon, but it is but the latest and it is spreading. It’s not hard to trace its roots to protests earlier this year in Madison, Wisconsin. The Occupy Wall Street movement seems more amorphous, less structured and lacking much in the way of central authority. Occasional lists of concerns dribble out of various alleged spokespeople and they seem to be a laundry list of complaints. However, they picked Wall Street for a reason. It is emblematic, even more so than Washington, of America’s problems. In a nutshell, protestors are seeing wealth being sucked up by Wall Street like they have a Hoover vacuum in our pockets and houses. They perceive that Wall Street has largely not suffered, and indeed has profited from the suffering of others. This has the inconvenient fact of being absolutely true.

In truth, some people on Wall Street (principally office workers) did suffer from the Great Recession. Brokerage houses laid off a lot of people and a few institutions like Lehman Brothers went belly up. Mostly though the politicians Wall Street had bought off with many campaign contributions came through for them when they badly screwed up. The gates of the U.S. treasury were opened and capital flooded into Wall Street firms to keep them solvent and to weather the crisis. Both Republican and Democratic administrations decided doing so was in the country’s best interests.

If Wall Street were more politically savvy perhaps it would have shown some humility. However, it was soon back to business as usual which included a phenomenal amount of arrogance. Had the United States not interfered in the stock markets, most likely many of these firms would no longer be in business. However bad stock prices are today, they would be valued much less. However necessary the bailout turned out to be, it exacerbated engrained bad habits on Wall Street.

It’s a little early to characterize exactly who is protesting but it appears to be principally the downsized, the educated but under or unemployed, and younger people feeling that Wall Street is pulling the rug from the expectations of the lifestyle they expected in adulthood. In reality, the 2000s were a lousy decade for almost everyone except for the rich. 2011 and 2012 are merely extending this lousy decade and the frustrated have had enough.

To start, they want justice. They see no justice when income is taxed higher than capital gains. They see no justice when their houses are foreclosed from under them while those who sold them shoddy mortgages escape and civil and criminal penalties. They see no fairness when Wall Street quickly starts awarding itself obscene bonuses and they, if they can get a job at all, make some fraction of their previous income. Why do they have to scramble and depend on charity (if they can find it) when Wall Street is coddled by Uncle Sam and, indeed, soon feels free to raise a finger at Uncle Sam? Many on Wall Street are tsk tsking the federal government for deficit spending, while depending on its largess when times get tough. In short, they are perceived as arrogant and out of touch hypocrites. More importantly, they are financially successful arrogant hypocrites, because with power and influence bought and paid for their world is hardly the risky one they purport it to be. In fact, it’s pretty comfy in there, at least among those of a certain class.

I think this movement will only continue to gain stature and size. It is already spreading to cities across the country, like Asheville NC, Spokane WA and Chicago. It’s not like a lot of these people have much else to do. They are already miserable and unemployed. Many are also homeless. How is it much worse to stand around day and night in front of Wall Street and scream about the injustices between rich and poor when every day you experience injustice, poverty and misery?

It is not coincidence that America grew so prosperous when wealth was shared broadly because tax rates were much higher. The extra revenue collected generally went to good use: for VA benefits, including paying for college for veterans, for highways that connected us, for student loans that allowed ordinary people to aspire to the middle class, and for basic research that provided vaccines and the Internet. The rich were never seriously impacted by these higher taxes because they were rich, but taxing more of their wealth did allow many ordinary people to get a leg up and allowed our nation to grow prosperous.

For all their riches, Wall Street pointedly ignores that their wealth and our national wealth is dependent upon the people, and how well they prosper. The more the ordinary people prosper, the more the rich are likely to prosper, because with all that new education and energy new markets will open up, and America will be primed to exploit them. In short, more taxes on the rich are not evil for society as a whole. They enable general prosperity, they promote the general welfare, and in the long term they raise all boats. Of course any tax rate can eventually turn regressive if high enough, but with tax rates lower than they have been in fifty years, there is plenty of room to increase revenues, which will be redistributed through a democratic process for arguably more productive uses than feeding the balance sheets of Wall Street bank accounts.

The dynamics of the movement will play out over time, but the movement could be pivotal in the 2012 elections. We do need a strategy that lifts all boats. Cutting taxes hasn’t done it. Supply side economics hasn’t done it. Deficit spending hasn’t done it. However, redistribution of income through the tax system from those who have more of it has worked quite well for the decades it has been tried. It’s time to try it again.

Not so smart on Wall Street

I had a feeling that our cruise would occur during an auspicious time. A last minute debt deal at least assured me that I would not be on furlough when I returned home. On the day our cruise set sail for Bermuda, the stock market plunged over six hundred points, the sixth worst point fall on record. Since then the trend has been mostly down, with the Dow Jones Industrial Average down some four hundred points for the day as I write this (August 10, 2011). It feels a like 2008 all over again. Markets are especially nervous about national debts and obligations. The United States is hardly alone. Greece, Spain, France and Great Britain are among those countries that make their creditors nervous. The trigger this time was the downgrade of U.S. treasury bills by Standard and Poors, which last Friday cut our rating from AAA to AA+ status, the first downgrade in our history.

