Is the Stock Market Destroying America?

Is the Stock Market Destroying America?

Even if we act to erase material poverty, there is another greater task, it is to confront the poverty of satisfaction - purpose and dignity - that afflicts us all. 

Too much and for too long, we seemed to have surrendered personal excellence and community values in the mere accumulation of material things.  Our Gross National Product, now, is over $800 billion dollars a year, but that Gross National Product - if we judge the United States of America by that - that Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. 

It counts special locks for our doors and the jails for the people who break them.  It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. 

It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities.  It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children. 

Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play.  It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. 

It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile. 

And it can tell us everything about America except why we are proud that we are Americans.

If this is true here at home, so it is true elsewhere in world. 

-       Robert Kennedy, University of Kansas, March 3, 1968

By J.M. Hamilton (8-12-2017)

If we take Mr. Kennedy’s speech, and replace gross national product with stock market, the speech is as topical today as it was in 1968 (perhaps even more so).

Seemingly, the stock market, and its results, have become the sine qua non of the American economy and private & public sector achievement.  POTUS Trump – facing significant roadblocks in shoving his domestic agenda through Congress – has often cited the stock market as a key achievement of his administration to date.  Even his predecessor, POTUS Obama, cited the stock market and its results, as a key economic performance indicator.

But if we take a closer look at what makes the stock market soar, we find out that many of the contributing factors are actually highly detrimental to the economy, our nation’s democratic principles, and ordinary Americans… especially, in the long run.

Let’s start with the obvious, nothing warms a stock analyst’s heart, like layoffs and cost cutting.  An announcement of layoffs or reorganization will often spark a stock’s ascent.  If a company is facing slow growth, why push for organic growth by offering a superior product or service, when – if a company has the means or credit line – they can buyout a competitor.  The company that is bought out will almost always see their stock soar.  

And the primary purpose of buyouts and M&A?

Well, that’s to achieve synergy, which is a pretty name for layoffs and cost cuts. And with synergy and M&A – depending upon the nature of the product or service – often comes greater market concentration, the elimination of competition, and higher prices.  As JMH has addressed many times, market concentration (a/k/a cartel & monopoly) is bad for the economy, employees, creativity & innovation, and troublesome for the consumer. 

All these things, the stock market applauds, even if the company goes private for a period of time.

One avenue for owners to cash out of a privately held company is to take the company public, which places the company back into the stock market.

Financial engineering, that is goosing the stock and/or its performance, artificially, through buybacks, layoffs, and M&A is almost always a Wall Street favorite.  Even if the company has to take on debt to accomplish said financial engineering.  The money deployed for financial engineering isn’t finding its way into the hands of consumers/employees, which would increase aggregate demand; and the money deployed for financial engineering is not going into CAPEX, which often creates additional capacity, greater efficiencies, higher productivity, lower costs, and improved products & services.

No, the money utilized for financial engineering is going – directly & indirectly – into the CEOs', C-Suite Executives', and shareholders' hands, (since many CEOs, and C-Suite Execs - for publicly traded companies - are largely paid based upon stock performance).

Wall Street and the stock market, generally, eat the aforementioned up because the focus of the market is on the short run, and it is highly speculative.  Current U.S. P/E ratios are well above historical norms (can you say "bubble").

Of course no discussion, or write up, about how the stock market runs afoul of the interests of ordinary Americans can be complete w/out touching upon the impact the fourth branch of government has on the American economy, that is the Federal Reserve.

Perhaps, no other branch of government has the power re-inflate stagnant or panicked markets, like the Federal Reserve.  The Fed has the ability to: bailout entire industries; pump liquidity into markets that have all but dried up; suppress interest rates to drive investors into highly speculative financial vehicles, like the stock market (and away from bonds and savings accounts); and even buy up toxic assets to clean up Wall Street bank balance sheets.

But are the Fed’s actions good for the economy, the consumer, innovation, and the long term interests of the nation?  Does turning on the Fed’s printing presses facilitate long term solutions to real structural problems & government imbalances (such as the national debt, or the U.S. empire); or does the Fed - and assorted central banks - merely paper over crisis and punt the can further down the road for future generations to deal with?

A wise person once said: A crisis is a terrible thing to waste.  Thanks to the Great Depression, FDR and congress were able to enact many reforms that made the American economy and capitalism stronger in the long haul, like social security, the GI Bill (which played a significant role in America’s middle class creation), and regulations such as Glass Steagall, that helped protect the American economy for decades. 

As a result of the Fed’s actions in 2008, there was little or no real reform.  Wall Street banks grew larger and more powerful, and are still TBTF.  Moreover, what little reform effort that was passed in the form of Dodd-Frank has been, or is in the process of being, rolled back under the current administration & congress.  Wall Street banks are back to selling financial weapons of mass destruction, that is to say, banks are back in the derivatives and the debt securitization business, which is moral hazard defined.

The Fed spent trillions bailing out Wall Street banks, while the American people have suffered austerity, incarceration for non-violent offenses – like drug possession (to such an extent that America, arguably, has become the largest penal colony on the planet --- incarceration aimed primarily at the disenfranchised & minorities), and record levels of higher education debt.  The American dream is out of reach for a generation of Americans.  And don’t let the reports of lower unemployment fool you.  The government, conveniently, no longer tracks U6, but more than a few independent research firms do.  U6 measures, along with unemployment, the underemployed and those who have simply given up looking for work.  Today, U6 is in the high single digits, and was in the double-digits for much of POTUS Obama’s two terms in office.

