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What Do You Believe Accounts for Wall Street’s Recent Volatility? Please Join Us on the 31st

What was Wall Street telling us in the closing months of 2018? How can we know? Should we care?

Who drives prices in financial markets anyway?

Financial markets happened just about from the birth of capitalism in Holland and England. The Tulip Mania, the South Sea Bubble and the Mississippi Company Bubble demonstrated early on in the evolution of capitalism the incentive power of finance and the frequent irrationality of its pricing.

As we move into more and more advanced post-industrial capitalism, it seems prudent to reflect on the role of financial markets with the borrowings which keep them robust.

As the 2020 campaign begins, the issues around Wall Street will take center stage for the next two years.

Please join us for a round table discussion about Wall Street at 9:00 am on Thursday, January 31st at the University Club of St. Paul.

Registration and a light breakfast will begin at 8:30 am and the event at 9:00 am.

Cost to attend is $15 for Business and Public Policy Round Table members and $35 for non-members. Payment will be accepted at the door.

Space is limited.

To register, please contact Jed at jed@cauxroundtable.net or (651) 223-2863 (email preferred).

The University Club is located at 420 Summit Ave in St. Paul.

Parking will be available along Summit Ave.

The event will conclude at 11:00 am.

A Garden Among the Flames

I received a Christmas card from one of our colleagues, a Christian who has a substantial business in the Middle East.

He chose for his message a poem by Ibn Al-Arabi who lived in Andalusia, Spain from 1165 to 1240 C.E. I had not known of his poetry before but found his sense of the spirit compelling for our times of distrust and hard-edged competition.

He wrote:

A Garden Among the Flames

My heart is capable of wearing all forms.
It is a pasture for gazelles and a monastery for monks,
A temple for idols and the Kaaba for the pilgrim.
It is the tablets of the Torah and it is the book of the Koran.
I profess the religion of love, wherever the destination of it caravan may be.
That is the belief, the faith I keep.

Happy New Year.

“Market Failure: What is Wall Street Telling Us?” Please Join Us on the 31st


What was Wall Street telling us in the closing months of 2018? How can we know? Should we care?

Who drives prices in financial markets anyway?

Financial markets happened just about from the birth of capitalism in Holland and England. The Tulip Mania, the South Sea Bubble and the Mississippi Company Bubble demonstrated early on in the evolution of capitalism the incentive power of finance and the frequent irrationality of its pricing.

As we move into more and more advanced post-industrial capitalism, it seems prudent to reflect on the role of financial markets with the borrowings which keep them robust.

As the 2020 campaign begins, the issues around Wall Street will take center stage for the next two years.

Please join us for a round table discussion about Wall Street at 9:00 am on Thursday, January 31st at the University Club of St. Paul.

Registration and a light breakfast will begin at 8:30 am and the event at 9:00 am.

Cost to attend is $15 for Business and Public Policy Round Table members and $35 for non-members. Payment will be accepted at the door.

Space is limited.

To register, please contact Jed at jed@cauxroundtable.net or (651) 223-2863 (email preferred).

The University Club is located at 420 Summit Ave in St. Paul.

Parking will be available along Summit Ave.

The event will conclude at 11:00 am.

The Next Capitalist Revolution

A while back, I ran across several academic papers pointing to a causal connection between increased concentration of market power and stagnation in wage gains. The correlation was that rents obtained through market power were disproportionally shared with managers and owners and not with employees.

I also ran across several charts showing increased concentration of market power in American business sectors. Here are a few:

The special report in the November 17th, 2018 issue of The Economist pointed to the need for de-concentration of market power as the next revolution in capitalism. Anti-trust limitations on company market power would, said the editors, reduce rent extraction (a technical term economists use to point out returns to market power and not quality of product or service or fair pricing in open markets).

Take Google, for example. It has bought up some 200 small companies – potential competitors.

