Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

19 August 2011

Mad Money Men Mayhem

[For what is now becoming almost routine on this blog—near immediate confirmation from the mainstream media—click here.]

Yesterday’s market meltdown was a surprise even to me. Take Exxon Mobil Corporation (XOM), for example. It dived 4.34%. Its price-earnings ratio is now 9.32, or a bit more than half of the long-term average for good industrial companies. And there’s no telling where it will be today or tomorrow.

XOM makes products (oil, gas and gasoline) that the world needs to run. Fabrication and use of things that burn those products—cars, trucks and the roads to take them—are exploding globally. So demand is ever-rising. And supply is limited and (for oil) declining.

As I’ve noted repeatedly on this blog, oil and its products have high inelasticity of both demand and supply. So according to classical economics, the price of oil and gasoline (and eventually naturally gas) will rise inexorably, barring a double-dip recession or another Great Depression.

Now here’s the thing. Take a company that makes the most important products in the world: those that make everything else run. Admit that, despite its occasional climate-change denial and its mindlessly selfish political lobbying, it’s very good at what it does: drilling for fossil fuels. In fact, it’s the best firm of its kind in the world. Understand that its main products will (again, barring recession or depression) increase in price for the foreseeable future without any extraordinary effort or investment on its part.

So basic economics almost guarantees XOM ever-increasing revenue and profits, even in the face of declining output, for the foreseeable future. Sounds like as much of a sure thing as the investment world ever offers, doesn’t it? Yet its stock went down some 16% in the last three weeks.

And XOM is not alone. Apart from our military, American institutions may be failing in almost every respect. But not our excellent companies. We still have a lot of them, and they are among the best in the world.

I call them the “ABCs,” for Apple, Boeing and Caterpillar. If you think hard enough, you can find one for almost every letter of the English alphabet. (Disney, Exxon Mobil, Ford, Google, etc.) They make products that are unique, like Apple’s iPad or Boeing’s hyper-efficient Dreamliner. Or their products or services may have competition but are the best in their class.

These firms operate worldwide. So they aren’t dependent on any one nation, region or political system for revenue or profit. They get a large share of their business from abroad. So they are at least a little immune from the political extortion and nonsense of our Tea Mob and its “leaders,” who fortunately don’t have global jurisdiction. And with huge hoards of cash from their extraordinary earnings, and their recent ability to exploit ultra-low interest rates, they have the strongest balance sheets in the history of industry.

So what’s not to like? That’s why stockbrokers and Wall Street, like mad marketers, keep advising everyone to “buy now,” while prices are low. That’s why even Warren Buffet is buying.

But prices keep going down. And a few voices even from normally manic Wall Street are beginning to say the rout could go on for some time. What gives?

What gives is finance. The mad money men have the whole world in thrall. They are out of control and have been for at least a decade. And no one—not governments, not all those excellent non-financial ABC companies, and not the money men themselves—knows how to bring things back into balance again.

On this blog I’ve made much (1 and 2) of a simple “vital statistic.” A few years before the Crash of 2008, the finance sector’s share of all US business profits reached 41%.

That’s an extraordinary number. It’s utterly pathological. What it means is that, with all those excellent ABC companies doing things other than shuffling paper, finance was the 800-pound gorilla.

And it still is. After all the turmoil, volatility and angst of the last four years, that horrible vital statistic is probably still about the same. It may even be higher. We haven’t even begun to cut finance down to size.

And how could we? The whole purpose of the gigantic bailouts of the last four years was to keep finance alive, in its current form, and therefore hideously bloated. The three-quarters of a trillion dollars of TARP was just the tip of the iceberg. There were also several more trillions invested directly in the finance sector’s toxic assets and in QE1 and QE2, which inflated our money supply by giving the finance sector essentially free loans while our people, governments and industry tightened their belts.

Now don’t get me wrong. Like most thinking voters, I supported these measures initially, as the best of bad alternatives. Stop the whole house of cards from collapsing now, I thought, and we can sort out accountability and reform later.

But accountability and reform never came. No stupid or greedy banker has gone to jail. (Bernie Madoff was just an old-fashioned crook, a sideshow to the main event. He had nothing to do with the Crash of 2008 except the coincidence of timing and misplaced trust.) None has even taken a well-deserved loss. And reform has foundered on the rocks of intense lobbying, the opposition of idiots like Richard Shelby of Alabama, the immensely counterproductive silencing of Sheila Bair and Elizabeth Warren, and the myriad details of enacting regulations.

