Stock Markets Are Killing Themselves

There’s been much wailing and gnashing of teeth recently about the ups and downs of the US stock markets — the NYSE in particular. The self-imposed issues of the market, that is.

Meanwhile, the Big Pharma sector producing pain-relief and self-numbing medications has been banking big bucks. (That includes, of course, the alcohol industry.)

What’s all the wailing about?

Way back when, even before the birth of ‘stocks’ as we know them, people were trading in a stock-market kind of way, though they didn’t call it that. As it happens, that happened 700+ years prior to the invention of derivatives, automatic (computer-based) trading, and other ills of today.

In the old days, there was a level playing field: Someone had something to sell, some one was interested in buying. A trade was done. There were few if any intermediaries. Back then. Still, way back then. there was no ‘hedge’ buying, or ‘margin’ buying, which is pretty much the same thing: Betting on a stock’s rise, or fall, in some cases, to befit you.

You go to the doctor, and say ‘when I put my arm (way back) like this, it hurts.’

Doctor: ‘So, don’t do that.’

To mix metaphors, if an investment advisor told his/her client ‘I’m going to do ‘this’ and it might hurt,’ some investors would say ‘don’t do that; Follow a safe path.’ Others, of course, would say ‘go for it,’ anticipating a gold ring, or the equivalent thereof.

The advisor seeking the greatest gain ‘plays’ the market — buying low and, hopefully, selling high. When he’s representing a lot of small ‘go for it’ investor-clients, and is, as a result, dealing in larger-than-small quantities of stock, it’s just possible his buy or sell could create an up/down tick in the market that, on the downside, could cost his clients a bundle.

And all that assumes a few things: [1] The ‘advisor’ — maybe a street-level bank employee, more than likely a level or two down from an actual stock broker, or ‘buyer/seller’, supposedly has only the best interests of his clients at heart; [2] The advisor has a professional level understanding of certain stocks, or specific industries, and he has the expertise to make sometimes-accurate predictions of which direction — up or down — certain companies’ stock prices will move, in either the short term, or over a longer period of time, and [3] The advisor’s knowledge truly is substantial enough to serve his clients the way they deserve to be served — in a way that, it would be hoped, will shield them from losses and provide them, some of the time, gains.

Then there are the real trouble-makers of the economy: Hedge fund managers. They not only control usually-massive sums of clients’ money, they make, in effect, what amount to ‘bets’ on the direction a stock, or a stock market, will go. Their activities have, for the most part, absolutely nothing to do with the actual value of what a company — a stock issuer — producers; Instead, they are betting on swings in the market having to do with, um, swings in the market. For an assortment of reasons, swings can be hard to predict, or reasonably anticipate — any more than where a roulette wheel’s ball will land.

But give ’em credit: hedge fund managers get it right enough of the time to have major impacts on the movements of stocks and markets, overall. Unfortunately, their ‘exposure’, in terms of the risks they take, are far less than they should be, and both their clients and the America public in general pays the price.

A significant factor reducing managers’ risk is the fact they aren’t playing with their own money, but with that of clients. And which ever way a stock goes, sometimes as a direct result of their activities — and sometimes not — they take a commission.

‘Take’ is the operative word there. This is a bit circular, but try to stay with me: Because hedge fund managers take in huge amounts of money for themselves and their companies, they have lots and lots of money to spent on lobbying Congress in support of this, or in opposition to that, tax law amendment. One of their greatest accomplishments, as sponsors of highly-paid lobbyists, is a section of the tax code that enables them to defer taxes on trading profits. Then defer them again — sometimes to the point, when losses are balanced against gains, their tax liability can drop to a point where, in relative terms, it is ‘affordable’, on their terms.

But, sadly, those terms are not ‘affordable’ to the American taxpayer because tens — nay, hundreds — of millions of dollars of potential income to the Treasury are lost because hedge fund managers are deferring, well off into the future (that may never come), taxes liabilities on their profits.

Then there’s the really nasty stuff — types of trading (beyond hedging and similar ploys) that should have no place in a stock market supposedly based on the real worth of a company, based on what it produces or, in the case of, say, Walmart, sells. (There are many, many Walmarts out there — companies that actually produce nothing but have great (or less) value based on how efficiently they buy and sell items produced by others.)

‘Remember when their was a massive ‘crash’ of the US stock markets in 2008? Who doesn’t, right?

Essentially, and this is, of course, grossly over-simplifying, this crash was caused by the failure of large financial institutions — banks so large that the government deemed them to be ‘too large to fail’ — to be able meet obligations because they were oversubscribed — they’d sold way more than was reasonable, or the market could absorb — on stocks or securities based, totally ludicrously, on totally unaffordable loans made to potential home buyers who, duh, fairly quickly failed to keep up with their payments, causing banks to foreclose on the loans. causing people in massive numbers to lose their homes — and leaving the banks with both loans and houses (they didn’t want to own) with far less value than could be absorbed by the demand for housing. (Take a deep breath after that sentence!!)

