Speculation

                Pressure from shareholders seeking dividends and capital gains is a potentially troublesome thing that seems to be at the heart of many of the difficulties with capitalism.  Shareholders want dividends, or they want stock price appreciation, and many of them do not care what companies’ managers have to do to deliver it.  If they have to keep employees skittering along the precipice of poverty, that’s what it takes.  Many shareholders don’t even know what is going on.  They just want their dividends and capital gains. 

                Of the various ways of financing a company, selling shares of stock is not even the most cost-effective method.  It is generally more expensive than selling bonds or simply getting a loan from a bank, especially in today's low-interest environment.  It is also fraught with peril.  The shares go onto markets, where they go out of the control of the company itself.  If somebody with deep pockets wants to go on a campaign of buying up a controlling interest in the company’s stock, he can do it.

The long history of capitalism is littered with examples of stock being sold based on nothing but blue sky.  Today, stock offerings must by law be accompanied by endless disclosures and proofs of its reality.  Nevertheless, scams are still perpetrated.

                Despite all these problems, stock is still a legitimate mode of financing.  It has advantages for the company that sells it.  For example, there is no set time by which the shareholders have to be paid back, whereas a loan or a bond must be paid back on a specified schedule.  It is a proven way of raising lots of capital for expansion and for other purposes (including enriching the company’s founders or its venture capitalists.)

                Unfortunately, for many people buying and owning stocks is like gambling, like the lottery, like playing the horses.  It represents the hope of getting something for nothing—easy money.  Investing in a sensible manner in the expectation of growth and profits of a company is one thing.  Investing in desperation to save oneself from poverty is quite another thing.  There are always people around who will take advantage of someone’s desperation or greed. 

                There are always a few people who can “beat the market.”  They can make a lot of money by “playing” stocks.  It raises false expectations for the rest of us whose only role in the game is to lose money at the expense of the few winners in a speculative game.  For despite all the efforts of governments to regulate the markets, there is always room for manipulation, for empty hype and for playing on greed and desperation.  The many become the prey of the few who know the game.  It happens on a broad scale once in a while, but it happens on a small, single-stock scale all the time.

The Great Depression and the recent “Great Recession” were preceded by periods of excessive speculation.  In the 1920’s, it was stocks.  In the years leading up to 2007, it was real estate.  The mentality develops that prices can only go up, never down.  Until the market proves us wrong.  Whether the speculative excesses actually were the fundamental cause of the hard times that followed is not certain, especially in the case of the 1930’s Depression, but they were a factor.

                The only real way to make money, in the words of the old commercial (ironically, a commercial about investing in stocks), is the old-fashioned way: to earn it.  Once it is earned it can be invested in assets that you hope will not become victim to speculative cycles, and you can take precautions against that happening.  If you want to “play” the market, just be sure you play it with money you can afford to lose.

                The assets you invest in can include stocks if the intention is to invest in the growth and profits of individual companies.  Even then you have to beware of speculative forces and cycles, as well as other potential mishaps that could thwart your intention and turn your investment into a loser.

                Despite all the books and systems about investing in stocks, the best thing to do is just do what you do to make and save money, then let a good investment advisor invest it for you.  (The trick, of course, is finding a good investment advisor.)  And don’t expect him to make you rich; just expect him to get you a reasonable return on your investments.

               An investment advisor cannot ignor speculative patterns if they present an opportunity for profit, but they can carry considerable risk. 

Gettysburg, Part II

                The phrase “all men are created equal” raises certain expectations, among them the expectation that all people will have, eventually, about the same amount of material possessions.  Or at least that there will not be a terrible disparity between haves and have-nots.

                Unfortunately there are all kinds of people, and there are differences among them in their abilities to have, their abilities to handle life, their abilities to lead (or follow) and their capacities to be in charge of things.  The tendency is always for some people to accumulate more than others.

                This is not to say that it must always be that some have things at the expense of others.  Nor does it mean that those who have a lot of material things can’t help those who have less.  It does not mean that the haves are actively trying to prevent the have-nots from having. 

                There are all kinds of people, and this also means that at the highest and lowest levels there are good people and bad people.  It is not healthy for people to think that goodness is represented only in their own social stratum and badness is in some other. 

