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Remember Clinton’s “Don’t Ask, Don’t Tell” policy for admitting gays into the US military? It appears that Big Media has adopted a “Don’t Know, Don’t Care” approach to covering the tumultuous stock market. Cal-Berkeley journalism prof Orville Schell says that Big Media’s obliviousness to the looming financial scandals stemmed in part from the fact that they are part of the corporate world too.
Maybe that’s why Big Media failed on the investigative side, but that still doesn’t explain how it is that the largest and most reputable media outlets in the world are simply at a loss to tell their readers what is happening in the financial markets. Instead of providing answers, they rely on pop-culture cliches, psychobabble and a Rolodex full of self-serving “experts.” Here are three of the worst examples of the DK/DC mentality in recent days from three major news sources: MSNBC, the New York Times, and CNN.
Exhibit 1: MSNBC on Market timing
MSNBC wonders out loud whether it is possible to “time” the market — that is, can investors count on making extra money in the stock market by picking the optimal times to buy and sell? This is hardly a controversial issue in the finance community — the weakest version of the Efficient Market Hypothesis (EMH) says that you cannot forecast stock prices by extrapolating present trends or by overlaying historical cycles — that “market timing” is fool’s gold. Yet in an attempt to make the story “balanced,” MSNBC gives disproportionate weight to the crankish opinions of a “stock cycle” fetishist named Peter Eliades. The author of the story is totally unable to critically assess Eliades’ claims.
Never mind that stock cycle theory is the phrenology of the finance world — Peter Eliades is telling us that he can make money timing stocks. His “proof”: stock prices fluctuate, so it is critical to buy and sell at the right times. Gee, you mean I would make more money if I bought at a lower price and sold at a higher one? That is a tautology, not an argument; it is not proof that any valid strategy for forecasting the peaks and valleys of the market can be devised. The MSNBC author seems totally incapable of making this critical distinction.
As for Mr. Eliades, we are told that he “[has] his money in cash until the market shows clearer signs of its next move.” So he essentially concedes that he doesn’t know how to time the market either, but this point is also lost on the author of the piece. And why on earth is he in cash? Is cash the only alternative to corporate equities? But since MSNBC knows as much about securities markets as Mr. Eliades — next to nothing — he is their peer, and as such is taken at face value by clueless Big Media scribes.
If you are concerned about when to get out of the stock market, you can always hedge your bets by selling off your stock portfolio a little at a time, smoothing out the bumps in the ride. Market timing poses no crisis to smart, disciplined investors.
Exhibit 2: The NY Times on the recovery
I picked this next quote not because I felt like picking on the New York Times, but because I think that it is all too typical of pseudoscientific analysis of the stock market and the sheer pervasiveness of the DK/DC policy by Big Media in general. It could have come from any newspaper. This is how The Gray Lady attempts to explain Monday’s stock market rally:
Emboldened by the broad market’s ability last week to snap a three-week losing streak, investors jumped back into the market on Monday, scooping up stocks with beaten-down prices.
Stock prices rose because investors jumped back into the market? Hmmm … how did these investors “jump into” the stock market? By purchasing stocks from the Stock Market Fairy, right? No, they bought shares from willing sellers who were already in the market and wanted to reduce their exposure to those particular securities. Every share of stock that is traded on the NYSE is simultaneously bought and sold, by definition. Duh!
And what is with this psychobabble? In an absurd anthropomorphosis, the Times tells us that the market had the “ability” to snap a losing streak. Markets don’t have “abilities” — markets do not “struggle” to “find their level” or “seek to reverse their losses” or whatever other characteristics journalists assign; markets simply calculate the prices needed to avoid surplus or shortage conditions. If the buyers were “emboldened,” what does that say about the investors who sold their shares to the emboldened buyers? Are they wusses?
Exhibit 3: CNN on the scandals
This CNN piece is typical of the media’s DK/DC attitude toward the
corporate earnings scandals. Investors, we are told over and over again, have been “alarmed” and “shaken” by various scandals in which senior management “cooked the books” to overstate profits. Well, maybe rank amateurs and ham-fisted day traders allow measures like “earnings per share” drive their investment decisions, but as they tell you in accounting courses — profit is opinion, cash flow is fact.
