My Considered Opinion

Part 1: Here’s What We’re Talking About

We’re all fairly familiar with the universe, or at least we think we are.  Most cosmologists and sciencey-type people accept the idea of the Big Bang as the beginning of the universe.  The idea is that right after the creation of the universe, there was a big bang – meaning that the universe started both expanding and cooling, moving from a very hot dense state to the fairly spread out, comfortably warm state that we all know and love.

But linked to this is the idea that the universe was first created somehow.  Some folks believe that the universe was created in a purely physical way, through some process that we currently don’t understand but hopefully will someday, kind of like how we don’t currently understand where the other sock disappears to.  Other folks believe that there was some mysterious mumbo-jumbo involved that we will never understand because we’re incapable of understanding it, and they tend to think that some supernatural being was responsible for that, whom they tend to call “God” (or “Allah”, “Yahweh”, “Jehovah”, etc.)  A third group of folks comes down squarely in the middle, believing that there was a supernatural being responsible, but that we might someday understand His ways and may already understand part of them.  They point to various ideas in modern physics as evidence that “an intelligent being must have done this”, such as the delicate balance between the four forces – electromagnetism, gravity, the strong force, and the weak force.

I’m here to tell you that they’re all wrong.

Ok, I know that most of you will jump up with the arguments from whatever group you belong to and try to prove me wrong, or just discount whatever I have to say on the subject.  Ok, fine, but hear me out first.  And yes, there’s just a teensy little chance that I could be wrong too, but I think we can just dispense with that out of respect for my massive intellect, right?

Before I explain all of this, I should warn you – this will not feel right.  It simply doesn’t quite fit with our everyday experience of the world, and the way we perceive reality.  If you’re familiar with general relativity or quantum mechanics, you might remember how hard it was to wrap your head around it when you first learned about it.  It’s so outside the way we experience the world that even people like Albert Einstein had problems with it.  He said [I can't accept quantum mechanics because] “I like to think the moon is there even if I am not looking at it.”  Neils Bohr said “Anyone not shocked by quantum mechanics has not yet understood it.”

Well, this is like that.  Don’t say I didn’t warn you.

Part 2: Before I Tell You That, I Need to Tell You This >

If you’ve ever gotten a microphone too close to a speaker while they’re both plugged into the same amplifier, then you know the sound of a feedback loop gone crazy.  If you could hear the sound of the stock market today, that’s what it would sound like.

The stock market is a very important part of our economy, theoretically.  It’s where most corporations raise most of their capital.  When it works right, the stock market is supposed to accurately determine the value of current and future assets of public corporations, and express them in terms of present value.  If it doesn’t work right, corporations and their owners no longer have that measure of the value of their decisions and activities – they might be creating value, or they might be losing value, it’s hard to say.  Not that the stock market (or equity markets in general) were ever a perfect measure — largely because future value is always uncertain and people don’t always behave rationally — but it was better than nothing.

In my considered opinion, today the stock market is worse than nothing as a measure of corporate value.  It not only doesn’t provide an accurate measure, it provides a measure that is complete devoid of value but is still used to measure things.  Kind of like a scale where the dial is hooked up to a slot machine.

The reason that I think this is what has happened in high-frequency trading over the last few years.  These are completely computer driven trades, where buy and sell decisions are made in milliseconds based on algorithms, mainly driven by other trading activity – trading driving trading, a pure feedback loop.  Each algorithm trying to game the other algorithms – I design software for a living, and I can tell you that ain’t good.  The stocks bought are usually only held for a few seconds, and then sold.  There is no assessment of corporate value, future earnings, or anything real, and a great deal of money is made based purely on gaming the system.

High-frequency trading accounts for something like 73% of all trading volume.  Think about that.  Any investor trying to evaluate real value is wasting their time.  Any investor looking at charts is wasting their time.  Any investor trying to maintain a balanced stock portfolio is wasting their time.  The price will be set in milliseconds, with no connection to reality.

http://www.pbs.org/nbr/site/research/learnmore/inside_high_frequency_trading_100524/

http://www.nytimes.com/2009/07/24/business/24trading.html?_r=3&ref=business

http://market-ticker.denninger.net/archives/1259-High-Frequency-Trading-Is-A-Scam.html

http://www.sec.gov/news/testimony/2009/ts102809jab.htm

The nosedive at the end of last week and today’s rocket launch have, I think, settled one question once and for all.  There is no relationship between tangible value and stock prices.  The market has clearly demonstrated that it is purely based on the madness of the crowd, a collective delusion, a mass hallucination.  That’s the good news, such as it is.