                It is not true that the so-called rich and powerful are trying to screw everyone else.  (Certainly not all of them!)  Nevertheless it is true that some people amongst the highest social strata are not always acting in the best interests of people other than themselves.  In other words, there are good and bad people amongst the rich, just as there are amongst the poor and the middle-class.

                Finding out who is good and who is bad is among the hardest things in life.  The belief here is that most people are good, and we want to trust people.  The danger we constantly face is that of trusting someone who does not deserve to be trusted. 

                People who can create or run a business are useful because they can create and maintain jobs that enable other people to earn a living.  Some people who have those jobs blame their bosses for not being more generous with their money.  They want higher pay.  There is a fine balance between profitability and generosity.  The survival of a business requires a certain amount of profitability.  Pressure from many quarters puts pressure on the bottom line, among them pressure from competitors, government regulations, taxes and pressure from employees seeking higher pay.  There is also pressure from shareholders seeking dividends in exchange for continued and/or new investment in the company.  This last group will be the subject of our next post.

Gettysburg Redux

                The anniversary of the Gettysburg Address whizzed by us again on Nov 19.  Feeling a bit grandiose, we wanted to start this post off with a tip of the hat to it.

                Two hundred and thirty-seven years ago, our forefathers brought forth on this continent a new nation conceived in liberty and dedicated to the proposition that all men are created equal. 

                (It is a time so far away that our interest in it sometimes verges into the archeological.  A few years ago in Boston someone accidentally dug up some old bottles and such that dated from colonial times.  Scholars carefully combed through the site, wondering what life was like for people back then.)

We are now engaged in a great struggle testing whether that nation, or any nation so conceived, can long endure.

                That struggle is not just about terrorism, and terrorism may or may not be connected to what the basic struggle actually is. 

                The big picture is the worry that Plato might have been correct when he said that the cycle of government goes, in descending order, from monarchy to oligarchy to democracy to tyranny.

                The smaller picture (although still a rather large one) is that, although there are many things required to maintain a society’s health, among the most important is economic growth.  In fact it is something without which we are in deep trouble.  We saw in the mid-twentieth century what happened when growth was reversed during the worldwide Great Depression: the globe convulsed in the violence of World War Two.

                Economic growth is vital for the maintenance of our civic order.  It maintains the hope, for those who want a better life, that they or their children can have it.  Without that hope, there is blame and the impulse to want what others have, to the point of taking it from them.

                For that growth to occur, there are certain basics that must be in place.  Many of these basics boil down to freedom: the freedom of individuals to operate as they see fit, in business as well as in their personal lives.

                Our economic system, besides being labeled capitalist, is also called free enterprise.  The basics of its operation were observed and written down nearly three centuries ago by Adam Smith in The Wealth of Nations.  He spoke of the “invisible hand”—the marketplace--that would automatically regulate business and commerce for the benefit of everyone. 

The question of whether his system should be applied in its total purity is still a matter of debate.  It is generally agreed that its opposite, a total command economy, does not work.  No government is smart enough to know what and how much is needed at all times.  (As a matter of fact, no government is smart, period. Only individuals are smart, and they generally do not think well in group situations.  Especially governments.)  Conversely, a functioning free market will result in needed and wanted things being produced and delivered.

                (To be continued.)

Thumbnail Update

     "The Economist" opined recently that the US is once again coming into the position of being the most healthy major economy in the world, and as such could be an engine of growth for everyone.
     Being "the most healthy" might be rephrased as "the least unhealthy."  Clearly there are still major difficulties.  However, many of the horrible effects of the "great recession" have been worked out of the economy and the financial system.  The US economy has more flexibility in it than most other major economies.  Innovation is not as stifled, entrepreneurship is more healthy and innovation is somewhat easier or less frowned upon.
     Europe is still bogged down pretty heavily, though it looks now as though the Euro area may survive intact.  One of their major problems is that their labor markets are much more rigid than in the US.  For example there are laws that make hiring and firing more difficult for most Euro area employers as compared to the US.  Such rules are a drag on growth, productivity and profitability.
     The "fracking" revolution in the US is the prime example of the fruits of greater flexibility.  The US leads the world by far in this new way of extracting natural gas and oil from the ground.  It has provided previously almost unimaginable quantities of energy; it is projected to so radically reduce our dependence on foreign oil as to re-order world power politics in the energy sphere.  This is big.  How did it happen?  Entrepreneurship, innovation and the freedom to use private property without overbearing government supervision: these are the keys.