"Parallel Universe: How Wall Street & Republicans Thrive On False Negative Hype," LeadStories.com, January 17, 2016

Parallel Universe

If you listened to the last GOP presidential debate in South Carolina or have watched with anxiety the tumbling of the stock market, with a downward spiral that comes close to the 10% official “correction” designation, you’d think that the US is on the verge of collapse. If you were young and ambitious or retired with a sufficient nest-egg, you’d be checking the Internet on where to immigrate. Who would want to live in a country that is unsafe, led by a president who “doesn’t care about America,” and an economy that is so bad that more illegal immigrants are leaving than entering our southern border (by as much as 140,000 from 2009-2014, according to Pew Research Center). The political climate in Washington, DC is so contaminated and corrupt that some leading members of congress (Steve Israel of the 3^rd district of New York is the latest casualty) are simply not seeking re-election (which is a guarantee to incumbents at the rate of over 96%, according to Louis Jacobson in Politifact).

But this isn’t the America I live in. I recall the announcement by the Bureau for Labor Statistics that some 292,000 nonfarm jobs were added in December 2015, that the economy was growing fast enough for the Federal Reserve to increase interest rates by .25%, that lower oil and gas prices and the discontinuance of the prohibition of oil exports will make the US not only energy independent and a net exporter of oil and gas but one of the leading producers of oil and gas in the world, and that overall we still enjoy civil rights that are denied by many of our allies, like Saudi-Arabia (whose legal system is based on a very strict orthodox interpretation of Sharia law). Paying less than $2/gallon of gas will allow all of us to spend more of our money on other goods and services which in turn will boost the economy, since about 70% of our Gross Domestic Product comes from consumer spending. Lower oil prices will lead to greater spending, and greater spending to economic growth; this, at least, is what neoclassical economic theory teaches us. But maybe this theoretical rosy picture is too naïve, maybe in the real world things work differently, even without a conspiracy theory at work.

In the real world of brokerage houses on Wall Street a stable economy that is slowly but steadily growing is not volatile enough for daily trading spreads. A bit of bad news followed by good news and vice versa ensures enough volatility to guarantee great profits. You can check the financial reports of any of the major investment banks in the US and see right away that the largest contribution to their bottom line comes from trading, what some call arbitrage (which is simply buying low and selling high). The margins are miniscule, but the volume is so large—billions of dollars daily—that by the end of the year there are substantial amount of money being made from little movements in stock or commodity prices. And when a bunch of hedge funds collaborate to bring prices down or up, as they have been fined after legal discovery, then the trust we have in the fairness of markets and the supposed reflection of prices of efficient information about supply and demand (EMH) falls apart. And if these margins aren’t sufficient, inside-trading is always available, as hedge funds, such as SAC Capital and its CEO Steven A. Cohen, have admitted as much when paying $1.8 billion(!) in fines.

Add to this the technically-enhanced “high-frequency trading” which finds the buying and selling prices of stocks nano-seconds before these prices appear on the market itself, and therefore are able to “game” the buy and sell orders before anyone else has a chance to fill them, and you have, once again, inside-trading plain and simple: information gained before anyone else has a chance to compete with you is still unfair, no matter what technical trick or loophole you were able to find. So, is volatility the dream of any trader? Yes, it is. Is knowing a bit before anyone else what someone is willing to pay for a stock inside-trading? Yes, it is. Grand conspiracy? Maybe not; but definitely an advantage to elite hedge-funds and investment banks that can game the system in the name of “free markets”; the term “collusion with impunity” seems apt. And when caught, years later, as Goldman Sachs was in its involvement with mortgages and the collapse of the economy, then a fine of $5.1 billion(!) makes it all okay—it’s the price of doing business. And the six million Americans who lost their homes can be forgotten. For those who are interested in a simple, straight-forward explanation of the mortgage bubble and its ensuing Great Recession, go watch the recently released movie The Big Short.

It’s plain why Republican presidential contenders claim that the country, led by a Democrat, is doing poorly—they want to build an argument for changing the guard: Democrats are bad, we are good, ergo: your next president must not be a Democrat but a Republican. It’s also plain why they would portray such a negative picture of America’s national security and its economy, not giving any credit to the president for any policy decision that helped us get out of the (Republican-induced) Great Recession of 2008-2012 or spending more on the Department of Defense than the entire world put together (ABC News 2/24/14), a budget which, incidentally, is voted on by Congress which, incidentally, is controlled by the Republicans. So what about the media?

