I am suspicious of the word ‘efficiency’ when it comes to business – big business to be more specific. There’s a level of honesty in small business that is absent in most of the big business models. Where new restaurants pop left and right, elbowing each other to deliver good food at reasonable prices, I don’t see this kind of eagerness to please a customer from an electric or a cable company or big pharma. What is their interest in going an extra mile for me? And why would they do that? Pleasing a consumer is no longer a goal of a modern day big business. These days, when I hear the word ‘efficiency’, usually from consultants and business majors, I don’t expect to hear about how they are going to devise new ways to deliver cheap and useful goods to a consumer. I usually expect to hear about a strategy of maximizing shareholders value – somehow a more sacred endeavor than merely serving their customers. The consultants never disappoint. In fact, customers of a monopoly have become merely means to an end, a stepping stone to the real endgame – profit at all costs. Peter Thiel, the founder of PayPal, knows this when he constantly encourages businesses to strive to become a monopoly, rather than wither under constant competition. In his view competition is bad. Nonetheless, we get fed endless stories about heroic entrepreneurs who risk their capital to deliver the goods to consumers, leaving aside the fact that those who are really risking their capital are idealistic mom-and-pops who have internalized this beautiful but obsolete narrative. The real entrepreneurs, the financial innovators in C-suites don’t take risks, because they know 1001 ways of unlocking the already existing value.
So extremists parties all over Europe are poised to win elections. It is making the Davos crowd nervous.
And what else did you expect? This year income inequality is all the rage and everyone is positioning themselves as defenders of the common folk. Ray Dalio of Bridgewater Associates, a $160bn hedge fund, bemoans the danger of extremists parties emerging and urges the moderate parties to “do something about it.”
But him and other Davos attendees – all billionaires and movers and shakers – don’t take it one step further. They don’t call on themselves to stop fucking with the politicians, stop lobbying, stop asking for favors. They refuse to admit that the current scheme works like this: business interests lobby the politicians –> politicians act on it –> common man gets squeezed (asked to work harder, study more, take more loans, take more pay cuts, etc.) –> economy dives –> businesses ask for more favors and loopholes –> common man gets fucked even more –> politicians bring on austerity –> common man gets fed up – >extremist parties win.
But Ray Dalio doesn’t see it that way. He think that he stands outside from all this mess and just does his business. He thinks he can just ask mainstream parties to get its shit together and when they will everything will be back to normal. But the cycle has to run through. So when the extremists win the Davos crowd will have no one to blame but themselves.
Fuck’em. Try to do business with Syriza and Sinn Fein and UKIP. See how that goes.
I don’t have an iPhone because I don’t want it. I’m content with my Blackberry. I resent the idea and the subtle implication that I need things today that I didn’t need yesterday, like some fancy new app. The other day I received a phone call from my mobile company telling me that now that Blackberry is bankrupt I should switch to any other phone. What do you have? I inquired. Touchscreens, the young kid on the other side said. But what if I don’t want a touchscreen? He didn’t have an answer other than to subtly emphasize the point that I live in a stone age. That pisses me off. I think that’s the biggest folly of supply-side economics: they don’t give a fuck about what you like, they tell you what you should like. This is where the glorified free markets system break down. It shoves products on me that I don’t want, and denies me the products that I like. At some point in the business cycle companies won’t care to deliver a quality service to its customers. They will morph into a business model that functions by collecting more and more fees while providing less and more shittier service. Do you think the recent Comcast Time Warner merger will cut your customer service waiting time or your cable bill in some way? Please!
Still, even that business model is more benign than the business model of financial services companies. After all no one forces you to have a phone or a cable. But we are all joined at the hip and taken for a ride, whether we want it or not, when it comes to SIFIs (Systemically Important Financial Institutions). Lefties, in the form of Krugman and Simon Johnson and the assortment of occupiers, have been talking about it for years. But it seems that some conservatives, with a knack for facts and simple analysis, begin to be troubled by such an unrestrained capitalism. What if capitalism collapses under its own weight, they wonder. Does that mean that, gasp, Karl Marx was right?
Republicans now are rediscovering the “middle class”. Rubio made sure to make “middle class” the focus of his SOTU reply. It’s a welcome about face in a party that just a few months ago was celebrating business owners (as opposed to people who work for them) on Labor Day. It wasn’t surprising: the current Republican dogma coalesced around the idea that only business owners work hard; everyone else is either lazy or not entrepreneurial enough. In Republican mind, whoever didn’t become business owner or “made payroll” is implicitly a lesser member of society, a leech and a moocher.
