Monday, September 14, 2009

Investing for Dummies

James was sitting at his desk writing one of the first chapters of the first edition of Investing for Dummies one beautiful spring morning when there was a knock at the door. Being up since dawn meant he went straight to work without glancing at a newspaper or talking to anybody else. Freda, his gardening consultant, was at the door with some of her colleagues to draw plans for a new garden. James stepped out and greeted his visitors with a cheery ‘Good morning,’ then looked at their grim faces. ‘Isn’t it awful what’s happened in America? All those people killed,’ said Freda, standing on the lawn that fateful day — 11 September 2001.

Looking back on the events, James knew almost immediately that September 11 would create a conservative climate for some time to come. Indeed, the investment markets of the early 2000s were very sober compared to the excitement of the 1990s and the 1980s.

Fast forward seven years to late 2008, when James and Barbara prepared the second edition of Investing For Dummies. Another completely unexpected event – the global credit squeeze and the unprecedented financial crisis that followed – were demolishing financial markets even more savagely than the terrorist attack of 11 September 2001.

(From the introduction to the 2nd Australian edition of James Kirby and Barbara Drury’s Investing for Dummies.)

Onlookers watch trading at the Wellington Stock Exchange during the 1987 stock market crash.

I moved to New Zealand on the ten-year anniversary of the 1987 stock market crash, and at the tail end of thirteen years of aggressive neoliberal reforms. On the day Justine and I landed in Auckland, the front pages of the national papers featured the story of a man who was being denied kidney dialysis on the basis that it failed to meet the cost-benefit requirements set out by the local district health board. And perhaps the treatment truly could not have helped him, but the story and the way it played out in the public media struck me as callously uncaring, and inflected by a grimly utilitarian rhetoric that I wasn't accustomed to. The nation seemed scarred, and the reports looking back on the events of a decade earlier were positively embittered.

In the crash of 1987 the New Zealand Exchange lost 60% of its overall value. By the time we arrived in the country the exchange had only just climbed back up to that level - shorn, of course, of all the companies that had had to be delisted, and without factoring in inflation - only to fall back under 1,400 points the following year. Business and political commentators lamented the resulting loss of confidence in the markets on what seemed like a daily basis. The idea they were pushing - that the market is the key to growth and wealth and is fundamentally trustworthy - was instrumental to the neoliberal project, which is integral in turn to how the media operate in New Zealand, and it simply had to be restored.

Which is not to say that crashes themselves aren't part of that narrative - after all, capitalism feeds on crises, is itself crisis - rather that the general populace needs to metabolise them in an orderly and timely manner, so that they can start feeding their earnings back into the machine. And ever since 1998, when the Australian All Ords became the first stock market in the world to be listed on the stock market (it listed itself on itself), the global machine has got even hungrier. It matters now less than a full jot whether the prices go up or down, for a stock market feeds on the activity that is generated on it, and so it happened that the All Ords decided to authorise short selling, the practice that allows traders to speculate on and swiftly bring about the collapse in value of listed companies. Nobody could see any harm in that, right?

More anniversaries to account for this week: it's eight years since 9/11, one year since the collapse of Lehman Brothers. And some numbers: on September 10, 2001, the Dow Jones Industrials Average closed at 9,605.51. Last Friday, at the end of a month-long rally, it closed at 9,605.41, exactly one tenth of a point lower. During the same period, the Milan stock exchange shed about thirty per cent of its value. And how about this: on December 29, 1989, Japan's Nikkei average closed at 38,916. As of this afternoon, almost twenty years later, it's trading at 10,186.63, roughly seventy-four per cent lower.

I am fascinated by these figures, but other than making me sceptical of the truism that over time shares are always the best form of investment, I don't really know what they mean. Is there an actual correlation between these indices and what one might stubbornly wish to call the real economy, or old fashioned money? Is there even a continuum anymore between work, production, capital and finance? Has there ever been? Faced with events such as the one that prompted the very first post on this blog - when the United Airlines stock lost eight hundred million dollars in the space of five minutes after a Bloomberg employee reposted as news of the day a piece about the company’s 2002 bankruptcy filing - it’s hard not reach the conclusion that the value of actual human work has become entirely notional, incidental to the creation and destruction of ever-more virtual wealth as defined by the perpetually shifting balance of share portfolios and financial accounts.

But just like money and credit, the financial markets are based on a covenant between people, and depend entirely on trust - if we didn't believe in them, they would simply cease to exist. Faith must therefore be kept at all times in the overarching narrative: that the markets are the lifeblood of our enterprises; that they obey the laws of reason and logic, and rest on concrete and measurable economic fundamentals. Consider, in utterly random fashion, today's headline on the home page of Yahoo Finance: 'World Stocks Down as Weak Dollar Weighs on Japan'. A terse statement of cause and effect, it suggests that in spite of their staggering complexity, scale and speed of exchange, the global financial markets can yet be observed and understood much like one would a physical phenomenon, and that their outcomes would be wholly predictable if only we could measure all the inputs going into the system, all the variables involved. Yes, humans operators are known from time to time to succumb to euphoria or panic, but even so, given enough time, the market will purge itself and restore its homeostatic balance, for emotions have no place in the workings of a machine.