And it gets worse. There is no evidence—none whatsoever—that accountability or reform will come to the finance sector in the foreseeable future. The culprits have not only got off scot free; they still run the store.

And why should accountability or reform come? The mad money men (they are all men: women like Shiela Bair and Elizabeth Warren tried to stop them but so far have failed) still have their grossly excessive compensation and obscene bonuses. They still have their private jets. They still have their pathological $600 trillion worth of derivatives (no, that’s not a typo), entirely outside the control of government regulators worldwide. They still have their high-frequency trading computers, which trade faster than any conceivable development in real industry and caused the Flash Crash of May 2010.

But most of all, they still have this country by the balls. As I have pointed out, the mad money men of Manhattan control this country completely. They have Congress in their pockets, or at least powerful bossists like Shelby. They have the Supreme Court on their side. They control our national media, which are all in Manhattan and depend on finance. They have infiltrated the administration of the most competent and aware president in three decades. And, because he needs their campaign money to fight the most extortionist, scorched-earth nihilism since the Civil War, they have his ear.

What’s new in the last month is that the same story is unfolding in Europe. The EU’s economic engines, Germany and France, briefly considered a partial default in the bonds of tiny Greece. That default would have given the banks that invested in those bonds unwisely a bit of a “haircut”—really, just extended maturities. But that proposal lasted only a few days before the overwhelming power of global finance killed it.

The banks, say our real rulers, must be served. None must lose money, lest the whole debt house of cards collapse. Even tiny Greece can’t be rescued by a mere partial default, they say, because default might follow in Ireland, Portugal, Spain or France itself. And governments from Berlin to Paris, from Brussels to Madrid, salute and obey.

And who are these unelected rulers? The same mad money men who created the problem in the first place. They are the same men who profited from their folly in the Crash of 2008 and now stand to profit from their folly of allowing country after country in the EU to come close to insolvency without (until recently) a precipitous rise in interest rates or anything close to default.

The problem is easy to state but devilishly hard to solve. The entire global finance sector has become “too big to fail.” It therefore has become our de facto (and utterly undemocratic) global ruler.

That’s true not just here at home, but in Europe and Japan as well. With the possible exception of Russia, China is the only nation on our planet that has practical control over its financial sector and any hope of preventing the explosion of gambling and swindling that has overwhelmed the otherwise healthy global economy.

So we have several undeniable and ugly facts. First, the mad money men rule. They rule everywhere but China, and even China can’t curtail their global power. Second, they have forged a bloated empire of gambling and swindling, of which shaky sovereign bonds are just a small part. Third, that empire, like a cancerous tumor, has metastasized into the US economy, sucking away the lifeblood of 41% of all US business profits. It is now draining the life away from all those excellent ABC companies by depriving them of customers. And finally, no one in authority has the faintest idea how to stop the mad money men from plunging us into a second global depression by sheer inertia and inaction.

All this the public dimly recognizes. The fact that bank bailouts left ordinary people to take the fall is still one of the chief drivers of the Tea Mob and Republican extremism here at home and the riots in Greece and now England abroad. But right-wing propaganda has perverted that understandable and well-justified outrage into precisely the wrong prescription: destroy government and give the mad money men yet more power.

The consequences are equally apparent. No rational person can have any confidence in a system ruled by gamblers and swindlers, where they make the rules under which they continually prosper, while the excellent ABCs lose customers and opportunities, sovereigns fail, and ordinary people suffer for the sins of the ruling financial class. The recent riots in Britain, inarticulate as they were, are just a precursor of what’s to come.

The solution, of course, is obvious. The misbehaving financial sector must be: (1) chastened and held fully accountable, (2) brought under rational control for the public benefit, and (3) downsized by a least a factor of three. In the US, the downsizing would best be by a factor of four, from 41% down to something resembling the Biblical ratio of 10% interest.

Downsizing and subordinating finance is an absolute prerequisite for avoiding another crash and a second Great Depression. But that downsizing itself will not be without pain. Legions of uneducated and barely literate traders, brokers, tellers and call-center zombies will lose their jobs. A recent report of 101,000 jobs to be lost in global finance should be just the beginning. Having all those unemployed and otherwise unemployable people out on the streets will just make the labor market worse.