If I am a CFO, which would I rather do: report higher earnings or lower earnings? Suppose that I have the option of valuing inventory in two ways, one of which would result in a higher cost of goods sold; or suppose that I can choose from two depreciation schedules for my fixed assets, one of which would cause me to take more depreciation expense sooner in the life of the asset. In either case, I’ll take the option that depresses current earnings, thus minimizing current tax liability and giving me more cash sooner. Tax reforms such as accelerated depreciation and LIFO (last in, first out) inventory modelling would allow corporations to report LESS taxable income while INCREASING their cash flow by decreasing their tax liability. Investors value a stock for the company’s ability to generate cash to pay dividends, not for its ability to enrich Uncle Sam.
A healthy firm is going to try to err on the low side when reporting earnings. For a struggling, nearly insolvent firm like MCI WorldCom or Enron, the incentives might be reversed if, for example, reporting very low or negative earnings would cause the firm’s bond rating to fall substantially. WorldCom and Enron were highly leveraged, which means (1) that they are extremely sensitive to the cost of financing their debt and (2) that they are extremely sensitive to downturns in the business cycle. Firms that are fighting for survival, and management that is trying to hold on to power, might try anything. But it is fatuous to treat every business as the exception to the rule.
Here is something that Big Media is not going to tell you: the outright majority of the value of the US stock market is owned by financial institutions (e.g. investing intermediaries such as mutual funds, and contractual intermediaries such as pension funds and life insurance.) Households are net sellers of individual stocks, but they are net buyers of mutual funds. In other words, households are still heavily vested in the stock market, but they are investing indirectly through professionally managed mutual funds and pension funds, etc. A pension fund manager is not going to be swayed by a cash flow statement that tries to shift $4 billion from operating activities to financing activities (as WorldCom did) — these people are just not duped that easily.
So is “shattered investor confidence” the reason the stock market is falling? Call me a heretic, but I think the scandals have relatively little to do with the declining US stock market. I think it has more to do with the EU Savings Tax Directive, which Perry has discussed below. The US stock market was fueled in the ’90s by massive foreign investment in American equities (British Petroleum buying Amoco, Daimler-Benz buying Chrysler, etc.) Europeans prefer to set up American holding companies to invest in the US, earning income on their investments that is taxed at (comparably low) American corporate tax rates.
The US attracts massive amounts of foreign investment (another way to say this is that the US has a massive current account deficit) because the US has relatively low tax rates, and relatively light regulatory burdens. But the EU considers this “unfair tax competition” and is trying to establish a tax cartel that would tax receipts of income earned in the US by Europeans at higher European rates. To the extent that such a thing would make investment in the US less profitable, it has reduced the global demand for American corporate equities. It’s just a theory, but at least it is a theory backed by some evidence, not just a bunch of tiresome cliches pastiched together into a jejune news story.
Call me an incurable optimist, but I can’t help wonder whether the recent jarring fall in the price of gold to near the psychologically-key $300 per ounce level may be a sign that the worst is over in the global stock market.
Gold has shot up in recent months partly because it is seen as a safe store of value at a time of cratering equity markets, corporate scandals and worries about developments in the Middle East. Now that yellow stuff is getting cheaper again. A straw in the wind, perhaps. But without investing erroneous mystique in this metal, I think its recent fall from highs is the market’s way of telling us that better times may be ahead.
On the other hand, if an when the U.S. goes after Iraq, gold may go into hyperspace for a while.
The good news is that it looks like there is no significant support for the US joining what can only be described as a monstrous tax cartel with truly global reach being advocated by the high tax states of Europe.
This is truly splendid but do not for a moment think that this is the last we have heard of attempts to end the ‘unfair’ competitive advantages of lower tax economies.
There is an excellent, detailed and revealing interview in the July edition of techie magazine Wired with supply-side economics writer and computer enthusiast George Gilder. I missed it when the magazine came out but caught it on the net this morning.
Gilder is one of my favourite writers on economics. He can actually make the often-dry subject matter really sing, in a way few others can. His first major book, Wealth and Poverty, published in the early 1980s, helped to provide the intellectual ammunition for Reagan and Thatcher’s supply-side tax cuts, the beneficial effects of which are – mostly – still with us. I recall an enjoyable evening, about 17 years ago (!) when Gilder came along to the now-defunct Alternative Bookshop in Convent Garden, central London, to talk about his following book, The Spirit of Enterprise. After that book was published he turned his attention almost full-time to writing about technology, especially the whole area surrounding computers and the Internet. He later became something of an investment guru, which initially made him a very wealthy man.