Amazon has just bought a software firm which manipulates data on individual health conditions and a company which sells drugs over the internet. Put the two together and fund them with Amazon cash and you re-structure the health care market to Amazon’s advantage in giving its platform greater market share.

Rent extraction – the result of successful rent-seeking – is the antithesis of moral capitalism and even of Adam Smith’s invisible hand capitalism. Smith excoriated monopolies and mercantilism for the unfairness of its rent extraction propensities. Rent extraction is an economic system using political power of some kind to obtain cash income. It is the basis of aristocracies and landlord regimes, of warlord societies and political hegemony and most of the crony capitalism and self-serving autocracies in the world today.

If profits in America were at historically normal levels, says The Economist and private sector workers got the benefits, real wages would rise by 6%.

The Economist pointed out that in America, the free cash flow of companies is 76% above its 50 year average, while real incomes for workers and the middle class have been largely stagnant for several decades. Is it, therefore, any wonder that so many non-elite Americans voted for Donald Trump in 2016?

The Economist also calculated that the global pool of “excess” profits is $660 billion, of which more than two-thirds were extracted in America.

The Economist recommends: 1) let individual users of tech services take their information anywhere they want; 2) outlaw many barriers to entry such as non-compete clauses in employment contracts; and 3) modernize anti-trust jurisprudence to take into account more than short-term consumer benefits, including consideration of competitive health of markets and excessive returns on capital.

In several commentaries and articles last year, I suggested new examination of the big internet firms for buying excessive market power. It’s nice to have The Economist supporting our recommendation.

“Market Failure: What is Wall Street Telling Us?” Please Join Us on the 31st

What was Wall Street telling us in the closing months of 2018? How can we know? Should we care?

Who drives prices in financial markets anyway?

Financial markets happened just about from the birth of capitalism in Holland and England. The Tulip Mania, the South Sea Bubble and the Mississippi Company Bubble demonstrated early on in the evolution of capitalism the incentive power of finance and the frequent irrationality of its pricing.

As we move into more and more advanced post-industrial capitalism, it seems prudent to reflect on the role of financial markets with the borrowings which keep them robust.

As the 2020 campaign begins, the issues around Wall Street will take center stage for the next two years.

Please join us for a round table discussion about Wall Street at 9:00 am on Thursday, January 31st at the University Club of St. Paul.

Registration and a light breakfast will begin at 8:30 am and the event at 9:00 am.

Cost to attend is $15 for Business and Public Policy Round Table members and $35 for non-members. Payment will be accepted at the door.

Space is limited.

To register, please contact Jed at jed@cauxroundtable.net or (651) 223-2863 (email preferred).

The University Club is located at 420 Summit Ave in St. Paul.

Parking will be available along Summit Ave.

The event will conclude at 11:00 am.

What Are We Worth?

Recently, we have been wondering at the emphasis in capitalism placed on income earned rather than on asset value. Not marking the value of assets is particularly odd because it does not account for vital assets such as social or human capital, which contain moral qualities or for natural capital, which is subject to degradation.

I recently saw a story that in the U.S., a credit rating agency for individuals will add to its consideration of one’s “asset” potential to support a loan one’s habits of paying cellphone and utility bills. Timely payments indicate a person of more “worth” as a capitalist.

I am, thus, reminded that a person’s credit is a reflection of their asset value, not just their earning capacity. A good credit is a worthy asset. And one’s credit does not depend on one’s income but more on one’s character and good judgment.

A good credit rating is a capital account in some important way, standing us in good stead through the vicissitudes of material ups and downs.

The great Wall Street tycoon J.P. Morgan was once asked: “Is not commercial credit based primarily upon money or property?”

Morgan answered: “No, sir; the first thing is character.”

Untermeyer: “Before money or property?”

Morgan: “Before money or anything else. Money cannot buy it.”

This is from Morgan’s testimony before the U.S. House Committee on Banking and Currency in December, 1912.