Republicans love to keep their focus on inflation: there was no shortage of dire warnings coming from the right quarters about inflation that was just around the corner. The inflation that they had in mind never materialized, but in the meantime the other type of inflation – labor inflation has been devastating the communities for decades but received little attention of the doomsayers.
Back in the day, the time that many conservatives are nostalgic about, the 1950-60s, it was possible for a man with a high-school diploma to work at a factory and get paid enough to provide a middle-class lifestyle for his entire family. For a man with a college degree the career paths were wide-open and his chances of successful employment were even more robust. To achieve and maintain a middle-class lifestyle one didn’t need a double-income family and didn’t need to leave home and 6am and get home at 12am and be available on weekends. Since then “success” has been redefined. To be considered successful these days you have to negate your own self and turn into a machine.
Toiling away from paycheck to paycheck and working harder and longer hours is required nowadays just to keep one’s head above water. The world where business owners work 24/7/365 and everyone else works from 9 to 5 with an hour break for lunch is a fantasy. Let’s examine a minimum wage worker working shifts at Walmart. If he or she works 8 hours a day they would make roughly $15K a year. I would argue that if this person is presented with an opportunity to work longer hours or find another part-time job, say, at nearby Taco Bell, he would take it. Many do. We’ve all heard stories about people working 2-3 jobs. Or let’s even take an average Wall Street employee: no matter how entrepreneurial they might feel about themselves – they are still just glorified salary workers (with bonus). They are expected to be on-call 24/7 checking their blackberries at night and on weekends and they have acquiesced to this way of life as a default and some, in some masochistic way, even consider it a badge of honor. Working hard and especially reveling in your hard work is as American as apple pie. Our entire way of life now is treating the best-case scenario as a base-case scenario. In other words, there were times when working 8-hour days meant to be average and working 12-hour days and weekends meant to be successful. Now, for many, to work 12-hour days plus weekends is a given, a base-case scenario.
Humans have a great adaptive mechanism – we can get used to many things and we can accomplish remarkable feats especially if we’re in a survival mode. But we can only stretch our productivity so much, and after a certain point more workload becomes detrimental to an individual, counterproductive for companies, and eventually damaging to society. We physically can’t work more than 24 hours, we can’t be at 2 places at the same time, we can’t win on every trade. At some point there will be no room left to push harder. The benefits of longer hours and constant availability are becoming marginal. To take success onto the next level from what is considered successful career today is to become superhuman, develop magical powers or to rig the game. And if you have no way of doing it – you’re just an average, talentless, lazy schmuck. But don’t dare to complain about it – to complain is un-American.
There’s clearly an inflation of labor for those holding a wage job. Over the years the normalcy of 8-hour work days turned into 10-hour work days and then into 12-hour work days, but the benefits are failing to keep up with the contributing effort. The jobs for which a high-school diploma was sufficient, now require a college degree; and where before a college degree would provide job security for life, a graduate degree is required and yet it is no longer a guarantee of lifelong employment. It’s hard to say which came first: inflation of college degrees or inflation of labor. Surely, today this labor inflation can be attributed to high unemployment rate, but this phenomenon was prevalent even during the roaring years prior to the 2008 collapse.
The “moochers” that Republicans keep talking about are stretched too thin. They are one accident, one blown tire, one missed paycheck away from not being able to keep afloat. It is only in the imaginary world of self-declared “makers” everyone else lives off of the fruits of their labor. In the real world, “makers” expect everyone to be on call at all times for pennies and then have the chutzpah to accuse them of being lazy. Well, at least some in the GOP, who actually have to win elections rather than exercise their wits at the expense of an average Joe, are rediscovering that such attitude is damaging the brand. I’m following their transformation with great interest.
I want to wish everyone who reads this blog a very Happy New Year!
Also, I’d like to speculate about what the new year might bring in areas that I follow closely: politics and economics.
If the fiscal deal is not reached tonight (and it increasingly looks like it won’t be), we will begin the 2013 with Democrats in congress and Obama pushing for the middle-class tax cut. Republicans will grudgingly, and after some mandatory posturing and howling, accept it. The bigger wave on the horizon is the impending debt ceiling which will have to be raised somewhere in February. Unless debt ceiling is somehow dealt with during the tax cuts negotiations that will happen in January, we can have a repeat of August 2011 debacle. And Republicans will have the upper hand again, because as they have demonstrated earlier, nothing indicates their love of the country better than the willingness to hold it hostage to placate the far-right constituents in their home districts. If I were Obama I would deal with it now, while I have a better hand and can force some consessions. But there’s a silver lining here too – those who are looking to buy some stocks will be well advised to wait till Feb or March when the markets will dip during the certain debt ceiling debacle.