Gilder has taken a hard knock from the meltdown in technology stocks over the past two years, but his boyish enthusiasm for what the future can hold is undimmed. The man is a tonic, even when reflecting on the rough times he has endured over the past two years.
Now that our own British government seems bent upon wholesale reversal of some hard-won supply-side reforms, his message needs to be broadcast again.
One of the threats to economic freedom is the state sponsored cartel, in which groups of economic agents can collude to fix prices with the aid of the state, crushing opportunities for lower prices from newcomers to the market. A particularly dangerous cartel is in the offing – the global tax cartel. Such a cartel is the aim of the European Union, which in the name of tax “harmonisation” wishes to prevent countries, especially the United States, from setting taxes at rates lower than those in the EU. The EU, dominated in recent years by leftist governments hostile to the market, resents the way in which the Anglosphere nations have been able to outperform the EU in terms of growth and job creation. The latest manifestation of this desire is enshrined in what is called the “savings tax directive”.
One of the great things about global free markets has been the ability of financial capital to whizz around the planet, seeking out the best returns and the countries with the lowest tax rates. This financial freedom has forced many a government to give up tax-and-spend policies and follow a more market-friendly path. And that is precisely why the High Priests of Big Government at the EU wish for such a cartel. I am quietly optimistic, though, that American politicians will see this proposal for what it is, a desire to shaft American enterprise and hobble the global economy. (I may be wrong, of course) It comes at a time when there has been a lot of friction between America and Europe post September 11. Tthe threat of a tax cartel to throttle American enterprise will only deepen the rift.
With this in mind may I commend readers the freedomandprosperity.org website, which is a lobby group and publishing house giving a full list of articles spelling out the horrors of tax harmonisation. They also have email addresses so that people can contact Senators and Representatives about this crucial issue.
It is difficult to get one’s mind around the vast sums of taxpayers’ money that British finance minister Gordon Brown has planned to hurl at our public sector. The sums are mind-numbing. The spending plans are predicated on some pretty rosy forecasts for the British economy over the next few years, not to mention some fairly dubious accounting methods which reduce the potential bill to the taxpayer from infrastructure projects.
Those rosy forecasts could easily fail to materialise, particularly as mounting red tape, higher taxes and growing interference from the EU clogs the arteries of the UK economy. What is beyond doubt in my mind is that “New Labour”, that strange political entity supposedly different from old tax-and-spend Labour, is dead. Central control of finance, big spending, handouts for the public sector unions – the whole unlovely mix is back. And of course Brown’s announcement on Monday of this spending mania was accompanied by a sharp fall in British equities to the lowest levels in six years. Of course much of the damage to stocks stems from events in the U.S., mired as it is in accounting scandals. But one cannot help but conclude that Brown’s charmed existence for the first five years of his time in the job is about to get a lot rougher.
There may be some upside to all this. Brown’s attempt to improve our creaking health and education system may prove the futility of state monopoly as the ideal way to deliver good service and give the opposition Conservatives ammunition for the case for root and branch reform. But I would not bet the farm on it just yet.
Paul Staines thinks Alan Greenspan as a canny operator who requires some careful interpretation
Yep, the 80s are over, Gordon Gekko is dead and buried, Gordon Brown lives, the stock market is going to the Antarctic, CEOs are going to jail and now the high priest of central banking himself says greed got out of control in the 90s.
I admit to never understanding why Disney’s Eisner would be motivated to work Mickey Mouse harder if he had $300m in stock options instead of $100m, but hey, I thought it was up to the shareholders to decide rather than the readers of the New York Times. Enron was pretty bad, the accountants seem to have been looking the other way and the CEOs were acting like robber barons of yore.
Today the Federal Reserve chairman Alan Greenspan was giving his biannual testimony to congress. Markets stop and listen, particularly when they are in trouble – and boy are they trouble today – I had CNBC (“bubblevision”) playing him live whilst trying to figure out how not to lose money, I heard him say “the latter part of the 1990s … arguably engendered an outsized increase in opportunities for avarice. An infectious greed seemed to grip much of our business community..”
Guilty as charged. For a period in 1999 to 2001 whilst the NASDAQ got gloriously irrationally exuberant, I was completely infected with greed, my altruistic immunity system shutdown. Hot dot.com IPOs? “Gimme, gimme, gimme” I cried. “Yahoo! Lets go Cisco!” I wasn’t the only one, an old friend is currently staying with me. He is a private banker, he grew his family’s nest egg 2000% in four years, then wiped it out in one year. His wife is suing him, not for divorce, but for misadvising her in his capacity as her broker. (Memo to self, never marry an American lawyer).