The market is desperately searching for safe harbors for capital, but is finding few of them. Our financial world is riskier than it was. Doubtless with these stock market declines my portfolio has been badly hit. Doubtless I lost my illusory millionaire status. I have no idea if we are plunging into a double dip recession or worse, but the tealeaves that our economy was having difficulty have not exactly been hard to read. Over the last few years, Wall Street has exhibited irrational enthusiasm and drove up stock prices to artificially high levels. It did this largely on hope, probably because recessions typically don’t last too long.

Wall Street obviously discounted the signs that this recovery, at least here in the United States, would be largely an illusion. Yet the signs were clear and unambiguous: an unemployment rate that would budge only grudgingly, a fearful middle class with no extra income, relatively high inflation and political intransigence that ensured that common sense would take a holiday. Standard and Poors finally acknowledged the obvious by lowering our bond rating. It did so not because our ability to pay bondholders was really in doubt, but because our country refuses to find a sensible financial path forward. With the debt ceiling deal, as usual, we pushed problems into the future and did not really fundamentally address any of them. We created a dubiously legal entity called a Super Congress which appears doomed to be dysfunctional. Everyone knows what would really calm the markets: some measure of tax increases to accompany expenditure reductions. This, of course, is exactly where Republicans in Congress will not go. While I am hopeful plunging markets may force Congress to exercise some common sense, it is mostly a fool’s hope. Perhaps the 2012 election will bring clarity, but if I were a betting person I would not bet on that either. So expect the stock market to remain in turmoil for some time.

I remain not too worried for myself as long as I have a decent job. I leave it to my financial advisor to keep me on a sound long-term financial strategy. But I can pretend to be scared like mostly everyone on CNBC, one of the few channels available to us here on the cruise ship. I once opined that capitalism is our true religion. Watching CNBC certainly reinforced this opinion. From watching CNBC, it is hard not to conclude that the financial class is largely a nattering bore, obsessed with the minutia of the moment and largely tuned out to the facts in front of them. There are only a few things that really matter about investing in a company, but you would never know it from listening to these CNBC talking heads. What matters is a company’s track record, how leveraged it is by debt, the opinions of their customers and their ability to innovate products that people want.

Look at the companies that are truly prospering, like Apple Computers. You know that money invested in Apple will probably return growth and dividends over the long run. I have no idea whether their share prices are overvalued or not, but I do know owning shares of Apple means your money is probably not invested down some rat hole. Whereas when you look at other companies, say Bank of America, whose balance sheet is rife with risky subprime mortgages, you can reasonably infer it’s a risky stock in the long term, because it was being managed by short-term profit-obsessed bozos in the mid 2000s when clearer heads were needed. I know I would need a lot of convincing to invest in Bank of America. Fool me twice, shame on me.

Instead, I simply refuse to become obsessed about short term trends in the stock market. To the talking heads on CNBC, that seems to be all that matters. In my opinion, short term investors are basically gamblers. I put no more faith in them than I would on some guy on a winning streak in a Las Vegas casino. Short term investing is a dangerous game. If you have the nerve for that sort of financial life, like many investors tuned into CNBC, go for it, but you are likely to end up losing a lot of money. Instead, us non-financial wizards can save ourselves a lot of angst by investing in companies with the attributes I mentioned above, holding on to them for the long term, balancing our portfolios yearly to meet our financial goals and cashing them in selectively during retirement. These short term market changes always disappear over the long term. The only short term decisions I would make would be to buy solid companies whose stock price is artificially discounted as a result of irrational and wholly short-term fears on Wall Street, but only if I had some spare cash. Presumably my other assets would remain solid for the long term, and I’d want to hold onto them.

I am not a stock analyst. However, I do know a fool’s errand when I see one. Despite the endless blather on CNBC, it’s obvious that even the wizards on Wall Street cannot accurately predict short term trends. In fact, no one can since by definition the future is always unknown. So if you are listening to CNBC analysts thinking they see things you don’t, disabuse yourself of the idea.  Instead, when judging the economy, judge it by the economy you see and experience, which is the one that matters.

The short term market is driven principally by fear and greed, which depend on each other. It’s like an endless game of tug of war and like a Las Vegas casino, the odds are stacked against you by default. Rumors that are widely believed can be as good as gold for a short while, even if they are wholly fallacious. All sorts of short term fools will follow analysts on CNBC and elsewhere and dump perfectly good stocks for potentially risky ones elsewhere. You are likely a better predictor of market trends than they are. After all, these wizards built up stock prices on the hope for a recovery that never really materialized. Once again they have been proven catastrophically incorrect. And yet the economy will truly recover in time. It always has. When it does you want your portfolio to be full of solid and meaningful assets.

Instead, I recommend that you do your best to tune out the daily stock market ups and downs and keep investing in the long term. If you are not someone who wants to waste your time getting into the minutia of stock market analysis like me, then get a trusted financial advisor with the long view who will allocate your investments into funds that are well managed and include companies that have the attributes I mentioned.