18
Apr 10

There was a ‘Wall Street’ movie in 1929, 1987, and…gulp…in 2010?

The Business Insider says that there was a movie named ‘Wall Street’ released in 1929 [IMDB] and 1987 [IMDB]. ┬áThe sequel to Oliver Stone’s 1987 Wall Street will be released in September 2010 [IMDB]. ┬áContact your financial planner.


11
Jan 06

Broken Institutions: Capitalism

This is a nascent thought which has been perculating in my head…basically, we’ve been dependent (in this country) on growth as a job engine.  By making more and more stuff, and selling it to more and more people, we continued making more and more jobs.  But the problem with "economies of scale", that is ramping up and basing your economy on volume is that you inevitably get "diminishing returns" on your investment, that is, it gets more and more expensive to increase each unit of production.

So what happens when consumption is tapped out.  Wages have not kept up with inflation.  Job creation is still subpar.  And we can no longer count on low interest rates to drive consumption.  So again, now what?  Economic Dream, Economic Nightmares quotes this Morgan Stanley analyst:

America’s once mighty job machine is struggling as never before. The combination of subpar job creation and real wage stagnation puts extraordinary pressure on the income-generating capacity of the world’s most aggressive consumer. …

 

The manufacturing share of US employment hit another record low as 2005 came to an end — down to 10.6% of total nonfarm payrolls, or about one-third the share prevailing as recently as 1970. At the same time, employment and compensation is being squeezed in services as well, where offshore outsourcing is moving rapidly up the value chain. … The Internet is living up to its reputation of being the most disruptive technology in the history of the world.

The implications of these developments are profound. Long lacking in income support, the spending-addicted American consumer has turned to equity extraction from asset holdings in order to support the habit. …

It’s not just jobs and real wages, but also the legacy costs of healthcare and pensions for retired and existing workers. Recently, IBM and Verizon joined the ranks of those in Corporate America who have frozen pension benefits. There can be no mistaking such telltale signs of the global labor arbitrage: Companies in high-wage economies see little choice other than to rewrite social contracts as the means for competitive survival. For the United States, it’s the end of labor as we once knew it.

Mark Thoma on Economist Review also looks at the dark clouds prophecied by the University of Chicago’s Raghu Rajanthat.  Our current and future growth necessary to fuel capitalism is increasingingly risk-dependent, and there are several hazards where a bad break could be disastrous:

These are quiet times in the global economy, just the sort of lull that worries Raghu Rajan, one of the University of Chicago’s leading stars. On loan to the International Monetary Fund, … the 42-year-old native of India sees risks on the rise in housing markets, hedge funds, pensions … Difficult to track and often disguised, the steady accumulation of risks has increased the odds of what Rajan cautiously terms "a greater (albeit still small) probability of a catastrophic meltdown."

A sharp decline in home prices, for instance, could cripple the job market, trigger loan defaults, hurt anyone invested in mortgage securities, and eventually undermine every moving part of the interconnected financial system. "When you’ve let down your defenses, things can come and smack you," Rajan explained …

Rajan is no Dr. Doom. His sophisticated ideas have won him the respect of the world’s most rigorous financial experts. Yet he is convinced that years of easy credit and the rapid expansion of financial markets have left little cushion if things go wrong. "We haven’t had a real storm in the financial markets since 1987," he said. "The cost of this thing could be tremendous if it turned out the wrong way."

On a similar note, Mark Cuban, entrepenuer and Mavericks owner is also a blogger.  He has this post that is pretty interesting, stating that "The Stock Market is for Suckers!".  Again, growth is old and busted.  Maybe "value" should be the new hotness?

Wall Street has done an AMAZING job of creating conventional wisdom . “Buy and Hold ” is the 2nd most misleading marketing slogan ever,  after the brilliant “rinse and repeat” message on every  shampoo bottle.  We as a country have fallen for it. Every message from every marketer of stocks tell us. Young or old, if you can hold for the long term, things will work out for you. 

That is total bullshit. Its for suckers.

[...]

The stock market is by definition a ponzi scheme. As long as money keeps on coming in, then there is someone to take the stocks from the sellers. If the amount of money coming in is reduced, the stocks, indexes, et al go down.  What if, for who knows whatever reason, the amount of money going into stocks declined significantly ? Who would buy stock from the sellers. I mean goodness gracious, you could see something disastrous happen. Like the Nasdaq dropping from 5000, to under 2000 in just a few years. Its happened before, it can happen again.

[...]

The stockmarket used to be about investing capital in companies that came public or did secondary offerings. That money was used to create amazing businesses and return dividends back to people who truly were investors.  There once was a day where most companies paid dividends higher than the interest rates on their bonds. Why ? Because stocks are inherently more risky. If a company goes belly up, bondholders collect first, shareholders usually last.  People could buy and hold stocks, and get paid real cash money for being a shareholder in the company at rates far higher than the divident yields we see today. If the company did well, the dividends went up. Investors who held, actually got all their money back in dividends at some point and the rest was gravy. The good ole days.

But that changed when mutual funds came along and started marketing the concept of growth as a way to attract investors.

So the question again is, now what?