Greenspan has been very clever in his testimony, he has defended capitalism whilst decrying capitalists and their avarice. He basically said the bull market gold rush of the 90s overwhelmed the checks and balances of American capitalism, but capitalism is good, just some capitalists are bad. I could further summarize what he said but why not click to the Fed’s own page for yourself?
Oh, one of the big insurance companies has just announced that it “is not a forced seller of equities”. Hmmm.
Paul Staines
I spent a couple of torpid hours on Tuesday afternoon listening to the billionaire hedge fund king and now globetrotting philanthropist George Soros give a talk to a British parliamentary committee. Soros is the man who, to the everlasting gratitude of the British public, attacked the pound sterling in the foreign exchange markets during September 1992, ejecting this country out of the European Exchange Rate Mechanism (ERM), a move which allowed the pound to fall to a level that made it possible for British goods to be profitably sold abroad once more. So one might have thought that the Hungarian-born finance wizard would be a hero to this humble hack. Alas, the man has feet of clay, and very big lumps of clay at that.
Soros has spent the last few years ruminating about the many dangers of global capitalism, which is a bit like Formula One racing ace Michael Schumacher warning about the risks of high-speed motor racing. Soros thinks the globalisation of capitalism, while not without a few benefits, is full of dangers and problems, which require rules and international watchdogs to run things. Here are a few snippets:
“The major causes of poverty are bad governance and bad location.”
Well, I agree bad governments contribute to poverty, and there are dozens of examples of how collectivist regimes of various stripes have beggared their populaces and retarded wealth creation down the centuries. Take the current miserable example of Zimbabwe, for example. But bad location? Does Soros think that unfortunate geography causes poverty? Then how does he explain why places like Hong Kong, with hardly any natural resources apart from good shipping links, are fabulously wealthy, while most of Africa, with huge mineral wealth, subsides in misery? The same goes for large chunks of Asia and parts of Latin America.
“Governments are less well situated to provide public goods than they were because they cannot tax capital as they used to. We need to strengthen international institutions for the provision of public goods.”
Well, all I can say to that is – thank heaven for multinationals. By George, George has got it! International capital flows are cramping the ability of would-be socialist spend-it-like-water governments from doing what they used to do. The likes of British Prime Minister Tony Blair have been forced, through gritted teeth, to rein in old socialist habits on the knowledge that financial markets will punish those habits in a heartbeat.
George Soros is clearly a highly clever man when it comes to making dollops of money beyond most folks’ wildest dreams, but I fear that like many in his case, he has almost rebelled against the free market order in which he made his billions out of guilt or perhaps more honorably, out of a desire to help mankind from his lofty vantage point. It bears out the point I have sometimes heard in libertarian circles that capitalists often make the worst advocates of the classical liberal order.
On June 18th I attended an IEA lecture addressed by the Peruvian property rights advocate and analyst Hernando de Soto, author of The Other Path and more recently The Mystery of Capital, and I promised a report. I apologise that this is a belated report, but this has also given me time to think. (I also said I hoped to get a picture of the great man, but he rushed away as soon as he’d given his talk and I didn’t manage this.)
De Soto understands that property is a social fact. Property rights are triggered by ownership documents and written records and de Soto makes much of these triggers, often to the point of saying that they are the property. No, the property is the property. But the bits of paper make it clear to the world that this is what it is and who owns it.
De Soto’s key insight is that poor countries are poor not because they don’t contain enough potential property, but because the abundance of informal property that they do contain has mostly not yet been nailed down in writing. It therefore can’t be traded, or used as collateral. There can’t be a modern economy. De Soto’s life’s work is to try to set in motion the political and legal processes necessary to correct this. He lobbies politicians, he speechifies, he writes books. He gives lectures like the one I attended.
Most of what de Soto said at the lecture echoed things I’d already read in The Mystery of Capital. But the question and answer session contained what for me were novelties.
He said that the reason so many of the world’s poor like growing “drugs” is that drugs offer a quick return, in a world of insecure property rights. Contrive more secure property rights, and the poor of, e.g., Columbia would have an incentive to go into more respectable businesses which take longer to yield a profit. Interesting.
How, someone asked do you persuade the existing powers-that-be that clearer property rights are good? How about the police? You have to look at things from their point of view, he said. It is easier to catch criminals if you have a property rights paper trail to follow. Property in other words, doesn’t just attach my home to me, it attaches me to my home. It tells the police where to go if they want to talk to me. Interesting, and somewhat creepy.