But job one is not really jobs. Job one is downsizing and controlling the global finance sector. The job market cannot recover while madmen rule and otherwise unemployable people suck resources and attention away from real industry. Unless we drastically downsize global finance, the tumor will continue to grow, and the patient—our global capitalistic economy—will wither and die. Perhaps something better will rise from its deathbed, just as Bretton Woods and the WTO arose from the catastrophe of World War II.

But economic collapse, with the possibility of major war in consequence, are not real solutions. They are abdication. In my next essay, I will propose some solutions that, albeit radical, might restore economic balance without a general global collapse.

Absent some such solution, the markets’ free fall will continue without foreseeable end. For the free fall reflects a well-justified crisis of confidence. No one can trust a system run by greedy, stupid people whose only “value” is short-term self-interest and who nearly destroyed the same system a mere four years ago.

Rational people, including ordinary folk and business people outside finance, now see dimly what has undone their confidence. And neither their confidence nor the markets will recover until something real is done to bring back real industry and global government by the people, not the same bankers who twice brought us to our knees.

Quick Confirmation

Three days after the foregoing post appeared, Bloomberg.com published a review of US bailouts, essentially confirming the foregoing analysis. The headline says it all: “Wall Street Aristocracy Got $1.2 Trillion From Fed.”

That’s the conclusion from Bloomberg.com’s analysis of “29,346 pages of documents obtained under the Freedom of Information Act” and government databases, many of which were kept secret for two years after 2007 and 2008. Bloomberg.com also reports that the amount “invested” by our government in the survival of financial corporations and their plutocratic masters was “about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages.”

The Bloomberg.com report confirms what many (including me) heretofore only suspected: that a substantial portion of the Fed bailout went to foreign-owned financial institutions whose fate the Fed believed to be intertwined with domestic ones. This was a global crisis, with a global bailout (by our own central bank and others), which is still ongoing.

And central banks worldwide, including our own, chose to save the global economy by saving the institutions and people who had created the crisis, rather than its innocent victims. If was as if FDR’s administration had chosen to guarantee the prices of bank stocks, rather than depositors’ savings.


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  • At Sun Aug 21, 08:35:00 PM EDT, Anonymous Anonymous said…

    Dear Jay, you use way, way, way too much logic to judge day to day, or week to week market moves! The markets are almost never logical. As taught in "Reminiscance of a Stock Market Operator" the true story of Jessy Livermore you cannot will anything on the stock ticker, the stock ticker is ALWAYS right because it factors into it all events, all fact and most importantly human emontions especially greed an fear. So to be a good trader you need to understant the stock price is always right no matter how much you think otherwise. Understanding that, it is then "merely" your job to determine which way the market is tending to move. The last few weeks that movement has been strongly biased to lower prices. That is why I favor technical analysis to spot a new up-leg after it has been establish without guessing/picking a bottom. Most great trader I have read about neer guess bottoms or tops but make their substantail money on the in between moves.

    The trend (up or down) is alway your friend till it clearly shows you the end.....Rod H.

    (our tumble weed plants are still doing very well in our summer here0

  • At Sun Aug 21, 09:31:00 PM EDT, Blogger Joel Salus said…

    Fantastic and "point on" post, Jay. I look forward to your next post (solutions.) Joel

  • At Sun Aug 21, 10:55:00 PM EDT, Blogger cjcalgirl said…

    Again, you have put in 'synopsis', the despair and hopelessness I feel when I see our president weakened to near immobility, our congress setting their reason aside in support of monied interests, and few listening to those who WARN us, such as Buffet, Freidkin, Stiglitz, (my personal fave!), and Eliz. Warren, and others. When the SCOTUS ENDORSED this behavior by their decision in Citizens United, (a misnomer, if there ever WAS one), we saw the REAL 'Dogs Of War' LOOSED. And STILL we have a much BIGGER problem on the horiaon, and THAT is the saving of the planet, IF we can. Personally, I don't hold out much hope of that. Unless millions of humans die from starvation, disease, and war, I don't see any REAL movement in the direction that seems to ME to be most obvious. STOP feeding the 'beast'.