The bad news is, something like 40% of our economy is now controlled by this collective delusion.  20 years ago it was less than 20% of our economy, but largely as a result of pure greed and ruthless guile it has grown to gargantuan proportions.

It’s not exactly a comforting predictor of future prosperity.  With so large a part of the economy that we all depend on for jobs, clients, customers, and shopping controlled by a mass hallucination, just about anything is just about certain to happen.  Just about the only thing we can depend on going forward is volatility.  There will continue to be large swings, both up and down, as long as this coaster stays on the tracks.

My advice to you is to look for ways to protect yourselves from deep dives, and take advantage of mad climbs.  We all need to learn to adapt to crazy swings, and if possible to prosper from them.  It isn’t what I would choose as a forecast if I had a choice, but we is where we is.

A word to the wise is worth two in the bush.

Think about it.  We live our lives completely immersed in a market economy, and that economy shapes our behavior.

Markets reward the most effective sellers, so those guys get really good at making stuff that we want, and making us want it.  The result?  We end up spending money on stuff that we really want, but actually don’t need.  In fact a good percentage of the time we barely use the stuff we buy, so it ends up filling up our houses, which makes us want bigger houses to store all that stuff we wanted so bad but never use.  You do it too, don’t deny it.

Of course to buy all that stuff we need money, and markets have an answer for that too.  More than one in fact.

First, labor markets will trade us money for work – we can always work for a living.  But to buy all the stuff we want we’ll need a good job that pays decently, so unless daddy is going to set us up we’ll have to go to school to acquire some marketable skills.  Then we need to climb the ladder from our entry level position to one that actually pays decently, but when we get a few rungs from the bottom we realize that what seemed like a decent salary before is totally inadequate to fund the lifestyle that we crave.  The result?  We become workaholics.

While we’re waiting to become workaholic middle managers we’re still craving that lifestyle, so debt markets will loan us money now, as long as we promise to pay them back later, with interest.  That need to pay our debts only adds to our salary requirements.

And while we’re becoming workaholics, we need to sell all the stuff we produce to fund our salaries.  Meaning that other workaholics have to buy it from us with their salaries.

And let’s not forget that some markets are food markets, and they get really good at producing food that we want and making us want it.  We’re genetically programmed from thousands of years of actually being hungry to want calorically dense foods, sugar, salt, and fat.  Make it marginally interesting and we’re hooked.  The result?  The highest rates of obesity in human history.

Markets live their lives completely immersed in us – they are us – so markets are very good at producing the things we tell them we want.  Unfortunately, what we seem to want is to be fat, in debt, and workaholics.  Which makes us the perfect customers.  What good little citizens we are!

I wonder if we’ll ever want something else?  If we did, what would it be?

Deacon Blue

They come from the land of ice and snow, from the midnight sun where the hot springs blow.  Or something like that.

The first humans came to America looking for opportunity; probably in the form of new places to hunt, fish, and live.  The first Europeans came to America for similar reasons, and in some cases with the hope for a bit more freedom to practice their religion than they were used to.  Many sold everything to pay for the journey, on the gamble that they would have a better life and probably earn more money than they were in their old homes.  They’re still coming, for basically the same reasons, but from different places for the most part (although people still immigrate to America from Ireland, Poland, France, etc.)

Most Americans look on the 1800′s as sort of the quintessential period for the immigrant story.  In the 1800′s they were emigrating from an old, long established culture and economy to a new frontier culture and economy.  Spaces were big, land and jobs were plentiful, and opportunity was supposedly everywhere.  My in-laws tell the story of my wife’s grandfather, who made several trips back and forth from Alsace to Minnesota, each time “earning a fortune” in Minnesota and spending it in Alsace.

The frontier was a key to the immigrant story.  Frontier meant opportunity to acquire land much cheaper than in an old established economy like Europe, and land meant wealth to a farmer.  Merchants saw opportunity in frontiers to move into new markets where there was little competition and they could capture a large market share.  Untapped natural resources like California gold were also keys to providing opportunity for immigrants who were willing to assume the risk of uprooting themselves to pursue them.

But those days are gone forever, over a long time ago.  America is no longer a frontier.  In many ways, today’s America resembles Europe in the 1800′s.  Highly developed, globally adventurous, and relatively stratified.  Social and economic mobility are not what they were, although as in 19th century Europe there is still a fair amount of them.  Probably more, since our system of aristocracy is less formalized.