Here, I must say that I have been 70-80% long stocks for the last 3 years. It’s been a rollercoaster, but I held on during the 2010 flash crash and 2011 debt ceiling sell-off, notwithstanding several other, smaller dips. My strategy is not fancy, but rather straightforward, and it worked for me during the past years and it will work for me again in 2013. In a nutshell, the reason why I’m long stocks is because of the deleveraging (a process where everyone pays off their debts and stores cash on their balance sheets) and low yields in pretty much all asset classes out there. In plain English that means financial institutions are sitting on hundreds of billions of cash and have nowhere to put it. Bonds across the board (corporate, mortgage, Treasuries) have rallied so much that they earn zilch now. So stocks look more and more attractive to invest in. It’s riskier than bonds, but at some point (especially when the market dips again during the inevitable debt ceiling clusterfuck) many fund managers, pressed by their clients to deliver yield, will be forced to buy equities. Another powerful force that is behind my back on this strategy is Ben Bernanke who will stay as Fed Chairman through 2014 and will keep the rates low as he has been doing for years. Low rates are bullish for stocks.
I hope Wall Street will stop fighting the Obama administration and will come to terms with the new normal. The business model and the payoffs of the 2003-2007 era was an aberration and Wall Street handicappers, if they are as smart as they claim, should come to this realization.
And as always, I wish Obama and the Democrats would learn to play the hand they’ve been dealt forcefully. Here’s a great poker parallel about the way Obama plays his hand now: “The negotiating style Obama has displayed in these instances is what poker players call “tight-weak.” A tight-strong player avoids throwing in his chips, saving them for a big hand, which he plays aggressively in hopes of a huge win. A loose-weak player plays lots of hands, bluffing frequently. Tight-weak is the worst of all worlds — when you have a weak hand, you lose, and when you have a strong hand, you fail to maximize your position.”
Happy New Year!
“Save me from these evil deeds before I get them done.” Fiona Apple
The Libor fixing scandal is really not a very entertaining story. It’s a boring scandal. There’s no evil masterminds, no clandestine operations. Calling it a sham would give real sham a bad name. Fixing the Libor is as simple as tweaking the golf ball closer to the hole. It comes down to this: Libor rates are what I say they are.
The traders who were fixing the Libor didn’t think they were doing something wrong. Everyone else was doing it, so why should they be any different? Why stick your neck out? In such a high-five, fratboy culture it’s a bad taste to stand out. They don’t even have to be scheming bad guys for participating in the fixing. There was simply no coherent alternative mechanism to report those rates independently. If they don’t play the game the way everyone is playing it then their book will take a hit and they won’t get a bonus. But there’s a family to feed, kids to send to college, mortgage to pay. The little tweak here and there, in the grand scheme of things, wouldn’t do much damage. The accounts skimmed of a few basis points won’t even notice it and if there’s no victim there’s no crime. Add to this the desire to “not look bad” and fear of being “out of the loop” and you have a perfect mix that makes otherwise good guys do bad things. And if fudging the numbers is rewarded the incentive becomes even stronger. The reward is personal and immediate and the results of your actions are tangible. The loss is borne by many customers who won’t even notice that they have been shortchanged. I mean what are the benefits to blow the whistle? The participants are like members of a small cult – if you’re in on it you get the benefits, if you speak out you’ll be ridiculed and ostracized, besides whom are you going to complain to – the Fed? The SEC? Nobody wants to be a martyr, especially for such an obscure and unsexy, to an average observer, matter. If there’s no upside in exposing the weakness of the system to the feds, one will find an upside in exploiting these same weaknesses to his advantage. And try to explain to the general public why they should care about a few corporate investors being scammed of a few basis points on their investments when people lose their homes and jobs left and right? It’s not like selling toxic securities to unsuspecting customers, for Christ’ sake!
The more interesting story here is how this sort of “enchantment” has spread to the regulatory quarters. After all it’s hard to blame bankers for this sort of behavior – that’s what bankers do, they are in business to exploit every opportunity to make money.
The emerging story now is that the Fed and Bank of England might have known about the fixings. If Bob Diamond’s reasoning goes along the lines: I was just of many, we didn’t want to stick our neck out, then what is the reasoning for the Fed for not to have done anything? What was the risk for the Fed to get involved? I really don’t know why regulators didn’t do their job, or rather, I have many reasons that come to mind. The best analogy I would use to describe their actions is that of parents of a misbehaving child on the plane, careful not to take any drastic measures to rein him in and subject everyone to even more annoying cries. Sure, they have powers to discipline but it would create noise, and they just don’t want to face those disapproving passengers and would rather keep the whole thing as is. Child, of course, is perfectly aware of this kind of dynamics and is exploiting it with impunity.