  • At Mon Aug 22, 04:01:00 PM EDT, Blogger jay said…

    Dear Rod,

    I agree that technical analysis can play a helpful role, but only under two conditions. First, in "normal" times, when fundamentals suggest a market turn, you can use technical analysis to spot (although not, I think, reliably to predict) a trend in time to jump on the bandwagon before it ends. Second, technical analysis can confirm fundamental analysis and increase your confidence that you've got it right.

    But in the short term---days or weeks---I don't trust technical analysis. Why? Because the big boys can do it faster and better with their vast market experience, illegal insider knowledge, and pre-programmed trading algorithms. Anyway,I don't have the patience or fortitude to sit before the computer screen trying to outwit them and their programmed computers for seven hours a day. My only comparative advantage is an ability to think broadly and logically and hope the market follows, at least in the medium or long term.

    Right now, I see a relatively healthy global economy (despite our general national decline) being subverted by a metastatic financial sector in no way (yet) controlled or restrained. That, to me, is the reason for all the recent volatility. One day the markets look at the fundamentals of the "real" economy and rise. The next day some bit of news reminds them of the debt overhang and the financial sector's misdeeds and excesses, and markets fall.

    I think this state of affairs will continue until: (1) we begin to clean up and downsize our pathological financial sector worldwide or (2) our failure to do so causes another recession or, in the worst case, a global depression.

    So now I'm almost entirely out of equities now, because I can't foresee whether or when either of these things will happen. It looks to me as if most of the market sees things the same way.

    It's OK to be in a short-term-rigged market as long as the medium or long term has some relationship to fundamentals. But where short-term fluctuations dwarf fundamentals and threaten to do so for the foreseeable future, it's time to seek less volatility, unless you thrive on day trading.


  • At Tue Aug 30, 06:22:00 AM EDT, Blogger jay said…

    Dear cjcalgirl,

    Sorry to post your comment so late. I've been traveling abroad and have only limited Internet access.

    I'm sorry to agree with you that there are very few reasons for optimism now. Short-sighted selfishness appears to be the universal human condition. Only a few countries, including China, Denmark, Germany and Spain, appear to be addressing our environmental and energy future with anything like the necessary realism.

    I fear especially for our country, which will suffer terrible hardship and accelerating decline once the global economy starts to recover and oil prices begin their long-term secular rise. Calculations suggest that gasoline will be $15 per gallon (not including additional taxes) by 2018.

    But one thing gives me hope. Americans have a history of working practically and hard under conditions of hardship. As Churchill said, we always do the right thing, after exhausting all the alternatives. I just worry how much hardship it will take to get us collectively to see the light.



  • At Tue Aug 30, 06:30:00 PM EDT, Anonymous Anonymous said…

    Jay -not to sound like a broken record, but once again you have nailed it. Don't you sniff more than a whiff of desperation all around? Its like they are all grifters who can feel the end coming. To hell with rules and any thinking about the future beyond the next year (if long term thinking) or the next quarter. Unfortunately, due to 30+ years of magical thinking reinforced (constructed?) by the most pervasive and insidiously effective propaganda machine ever devised, most americans have become incapable (or at the very least, unwilling) to understand what is happening. I eagerly await some of your suggested solutions. We need some.

    Hope you are well. DC becomes more like an idiot Versailles ever day.


  • At Thu Sep 08, 12:50:00 PM EDT, Blogger jay said…

    Dear Doug,

    Thanks for your renewed vote of confidence.

    I agree with your third sentence about grifters feeling the end coming. Surely they do.

    Despite his Dick-Tracy-come-to-life chin, Rick Perry is just a male Sarah Palin, a Hail Mary pass by those who would exploit religious and political nutcases to retain power. The GOP has no one home any more. That fact was clear when Jon Huntsman, putatively the only rational non-jerk on stage gave the dogmatically correct answer ("no") to the hypothetical question about accepting one part tax increases for ten parts spending cuts. These folks are trying to appeal to economic Taliban and will have a tough time pivoting after the primaries.

    But I would not underestimate the parasites' cleverness or political power. A lot of hard lawyering lies ahead, including the Fannie and Freddie suits just filed, before we begin to see the gamblers and swindlers lose their shirts or go to jail.

    And a lot depends on us. Those who would abandon Obama out of childish disappointment with his failure to become the Messiah must reconsider. The only hope for this nation is to re-elect him in 2012 with a Democratic majority in both houses of Congress. Then we will see change we can believe in.



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