So what’s a 21st Century American to do?  Should we stay behind in the old world and accept our lot, or is there a frontier where we might find greater opportunity?

Until we get serious about space travel, today’s frontiers are in any old, established cultures and economies that are experiencing a renaissance.  A few years ago that was Japan and the Asian Tigers, now it’s probably India and China and places like Vietnam.  These aren’t really frontiers – they’re well established markets and cultures, and the land is not available for homestead.  I’d call them “refrontiers”, since they’re really only frontiers by virtue of their renaissances.  Still, any comparison of GDP growth rates will attest to the levels of opportunity in these economies.

So it seems to me that for the fairly average American, the opportunity is to try to move your net worth to a refrontier and practice good old Yankee Capitalism.  Consider that seriously and it gets pretty scary, but that’s the kind of risk that immigrants have always taken on.  “Honey, I’m going to sell our house, my car, my 401k, cash out and move to Hyderabad.  I’ll send for you and the kids when I get established.  Six months tops.”

I don’t know about you, but I might have a little trouble selling that to my wife.  Still, neither one of us would be living here now if our ancestors hadn’t done it.

Just a thought.

Deacon Blue

I’d like to state now and for the record that I am not the father of Anna Nichole’s baby.  I realize that that puts me in a distinct minority among American Men, and removes any chance of my inheriting the hundreds of millions that her estate might be worth, but the odds appear to be about the same as winning the Irish Sweepstakes, so I feel that it’s no great loss.

Not that I haven’t had an opportunity mind you.  The last time I saw Anna Nichole she was telling me how desperately she wanted my body — you know, like with her eyes — but I was all like “No Anna Nichole!  I’m spoken for!  I’m a happily married man!  A devoted husband and father!  You go work your womanly wiles on somebody else, Anna Nichole!”

Anyway, she wasn’t really my type.

I’m discovering soccer.  My kids are younger than most of yours, so you’ve probably been through all this years ago.  I never really played soccer, except briefly at Longfellow when Mr. Best tried to teach us all soccer, and for the most part failed miserably.  We just didn’t get it.  For all the years since in fact I just didn’t get it.  I didn’t understand the rules, and it didn’t help that almost every time I saw a game on TV they were speaking Spanish at high speed.

But now I have two kids learning soccer, and I’m learning it along with them.  I still don’t know what a halfback, or fullback, or sweeper is, but I do know when you do a corner kick or a goal kick or a penalty kick.  In fact our local league requires parents to volunteer 3 hours for each kid, so one of the things I’m doing is volunteering as a parent referee for the little kids.  I went to a 3 hours class to learn how, taught by this old Scot who has refereed for like 50 years, literally, and who couldn’t help but drift off into one anecdote after another.  Picture a Scottish Ronald Reagan of soccer.  It was all very confusing, and we tried to keep pulling him back from “the way they used to do it in the select leagues” to “what are we actually supposed to do?”  Anyway, by the end of the night I think I got the basics, and since they’re little kids and we’re playing in the “recreational” side of the league (meaning it’s officially supposed to be for fun), I think I can do it.  Now all I have to do is find a time when I can fit a game into my weekend schedule!  What with cub scouts and life in general, it might be a couple of weeks.

Anyway, just musing out loud.  I hope everyone is doing well.

I’m reading “1968” by Mark Kurlansky, and this quote really struck me:

“We will find neither national purpose nor personal satisfaction in a mere continuation of economic progress, in an endless amassing of worldly goods. We cannot measure national spirit by the Dow Jones Average, nor national achievement by the gross national product. For the gross national product includes air pollution and advertising for cigarettes, and ambulances to clear our highway carnage. It counts special locks for our doors, and jails for the people who break them. The gross national product includes the destruction of the redwoods, and the death of Lake Superior. It grows with the production of napalm and missiles and nuclear warheads . . . It includes Whitman’s rifle and Speck’s knife, and the broadcasting of television programs which glorify violence to sell goods to our children.”

“And if the gross national product includes all this, there is much that it does not comprehend. It does not allow for the health of our families, the quality of their education or the joy of their play. It is indifferent to the decency of our factories and the safety of our streets alike. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of public officials . . . the gross national product measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile; and it can tell us everything about America — except whether we are proud to be Americans.”

– Robert Kennedy, 1968