Some economist claim that many members of the U6 labor pool will be permanently unemployed and/or are unemployable.  Labor participation, w/in the pool of working age adults, has not recovered from the 2008 crash.

Moreover, there were many unintended (or perhaps they were intended?) consequences of the Fed’s actions.  For example, the pirates of the private equity industry and Wall Street banks have made out like bandits.  Wage and wealth inequality are at record levels.  And the Fed’s easy money policies have fueled a M&A binge, that kills jobs.

As for Wall Street, the stock market cannot get enough of the Fed’s easy money policies.  In fact, like an opioid junkie, the stock market has gone into a taper tantrum every time the Fed threatened to remove the easy money punch bowl. 

The stock market – and Wall Street - applauds easy money policies, job killing M&A, industry consolidation, cartel & monopolistic profits, and it climbs to new highs over the outsourcing of labor to foreign shores.

Hell, the stock market even applauds when U.S. multinationals, such as Apple (the largest publicly traded company by market cap), climb into bed with China’s totalitarian regime, and exploits China’s slave labor colony.  The exploitation of China’s labor at pennies on the dollar, plus the buyout of Apple competitors, plus tax avoidance strategies, has earned Apple stock market adulation and appreciation.  All the above allows Apple to make an obscene profit on its iPhone, its number one selling product. All this at the expense of the American worker, who not only misses out on an Apple job, but has to shoulder a bigger tax burden, due to Apple’s – and the crème de la crème of U.S. multinationals’ - tax avoidance.

Does Apple leverage its massive employment opportunities against China’s communist leadership to seek democratic reforms, or improved human rights, or even to enhance information & knowledge of China’s billion plus population? 

The answer is “no.” Apple has not leveraged their employment capacity for democratic & human rights reforms. In fact, Apple recently took many applications, including VPN apps, off their Chinese app store, so as to be in compliance with the totalitarian regime’s laws.

Apple is not alone…. Dozens of U.S. multinationals recently joined Mr. Trump on a junket to Saudi Arabia.  Saudi Arabia has been accused – directly & indirectly – of being one of the largest sponsors of radical Islam on the planet.  These U.S. multinationals, partnered w/ the Terror Kingdom, signed contracts and agreements worth hundreds of billions of dollars.  And yet, U.S. soldiers are dying many, many years later for wars in the Middle East, where U.S. leadership has no clear-cut objectives or exit strategy.  America spends trillions for weapons systems that are subject to failure, cost overruns, and monopolistic pricing… while one in five U.S. children live in poverty. (But hey, publicly traded defense contractors, and the stock market, loves it.)

These same multinationals – thanks to SCOTUS – lobby our own U.S. government daily, spending billions for legislation, tax breaks, and perks that benefit their interests, exclusively.

And the stock markets reaction, no morals here…. The stock market has climbed ever higher.  In fact, setting new records, since the ’08 crash.

 Mr. Robert Kennedy, former U.S. Attorney General & Senator from New York

So if the stock market works at cross-purposes with the interests of the majority of Americans, and the nation’s founding principles, what is to be done?  As reported in the Washington Post, only 50% of Americans have any interests in the stock market, and often that participation is indirect or passive, via ETFs, 401Ks, pension/retirement plans, IRAs, or mutual funds.  Approximately, 50% of Americans have no interest or holdings w/in the stock market.

Any yet, all the aforementioned highly detrimental activity to boost returns – let’s not kid ourselves – for an elite few.

Fortunately, there is a relatively new class of socially conscious investor, and indeed investment funds & ETFs that are encouraging board of directors and management to behave in a socially conscious manner.  A recent Bloomberg piece stated that even members of the highly conservative Chicago School of Economics acknowledged that profit maximization is not the sine qua non of capitalism.

Socially conscious investors are waking up to the fact that profit maximization, via a rigged system, often means social costs that are picked up by the taxpayer, the government (e.g. the private sector paying a non-living wage), or through higher unemployment.  Which means said socially conscious investor is paying for the short term profit maximization of multinationals, via higher taxes, social unrest, a polluted environment, and political instability.

But socially conscious investors will need to do more, and much of their firepower needs to be directed at executive pay.  Tying executive, and board, compensation to items other than stock price, or earnings (such as employee welfare; customer service ratings; lobbying efforts that are pro-environment/pro-consumer; and actually --- don’t faint --- paying one’s taxes, w/out exploiting every dodge and loophole) is something socially conscious investors will need to push for.  Consumers too, have a role to play in the executive compensation arena, via boycotts and voting with their purses and wallets.  Citizens can also vote in politicians that support a kinder and gentler capitalism…  a capitalism/mixed economy that works for the many, not just an elite few.

Employee ownership and stock plans – as well as employee seats on the board of directors – can also bring about positive, more socially conscious, outcomes (see Germany and Mitbestimmung).

In industries that are troubled, such as the energy sector, socially conscious investors are demanding more data, information, and exit strategies & future planning.  (Socially conscious investors can also say “no” to IPOs for highly leveraged companies, that have been looted by private equity firms.)

My guess is socially conscious investing has a future, as do socially conscious companies.  If the entire macro business paradigm is pushed to the tipping point, towards a more socially conscious multinational, the companies that will be hurt – w/in the stock market - will be those that are still involved in a hyper-predatory game, where the ends always justify the means. 

With a greater shift to capitalism with a conscience will come a more socially conscious stock market. 

Mr. Kennedy was right… we cannot measure the economic, ethical, and spiritual health of the nation by a single economic measurement, least of all the stock market.

 Copyright JM Hamilton Publishing 2017