But there’s some twisted beauty in the entire predicament. Everyone looks bad or at the very least disingenuous. Republicans, no friends of regulations, are now going to investigate why the regulators weren’t tough enough. “Some news reports indicate that although Barclays raised concerns multiple times with American and British authorities about discrepancies over how Libor was set, the bank was not told to stop the practice,” Representative Randy Neugebauer, a Texas Republican and the head of the House oversight panel, wrote in the letter to the the NY Fed looking for transcripts of phone calls between Fed and Barlcays officials. Such tough stance is commendable but how can we be sure that there’s no politics involved in this sudden conversion, given his and other Republican’s historical hostility towards regulations?
Wall Street is gleeful every time the public focus shifts onto regulators. You know, we weren’t policed like we were supposed to, what did you expect us to do – follow the rules unsupervised? It’s reminiscent of last summer’s British hacking scandal where Rupert Murdock-controlled media defended the actions of those involved in the hacking along the lines: “Sure there were some misdeeds, but look at the police! Why didn’t they police us? How could they let us do this?” There was nobody there to “keep me from these evil deeds”. Got it? Now leave us alone, if you can’t even enforce your own rules.
That’s a tactical mistake. The fact that regulators have tacitly approved or simply decided not to intervene into business as usual does not let bankers off the hook. In fact it kills one of their major arguments about regulations being too aggressive. As soon as the public sees that regulators didn’t do their job it becomes harder to convince us of the Wall Street-peddled notion that regulations are an impediment to a normal flow of business. All the cries of heavy-handed regulators are a fantasy, simply because such regulators never existed. Bankers can’t have it both ways: they either suffer from too much regulation in which case they admit that regulators actually have some pull; or they proceed to do their business because regulators are too weak in which case their complaints about regulatory hurdles and heavy government oversight that harms business are a simple disingenuous posturing. You can’t claim to be a victim of watchdogs and at the same time blame watchdogs for being dumb, inept and disorganized. And if you claim to be a victim of dumb, inept and disorganized watchdogs then you are simply too stupid to be in this business.
Righteous indignation of the public has worn itself out at this point. While this scandal affects trillions of dollars of investments that are reliant on Libor rate, the headlines of wrongdoings on Wall Street fail to shock at this juncture. This is business as usual. The beauty of Wall Street crime is that there’s almost never a smoking gun, or a dead body. If a wrongdoing occurs the bosses blame the subordinates, the subordinates blame the bosses and the corporate lawyers find a technicality that absolves all parties.
The victims of this scandal are not average Joe Schmos who lost money on their mortgage, but major financial institutions and municipalities who invested in Libor-linked securities. If regulators, lawmakers and ordinary people can’t police the banks then those institutional investors are our last recourse. I wonder if some of them can find the will to engage with Wall Street in the following manner: http://www.youtube.com/watch?v=mbwqeSV8Wc4
You think they’ll get the point?
Damn, Joseph Stiglitz beat me to it. I have been working on the related topic of why the top 1% should also be worried about current income disparity.
It’s no secret to anybody that Republicans in Congress in general and the top 1% of earners in particular are no big fans of taxes and regulations. In this post I’d like to demonstrate that this is a rather short-sighted view and, out of their own sheer self-interest, they should be for higher taxes and government regulations.
Imagine, you are a billionaire and the economic reality around you has been rather, shall we say, anemic. But why should you give a fuck? You’re set for life, live in a gated community, have private security, household help – in other words with money you can theoretically shield yourself from daily struggles that the peons face every day. There are many reasons why you should (give a fuck), beginning from the fact that, if you’re a billionaire, your worries are of a different scale, namely, you want to close deals, sell products and make smart investments. None of it can be done in a vacuum. You need a solid consumer base, a partner on the other side of the deal, people who want to buy when you want to sell, the suckers at the poker table if you will! In order to be the king of the hill, you have to have the freaking hill! You have to have a vast and robust middle class whose wages are rising consistently year after year. Henry Ford was no fool when he paid his workers high salaries – so that they could buy his cars. The taxes have been falling for the last 30 years but that did not bring the promised prosperity and jobs to the middle class. Let’s admit that we tried it and it didn’t work.