Let’s get personal for a minute. Not all that long before the crash, my then wife and I, working with a bordering-on-the-illegal presentations of a loan arranger, got a mortgage on a house we could ill afford. In a sane housing-lending market, our beefed-up incomes and down-played expenses would have earned us a ‘you’re kidding, right?’ response from any institution to which we applied for a mortgage. Not so in the just-beyond-2002 period.

Oh, it took some shopping around and some messing around with the numbers — things the loan arranger was good at, and supposedly paid well for — but we did get the mortgage . . .   and barely managed to keep our heads above water — by scrimping and doing without a lot — to keep the mortgage paid. Late, sometimes, but eventually paid.

This actually happened, successively, on two houses. The first of them, a lovely farm house in a very rural area, with an un-tended apple orchard, a large, fully-fenced yard in back and a pleasant view (over a reasonably-sized yard in front) over fields that, alternatively, prolifically produced corn or hay. They and the field in the back were regularly fertilized, in the off season, with liquid manure from a nearby dairy farm. The first half day or so of its ‘aroma’ is nearly overpowering; Then, if you are fortunate (to have an agreeable olfactory system), the fading smell can be interpreted as a reasonable, almost pleasant part of life in the country.

But while the house served our needs well, it wasn’t attractive, a few years later, when we wanted to move on, to potential buyers. One reason was the fact a tenant we’d had in place for a year or so didn’t do much of a job of maintaining even the simplest of things — like cabinet doors that, mysteriously, went missing.

Then there was the century-old stone foundation: It wasn’t holding up well, and properly repairing in would have cost tens (perhaps many tens) of thousands of dollars. (The house would have had to have been jacked up, the old foundation would have had to be pulled out, and be replaced by a new one. No one was willing to predict what the jacking-up process might have done to the structural integrity of the place.

Another ‘product’ banks were keen to sell in those days was loans against the supposed value of the property — home equity loans. We had one that, within months, as area house prices started suffering, quickly exceeded the potential sales price.

Long story short: We walked away, owing Bank of America $110 thousand or so, and God knows what in county property taxes. The county eventually took the property over for back taxes.

The second to-be-lost house a similarly sad story: Again, we bought in, too high, when we could ill afford to, and ran an antiques shop in one-third of the main store. It did OK, but wasn’t setting the world on fire. In time — a couple of years —  we extinguished the business, and set sail  for a lower-priced house that, should we decide to move on (as we did fairly quickly), offer a theoretical chance of recouping our investment.

But, on the to-be-lost house,  when we couldn’t find a buyer through a Realtor, we made the serious mistake of doing a rent-to-buy deal with a family that, initially, went all-out to fix the place up and fit it out to meet their sizable family’s needs.

Then, they failed to make promised ‘rent’ payments. Not even one. We tried to get them thrown out, but a lawyer told us the contract we’d written up wasn’t worth the expended paper.

Eventually, the illegal occupiers decamped, leaving a mess on the property we had pay — at the town’s insistence — to get cleaned up. Shortly after that, after we  and they were occupiers, their diligence to ‘keeping up appearances’ suffered an amazing setback — to the point we, the owners, got ‘you’ve got to clean the property up’ complaints from the town.

Then we walked away from that one, too.

Those two house losses were, in one way or another, precipitated by our acquisition of mortgages we totally did not deserve, based on our income and fixed expenses. We lost them, like millions of others lost their homes, because lenders were so eager to lend that they did bad deals — lending to people who had no business committing to the kinds of payments the banks were requiring.

Boom. Crash.

Boom, first for house-sellers. Crash, fairly soon thereafter, for lenders.

This is all part of the initial premise of this post: That financial institutions, be they stock brokers, hedge fund managers or mortgage arrangers, have no motivation to think, beyond the absolute immediate, what harm their actions might wreak. And they don’t.

And in the case of the housing crash, the government compounded the error by bailing out, with taxpayer money, those ‘too big to fail’ lending institutions.

If the US stock markets were run as they should be, without all the fancy beyond-a-company’s-real-value manipulations, and if banks were required to take more responsibility for (i.e. pay more attention to) the short-terms they’ve proven to favor over the past few decades, the NYSE’s shares’ value would certainly be lower, as would the value of the likes of the companies comprising the Dow-Jones average.

But stock values would be more realistic, as would the likes of 401(k) savings accounts, and less subject to fluctuations of computer-generated trades (don’t get me started on that idiocy!) to a point where a company’s output, in production or sales, was more accurately reflected in the price of its stocks.

None of that will, of course, come to pass. More’s the pity.


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