You’d think the media would be smarter than all of that, telling us if the king has no clothes or telling us the truth about our own country. But you’d be sorely disappointed. What happened to independent reporting, cool-headed analysis, and a long-range perspective on what’s going on in the economy? What about calming the population rather than scaring it half to death, especially when there is no reason for alarm? Last I checked, there is something called self-fulfilling prophecies, the kind of alarmist pronouncements that make people withdraw their money from their local banks, only to perpetrate a run on the bank that in fact leads to its collapse… Have we learned nothing from our own economic history? Don’t journalists and pundits realize that the more positive their pronouncements are—given positive economic data—the better the economy (of consumers) will function? It’s plain that the latest negative hype is just a hype, nothing more nothing less. And the quicker we get over it, the better, because the American economy is still very strong!

Raphael SassowerWall

“Closer look at the Stock Market Blues,” The Colorado Springs Business Journal, September 4-10, 2015, 23.

The Stock Market Blues

When I was a teenager I asked my father, a successful businessman, what he thought of a downturn in the stock market, and he calmly answered: those who bemoan a market downturn never tell you about the market upturn. They forget to tell you that their losses came after great gains.

My father was a refugee from Nazi Germany who never fulfilled his academic dreams; he was what we call an autodidact, a self-taught man, who began as a leather apprentice, brick-layer, and a truck driver; he eventually employed more than 100 people.

His words come to mind when looking at the most recent market collapse (and speedy recovery). What should we make of this financial turmoil? Whose opinion should we follow? Who on the networks and Internet is trustworthy?

There are two schools of thought when it gets to the stock market. One claims that the stock market is a reflection of the financial reality of the marketplace, a mirror through which we can clearly see the reflection of the health (or sickness) of the economy. 

This view is best articulated by the Efficient Market Theory, arguing that stock prices reflect or embody the best knowledge or information about a company and its financial prospects. 

In short, stock prices are an accurate measure of all available information of any individual company or an entire industry. In this sense, no manipulation is possible because too many hawks watch carefully every move of every company—transparency is best found in stock prices!

The second view claims that the stock-market is a side show where gullible investors waste their hard-earned money while professionals use algorithms to clean them dry. Private deals are cut behind the scenes, such as when the “prophet (or sage) of Omaha” (Warren Buffett) buys and sells companies outside of public channels. 

When he decided to “buy” some underpriced shares of Goldman Sachs after the last bubble burst that started the Great Recession in 2007/2008, he approached Goldman’s executives directly, named his conditions, and readily invested $5 billion. He “made” the market, rather than “followed” it or participated in its volatility.

Given that you may find one school of thought more appealing than the other, for whatever ideological reasons—there must be fairness! We are all equal investors, after all! My money is no different from a billionaire’s!—you still should be aware that it’s all about “framing.”

Framing is a favorite trope of behavioral economists who argue that judgments, choices, and decisions are made within specific frames of reference. Once the frame is changed, the decision will change as well. This is not “irrational,” but a reasonable reaction humans have to what appears relevant to their choice-making processes.

So, let’s frame the latest stock-market decline. On August 27, 2014 the DJIA stood at 17,122; a year later, on August 26, 2015 at 16,285; this is a 4.88% decline. Not something to cry over, is it? If someone told you that your house lost 5% of its value in one year, you might be upset a little, but not devastated.

If you look at a 5-year horizon, you find a different story. On August 27, 2010, the DJIA was 10,150, so that the same August 26, 2015 close of 16,285 represents now a 60% increase in value. Not bad for not doing much but letting your portfolio sit there, enjoying the economic recovery that was blessed by George W. Bush and implemented by Barack Obama.

For every Black Monday, August 24, 2015, with a so-called collapse of the market (588 point loss), there is Happy Wednesday, August 26, 2015, when the market rebounds (619 point gain). Do you live your life day-to-day or are you willing to look at a longer horizon? As I approach a milestone 60^th birthday, I look at decades, not days.

Nutritionists and diet expert warn us not to check our weight hourly or daily, and remind us of normal body fluctuations. They do, however, look for trends of gaining or losing weight, when the cumulative difference is statistically significant. When my 94-year old mother began to lose weight rapidly, we knew she was dying; it was a unidirectional trend, not a daily fluctuation.

As under-educated as my father may have been, he had the common-sense of a refugee and a self-made businessman; he knew that when his business had a bad day, it didn’t mean he’d have a bad year, and vice versa.

The same is true of the restaurant business. It’s hard to remain optimistic when you have a bad day with few customers. But don’t forget the great night you also enjoyed. What makes the day-to-day ups and downs bearable is the optimism of a long-term horizon!

Raphael Sassower is professor and chair of philosophy at UCCS. He can be reached at rsassower@gmail.com See previous articles at sassower.blogspot.com