Published CommPro.biz 2014.05.06

Walking the Edge of the Razor Blade

It would be hard to find anything gone farther astray from its intended purpose in our society than our capital markets. The New York Stock Exchange and all other such entities in the world of finance as played in the United States have forgotten their purpose, to create a source of capital for Capitalism. Instead they have succumbed to enriching the players. Those who manage the markets have allowed the investment banks and the traders to run the show. The exchanges’ purpose is to support the companies listed, not the bankers and traders.

The investment banks have strayed far from their purpose to aid in the creation of capital and to “make a market” for those “going public.” They have wandered off into the world of legalized gambling, having convinced the Congress that laws against gambling should not apply to them. It was a easy step from there into the toxic derivative instruments that plunged the world into the recession where we little folk still struggle. Traders serve little or no purpose except to generate fees for the markets and their middlemen. This is especially true of the latest breed, those rigging the markets with penny skimming high-speed trading.

These ills are just the latest in the distortions that have increasingly plagued the markets. The whole crazy focus on “Playing the Market” instead of investing has corporate management aiming for short-term goals instead of long-term growth. All it takes to unseat an otherwise great CEO is an unexpected-could-happen-to-any-company event. Take Target’s CEO Gregg Steinhafel, who joined the giant retailer right out of college and worked himself up the ladder. Since moving into the top job he has been walking the razor sharp edge between upscale department stores and grungy discounters.

Steinhafel has moved Target deftly along, playing the quarterly results game and introducing new merchandise lines without losing the chain’s flair for quality and value. His foray into Canada has not gone as well as hoped, but it’s not altogether bad and it’s far from a bad idea. Then came the massive waiting-to-happen-to-someone breech of Target’s credit card systems. While the chain lost volume, it’s a testament to Steinhafel’s solid management style that Target did not lose more. And truth be known, the fault lies more with our banking sector’s refusal to move to a more secure RFID based credit card system a generation ago with the rest of the world.

We understand that in the current climate Gregg Steinhafel had to pay the price for what happened under his watch. But there is a lesson to be learned here, and every publicly held corporate CEO has to be thanking their lucky stars that they aren’t in his shoes. They should take the ethical and moral high ground and use their clout with the Congress to focus on long-term financial health. The Wall Street anything goes Wild West financial world is bad news for everyone, for the people, for investors, for corporate America.

Published CommPro.biz 2014.02.27

The Solution
 

“What do you think is the most important problem facing this country today?” The folks at Gallup ask 1,000+/- scientifically chosen Americans that question the first week of every month. Last week (2014.02.17) they released the answers for this month. Jumping back into the lead it shared with “The Economy” every month from 2008 until last fall, was “Unemployment and Jobs”. So despite the chorus that has been droning “debt/deficit, debt/deficit, debt/deficit” during that same timeframe, the public has been worrying about unemployment, jobs and the economy. The deficit and debt has been at the bottom of their list after other concerns like healthcare and the politicians who are supposed to be doing something about these problems.

Actually the politicians beating the deficit drum are the ones who were in power when it was created. So if the people are concerned with unemployment, jobs and the economy, why do they keep sending the debt creators back to Washington to complain about their creation? The answer is twofold. Firstly, those who benefit most from the policies of debt creation –the ultra-wealthy– pour money into the election campaign coffers of the debt creators. Secondly, gerrymandered districts –immune to democracy– have been created for these servants of the wealthy.

How do we create jobs, reduce unemployment and fix the economy? We don’t claim credentials when it comes to economics, nor are we relying on the host of economists who see the solution we see. We are just reviewing the past. If you start at the beginning of the modern economic model –the industrial revolution and the birth of capitalism– you find the beginning of the pattern of periodic downturns in the economy, mostly caused by one greedy sector or another.

If you examine that series of ups and downs you will find that without exception, when the economy went down, recovery was triggered by the same solution. The government stepped in creating jobs, jumpstarting recovery. There is not a single instance in the United States or any other modern economy where a downturn has been reversed by any other means, not one. The idea that austerity is the path out of an economic downturn is a proven failure. Anyone who reviews history can see that. We see it today in Europe, nations teetering on the brink of bankruptcy. Germany, the strongest nation in the EU, is stagnating. We are the strongest nation in the world. Yet we are creeping; dragged down by the debt creators.

Now is the time to repair our crumbling infrastructure, to invest in education, to fund research, to create the jobs that will pull our economy out of the mud. To do what has been done every time we’ve faced this problem for more than 200 years, jumpstart growth. The people have been worrying about unemployment and jobs for five years. We know how to fix that; it could have been addressed in 2008. Makes you wonder why some of those charged with fixing it have instead focused on the debt/deficit; maybe a distraction?

"Am I wrong?"--"Am I Nuts?"-

-"What do you think?"--"Do you agree?"

Problems We Know How to Solve, “Piracy”

A host of issues plague our nation that I have no idea how to cure. However, I can make some disappear. The ones I have in mind are protected by powerful special interests although it would be hard to find anyone who would consider them beneficial to society or our nation.

Piracy is generally frowned upon at almost all levels in America, indeed in the world. However, the same electronic trading that has modernized our capital markets has opened the way for traders flying the Jolly Roger to make a mockery of the market’s purpose. Be it stocks, bonds, commodities, derivatives (yes there are good derivatives), or anything other financial instrument, there is but one reason for them to exist; to support our economic system. To put the “Capital in Capitalism.”

Unfortunately that purpose has been lost in what has come to be known as the “Casino on Wall Street.” “Playing” the market, as it’s called, has long been a problem. A focus on short term gains has pushed aside solid growth as the players –it would be wrong to dignify them with the title investors– jump in and out of market instruments. But now a new breed of players using sophisticated software and massive computers have created a new way to game the system, High Frequency trading.

Algorithms allow them to race alongside the flow of electronic orders in the markets not unlike the sea going pirates of old that they emulate. They jump in and out in nanoseconds, thousands of times in a few minutes picking up a fraction of a cent here and there. They are daytraders on steroids. High Frequency traders contribute nothing to the companies they trade, worse they drive up prices for legitimate traders looking to improve their long term holdings. Often those entrusted with little folks’ life savings.

How does the Casino on Wall Street get away with gambling that is illegal in New York State as it is in most states? Simple. The United States Congress exempted this form of gambling from State Laws. While that legal loophole should be closed it is not the most effective way to curb this abusive practice.

A change in our tax code would pull down the Jolly Roger. Let’s eliminate all capital gains taxes on profits from investments held for more than twelve months. Tax profits earned from investments held less than a year at 35%; those held less than six months at 50%; those held less than 90 days at 60%; those held less than 30 days at 70%; those held less than seven days at 80%; those held less than 24 hours at 90%; and those held less than an hour at 95%.

High Frequency trading generates as much as 70% of the trading on Wall Street; one of these outfits is reported to make 20% of the daily trades. When you add in the daytraders, there’s not much focused on what should be the primary role of the market, raising capital to support our economy. It’s past time to shut down the Casino and pull down the Jolly Roger. That will take the focus off quarterly returns and allow management to look to long term growth.