I must also admit that the game that you played for the last 30 years is spectacular in its shrewd, take-no-prisoners ways: pushing for tax breaks and lobbying for favorable legislation, eliminating competition, skimming consumers. Congratulations, you won. Now you’re all dressed up and ready to play but there’s no one left to play with. Now you’re a lonely player at the poker table with mountains of chips in front of you, wondering why is it that no one wants to come and play with you. Maybe it’s because people have no more chips left. In real poker, as in most games, being the last guy standing is the most optimal and desirable outcome, because there are other tables and other games always readily available. But the point of a real life game is not to win the most chips, but to keep the game going, simply because we only have one table. Besides, taking chips and going home is anathema to any businessman worth his salt: chips are supposed to be working. Now that you have that picture of yourself with all the chips let me ask you: Will the dealer taking smaller rake from the pot (I’m drawing an analogy with smaller taxes here, for those who don’t play poker. The dealer takes part of every pot, a ‘rake’) offer real solution to the lack of players at your table?
Another, more mundane reason why you should support taxes is unpleasant visuals that can spoil your day, if you’re not a complete sociopath. Do you like seeing bums on the streets or on subway trains, or, especially heartbreaking, neatly dressed middle-aged, resumes in hand, standing in unemployment line? Neither do I. Conservatives’ standard solution to this kind of situations and other life’s misfortunes is personal responsibility and charity. I disagree. It’s hard to be personally responsible if you’ve been a victim of forces beyond your control: mental disability for example as is the case with many homeless, or mass layoffs. The problem with charity is that it’s selective and whimsy. While there’s no shortage of charity causes here in New York City, the problem is that they mostly target arts, children and breast cancer. Nothing wrong with this, of course, but you can see how many other areas worthy of charity get omitted because, let’s face it, some of them are not picture perfect. And in a bad bonus year even those “New Yorkers for Children” (my favorite moniker on emotionally manipulative scale, to be surpassed only by “New Yorkers for Puppies”) charities will take a back seat to personal priorities of an otherwise generous and vain Wall Street soul. As for the unemployed, I have yet to hear any conservative to explain what is exactly wrong with government hiring those people for useful projects? Because government is evil?
But we’re way past worrying about the homeless problem. At this stage we need a charity ball for the middle class. I’m afraid that such a task is insurmountable, even to Koch brothers and Warren Buffet combined. There’s only so many maids and drivers that they can hire.
Sometimes I think that I’m more conservative than conservatives because I prefer order to chaos, rules to anarchy, so that I don’t have to spend most of my waking hours solving logistical problems like dysfunctional or non-existent public transport, unsafe drinking water in the tap, malpracticing doctors. Which brings me to regulations.
“I can’t be bothered with that shit”. This is my favorite argument in support of regulations. Do you really want to spend valuable time experimenting in choosing the best vendor who sells the best meat, doctor who practices solid medicine, insurance provider that pays off? Especially if you work 12 hours a day? If we lived in the realm of neighborhood mom-and-pop shops (many conservatives still think that this is the world we live in), where you could just go to the other one down the street if the first one treated you unfairly then you could make that case. But unfortunately we live in towns where only 2 or 3 big vendors exist for any product. What is your recourse against, say, an insurance provider to whom you dutifully paid premiums for several years, and who refuses to pay off if an accident happens? Are you going to follow a classic conservative advice and go to another provider? No, you’re going to call your lawyer. Moreover, if you can do your own “testing” of the quality of meat, how are you going to know the promised quality of products that you have no expertise of measuring, like software, for example? Or how about products which questionable quality you can measure only after you’re no longer a consumer, like bad surgery or faulty car breaks? Or how can you be sure that the guy managing your 401(k) is not a crook? Do you want to spend months doing research, aside from your main job, making sure that the guy you’re entrusting your money to is not the next Madoff? And more importantly, who’s going to enforce business contracts that you enter into? Who is going to help you collect? Nicky Santoro?
Sports have strict rules. That doesn’t keep athletes and teams from succeeding. In fact that makes the game more exciting because it is the ultimate ‘let the best man win’ situation. The beauty of a fair competition is that no particular party has an advantage at the beginning of the game. There are stronger teams and weaker teams, of course, but they all play by the same rules. By the same token, I do not resent the fact that there are rich and there are poor, contrary to conservatives’ cries; I resent the fact that there are different rules for different classes, that the game is rigged.
Conservative insists on being left alone, but who is should provide that aloneness, that peace of mind, that mechanism that makes trains run on time, the streets lit up at night, the garbage picked up in the morning? Hire a guy to do that for you. Let that guy have enforcement powers if someone is out to screw you. Such guy is the government, whether you like or not, whether you admit it to yourself or not.
By the way, speaking of Nicky Santoro. What can be better to conclude my post than this insightful quote from the movie, where Nicky laments on how reckless the Mafia has handled the casino business:
“But in the end, we fucked it all up. It should have been so sweet, too. But it turned out to be the last time that street guys like us were ever given anything that fuckin’ valuable again.”