Except if you follow the market news in real time, rather than read the verdict at the close of trading, you'll see headlines get rewritten sometimes three, four times in the course of an up-and-down session, and the reasons for a market rise be replaced by explanations of its decline, or vice versa. Sometimes, it's actually the same reason for both outcomes - say, a decision by the Federal Reserve that could be interpreted either way. Thanks to the capacity of electronic media to continually update their own pronouncements, replace a statement with another in the same conceptual and physical space, there is no confusion or contradiction, no time flow, no memory of any of this. Just a string of flawless predictions made after the fact.

Consider the passage at the top of this post: 'Looking back on the events, James knew almost immediately.' And what does he know now that he knew then? The same thing as everybody else, because we are all looking at the same numbers.

What of this crisis, then? It's hardly over, but the memory of it is being rewritten or erased even as we speak. We are getting better at forgetting. Some of the bans on short selling have been rescinded, others are about to expire. There is talk in the media of the end of the recession, of growth without jobs - I am not sure what we are even supposed to do with that. Perhaps the financial markets will live to see another bubble, and the crisis will be remembered as just another high mark: people will point to it and say 'in 2008/2009 the water came up to here'. And we’ll keep building on the flood plains, because it’s all we know, and besides we have nowhere else to go.


Paul said...

So true and so beautifully put. On first reading, I thought the introduction to Investing for Dummies was parody: that James should be working from Dawn, that he should have a gardening consultant, that his reaction to the news of 9/11 should be so callous. But then, the investor's world is a peculiar one.

Giovanni Tiso said...

Orginally I intended to just comment about that introduction, but I lacked the fortitude. There was plenty more unwitting self-parody, like the bit where it said that banks did badly last year, but then they picked at random this biotech company that did really well - it happened to deal in human blood.

Samuel said...

"Perhaps the financial markets will live to see another bubble, and the crisis will be remembered as just another high mark: people will point to it and say 'in 2008/2009 the water came up to here'. And we’ll keep building on the flood plains, because it’s all we know, and besides we have nowhere else to go."

This is eloquent and beautiful and absolutely scares the stuffing out of me.

Unknown said...

The brighter the light the darker the shadow.

GZ said...

"the overarching narrative: that the markets are the lifeblood of our enterprises; that they obey the laws of reason and logic, and rest on concrete and measurable economic fundamentals."

Which is absolutely true. They are said to be worth things, because they are equivalent to what has been decided to be of value by the allocation of money.

But this conveniently forgets two things - the allocation of money, and thus the allocation of "preferences" in the market is anything but evenly distributed, meaning that the millionaire makes much larger decisions about value. And even if we were to allocate the right to decide on what is good, as measured by our choice to spend, humans are decidedly frail in their ability to decide.

None of this is new, of course. But it is well expressed, almost poetically, and since these matters are almost always absent in New Zealand discourse - because the media is dominated by two companies who want to please their advertisers - it's refreshing to hear it spoken.

Giovanni Tiso said...

Which is absolutely true. They are said to be worth things, because they are equivalent to what has been decided to be of value by the allocation of money.

I don't want to pretend that I actually know how the markets work, nor indeed money itself, except in fairly vague terms, but one could reasonably question (as you do in the subsequent paragraph) who gets to assign those values, according to what criteria and to serve the interest of whom. The idea that it is the market itself that decides - call it the invisible hand, of which Adam Smith himself wasn’t a big fan - seems a convenient enough fiction, designed to obscure the role of the people who control the information and the rules of the game.

But beyond that, the markets are supposed to exist in a correlation with the real economy, in which case a crash would be the result of this correlation having gone out of whack - which is actually a very comforting notion in a times of crisis. Now I recall an economist by the name of Andreas Rivas who delivered a speech at my university in Milan in 92 called L'economia della Madonna (we could loosely translate it as "The faith-based economy", or "The Hail Mary economy") in which he said among other things that if you divided the world's economic output into 64 parts, 1 of those parts would be products and services, the remaining 63 parts would be the sum of the financial exchange, including loans and the trade in stocks and currency. And this was long before the dot com bubble - if he was correct, what would those proportions be now, when we buy and sell for billions of dollars companies that have never earned as much as a cent? And at what point the dilution of the real economy into the giant reservoir of the markets becomes such that - as in the case of homeopathic remedies - its traces would be so minute as to be practically non-existent?

Megan Clayton said...

Oh, we invested in you,
a kind of futures trading:
time, money and mobility
yet to be set aside.

That's the way it goes,
baby, often and often enough:
the word for you was "blighted"
although by whom, dunno.

The last thing we spent on you
was giving you a pronoun:
only once you'd gone from us
were you in the second person.