As We Reflect

On this last day of 2018, I wonder as I do often during this time of year as to the meaning of these holidays. We are so parochial in so many ways – each confined within certain traditions and so most likely distant from others with their traditions who, in turn, may feel themselves to be distant from us.

Yet, I am reminded listening in our family’s rather ordinary Protestant tradition to English Christmas carols with very young grand-daughters sitting on the rug entertained by new toys of one part of the meaning of Christmas – which is the freedom and the burden of personal choice.

The story of Jesus as told in the New Testament and retold in the carols is that of a gift – a gift, if you will, of choice. We are not commanded to follow Jesus. He just appears and teaches. We can adopt his teachings or not. It’s up to us individually.

No ultimate power commands us. That is the reality of ethics and morally. It is up to us. How should we live? How should we treat others? How should we regulate ourselves?

As I wrote in my 2004 book Moral Capitalism, moral capitalism is not a power, not a self-actualizing system that runs on its own. It must be made to happen by our decisions, made one by one, person by person. A tall order, perhaps, but one that follows nature, just as streams must flow from high to low.

Thus, I felt affirmed by the following comment in an article on homelessness in the quite wealthy city of Seattle, Washington, here in the U.S.:

“Advocates point to Zillow and McKinsey studies that show a high correlation between rent hikes and homelessness in Seattle, for example. But correlation is not causation and the survey data paint a remarkably different picture. According to King County’s point-in-time study, only 6 percent of homeless people surveyed cited “could not afford rent increase” as the precipitating cause of their situation, pointing instead to a wide range of other problems—domestic violence, incarceration, mental illness, family conflict, medical conditions, breakups, eviction, addiction and job loss—as bigger factors.”

We live in systems and are subject to powers and principalities, in the words of the New Testament. They constrain our choices. We are raised to believe in this or that. Such beliefs constrain our choices. We are moved by emotions. Such emotions constrain our choices.

But what efforts should we make to make our choices truly our own and in our best interest and with regard for the common good?

We are significantly free and our freedom can be used for good or for ill. Let’s use it for good in the New Year.

Data, Data Everywhere and Not a Drip to Drink

The dynamic process of capitalism in providing for human needs and wants relies on pricing that which has value. Pricing facilitates exchange. It internalizes the multiple values meaningful to buyers and sellers.

The internet, like markets, provides for the needs and wants of its users. It creates goods which have value. Who, then, gets to price these goods and who gets to buy them?

Should internet platforms be regulated as markets often are to protect consumers from exploitation?

On the one hand, the goods provided by internet platforms to its users are price-less – they are free. The users of such platforms are free riders. Use of platforms is undisciplined, not subject to the usual market rationality of price elasticity with an opportunity cost to the user only of how the time spent in consumption could be alternatively spent. Consumption of what internet platforms offer is a pure intangible value play; there is no cash nexus between provider and consumer.

So what is the business model at work?

As with television and radio, the internet takes advantage of electromagnetic waves. It uses electromagnetic technologies to provide convenient “entertainment,” “infotainment” and social connectivity with which to attract an audience. Platforms sell attractions to pay for the time spent absorbing their content in order to obtain suppliers of consumer preferences and personal data. Access to those preferences and data can then be priced and sold by the platforms as a “good” desired by certain specially interested purchasers.

Those who consume the free goods provided by the platforms are actually suppliers of what the platforms sell in order to make profits. The value which users of platform services provide is 1) the potential to purchase goods and services for cash and 2) the data they provide to the platform about their likely purchases and other actions they are disposed to take. The platform sells this value to their real customers – advertisers and others seeking to exploit collected user data. The cash proceeds received by the platforms from their customers is not shared with the suppliers of the potential spending preferences and other data which the platforms sell.

The data provided to the platforms by those who use them is a new form of wealth which can benefit many companies and others, such as political actors and issue advocates.

In a recent speech, Microsoft CEO Tim Cook took pains to point out features of this new wealth which raise ethical issues of responsible conduct on the part of platform companies.

His full remarks can be found here.