He said that that if he wants to get the right things done, he has to let the politicians take the credit. Accordingly he no longer boasts about what “he” has been doing, which is why the website of his Institute for Liberty and Democracy has gone so quiet lately. (I’d wondered about why that was.) So, how much notice are governments actually taking of this man? That he was in a great rush after giving his IEA lecture suggested that he has vital business constantly on the go, but who knows? Not me.
I hope that powerful people are paying attention to this man, because what he says still sounds convincing. Indeed it is the best big idea about ending world poverty that I know of. But although I still think de Soto is a great man, under his influence I find myself seeing property – indeed the entire modern world – in a different and rather gloomier light, almost as a pact with the devil. We must have it, but we all know where “paper trails” can lead.
Paul Marks casts a jaundiced eye at real voodoo economics.
The latest crackbrained theory to hit the media is the “Brazil must win for Wall Street” argument.
This argument holds that if Brazil wins the world cup “confidence” in Brazil will improve, an Argentina style collapse will be avoided, the ‘Right’ will win the election – and the money lent to Brazil by various ‘Wall Street’ institutions will be safe.
Of course if the term ‘Right’ means anti-statist the argument is out of touch with reality – as the government of Brazil are a bunch of social democrats and the opposition ‘Workers Party’ are worse.
However. the problem with the argument is rather more basic than this. The argument is really anther example of J.M. Keynes’ theory that a change in ‘confidence’ (‘animal spirits’) creates slumps.
Actually government credit money expansions create the boom-bust cycle.
This may have been explained a long time ago (David Hume stated it in a basic way – and Mises explained it in detail many decades ago), but ‘Wall Street’ and the media do not have a clue.
Everyone reading this blog may be saying to themselves “why is Paul Marks telling us things we already know” – but the problem is that the powers that be in our world do NOT know these things. They are not evil – they are ignorant. Ignorant of the basic principles of political economy.
Of course if Brazil wins the World Cup its economy will still collapse, but will that lead the people of power in our world to do some real thinking? I doubt it.
Paul Marks
The World Cup is a positive image of globalisation: it isn’t a government project, it’s racism free, it’s about as capitalist as it gets and celebrates individual and team efforts. It also allows national hatreds to be acted out without anyone getting killed. Even the refereeing is generally better than some previous shockers.
Especially wonderful has been the willingness of Japanese spectators to ‘adopt’ teams and players regardless of national origin. The sight of Japanese supporters of Belgium against Brazil was surreal.
Actually, GBRI stands for Global Business Research Initiative, and to call it the brainchild of my good friend Syed Kamall somewhat exaggerates its current level of development. The enterprise is now hardly more than a strand of intellectual DNA.
Mission
– The GBRI exists to promote a greater public understanding of the role of business in spreading prosperity across the globe.
The GBRI’s Work
– Our initial work will concentrate on barriers to free trade.
– We will identify and expose human and cultural barriers to trade, as well as traditional barriers such as tariffs.
– We aim to educate people about different business cultures across the world.
– We will publish the work of leading businessmen, economists and policy thinkers from across the globe.
– We will also seek to promote new, young intellectual talent and fresh perspectives.
And so on. A few more bullet points follow. If all I knew of the GBRI was the small amount of verbiage currently on offer at its website, I’d be saying: could mean anything and probably means nothing. However, I had supper with Syed yesterday evening at his home and it all sounded decidedly promising. The Internet has massively reduced the costs in cash, office space, time and emotional wear-and-tear of running something like the GBRI, and Syed is not merely enthusiastic; he is also capable and not given to exaggeration. So I too am optimistic, and will keep you posted of developments, as and when.
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Who Are We? The Samizdata people are a bunch of sinister and heavily armed globalist illuminati who seek to infect the entire world with the values of personal liberty and several property. Amongst our many crimes is a sense of humour and the intermittent use of British spelling.
We are also a varied group made up of social individualists, classical liberals, whigs, libertarians, extropians, futurists, ‘Porcupines’, Karl Popper fetishists, recovering neo-conservatives, crazed Ayn Rand worshipers, over-caffeinated Virginia Postrel devotees, witty Frédéric Bastiat wannabes, cypherpunks, minarchists, kritarchists and wild-eyed anarcho-capitalists from Britain, North America, Australia and Europe.
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