Why is Wall Street Going Down, Down, Down?

Yesterday, Wall Street was entering bear pricing levels of low expectations for the future. Why?

Yes, there are worries about new reputational and regulatory difficulties facing some FANGs (Facebook, Amazon, Netflix, Alphabet, et al) and other idiosyncratic corporate ups and downs which allegedly drive investors to buy or sell the stocks of various companies. And the uncertainty over global trade wars, Chinese debt and Brexit has raised the generic risk level of world markets. When risk of return rises, prices must compensate by going lower. A bird not in the hand is worth much less than one already caught.

But there is a bigger, systemic story here which should center our attention on the workings of global capitalism.

In short, money has been cheap since the 2008 collapse of credit markets (caused by Wall Street if memory serves). Money has been cheap not because of private market decisions but because of political decisions, because of state power applied to the economy. Money is fiat currency these days, created by governments, mostly by central banks. The supply of money – liquidity – can be controlled independently of market demand. The supply of money, and therefore its price, can be intentionally manipulated on a grand scale.

Starting 10 years ago, governments and central banks did all that they could to prevent a global depression. What they did was flood financial markets with new money, driving interest rates way, way down to entice everyone to buy and spend and so keep up demand for goods and services.

With the supply of liquidity high and its price low for 10 years now, we may rightly ask the old question about public policies: “Qui bono?”: who benefits.

Cicero in his speech Pro Sexto Roscio Amerino, said “The famous Lucius Cassius, whom the Roman people used to consider the most truthful and wisest judge, often used to say in evaluating cases “Who stood to profit” [cui bono fuisset]. This is the human way: no one pursues a crime without the hope of some profit.”

While we are not evaluating potential criminality here, we are facing the “human way” when we consider the mores of Wall Street: people take action with the hope of gaining some advantage.

A low price of money (low interest rate) benefits those who want to buy money. Now such buyers of money can include firms which want to invest in expansion, creating new goods, services and jobs but they can also include those who want to buy houses and others assets, including those who want to borrow money to buy and sell securities.

The lower the price of money, the cheaper it is to speculate on Wall Street. And speculation is the fat king living very well off financial market activity.

Another thing is certain, the poor and the middle class benefit less from cheap money than do the rich. Trading in securities is not for the many but for the few, the top 10% really. And they have done very well since 2008.

Yes, with lower interest rates, credit cards have placed less onerous repayment obligations on their middle class users than otherwise would have been the case. But while asset prices in all classes have risen, income for the middle class has not. The middle class lives off income, not capital assets. And the poor have been completely locked out of economic advancement.

We must also ask “cui bono” from higher interest rates: is it not those who save? And how can the poor and the middle class ever build wealth if they do not save? The low price of money favors borrowing and spending, not saving. Which, over the long run, does what to social justice in a society?

What is the transcendent good, as Christmas gift giving approaches, for many families of having a $1,000 iPhone when you have no retirement savings to speak of?

It was once said that habits of thrift build good character which has very positive externalities in all aspects of life – from being good parents to serving as admirable citizens being sensible in their politics.

For 10 years, those who benefitted from the low cost of money have kept Wall Street prices on the rise. Pricing of securities has internalized for today projections about the future, that the price of money will stay low.

Now that the Federal Reserve is raising the price of money, Wall Street prices must readjust. With higher prices for money, we can accurately predict that speculation will fall off. The human way is to seek gain and not loss, to empower the self and protect one’s dignity. As prices rise, demand falls in order to not deplete one’s wealth. As the price of money rises, the marginal utility of the next dollar earned or spent goes up, forcing more thoughtful consideration of market decisions. We need higher or more certain returns in order to spend willingly when the cost of spending goes up.

Wall Street over the past few months has only acted very sensibly – it has re-priced the value of securities for today to take into account coming higher prices for money and lower demand for trading in securities. And for most of us, that may be a good thing in the long run when we think about social justice for our children and grandchildren.