Wall Street's sham value

Mike Massey wrote an interesting article for the Coffee Party "'We are Wall Street' - Let the Fee-Takers Become Value Creators" He properly labels Wall Street as "rent-seekers".

"Rent-seeking, on the other hand, is a way to expand an individual’s share of the economy, without actually producing anything new – without producing much new value. Rent-seeking is not necessarily a bad thing; I don’t begrudge an innkeeper or a landlord the fee for a bed to sleep in and a roof over my head. Nor, indeed, do I begrudge a broker her commission, or the mutual fund company their expense ratio. All of these activities can enable value creation, and  everybody’s got to make a living. Rent-seeking just doesn’t really grow the economy that much, in comparison to value creation."

I left the comment:

"I remember hearing sometime in the early 80s on the morning news that 54,000,000 shares had been traded on the NYSE the day before. Friday 1.8 trillion shares were traded on the NYSE at an average price over $50. Has the economy really grown over 30,000 times in 30 years? These are not investors exchanging this many shares, probably not even live day traders, but most likely computers. Gosh, what a cash machine!"

Stock market – humans need not apply

Yesterday afternoon I sold shares in a stock through my online broker.  As soon as I clicked Submit, up popped a message that the order was filled!!!

In the past, this process has taken minutes or even hours, especially for odd lots like mine.  It's all done by computers owned by the really big guys who are taking advantage of the small ups and downs of the market.  The cents part of my price was .1902.  The stock closed about five cents higher.

And to think that many financial articles talk about investors doing this or that to the market.  Buying a stock and then selling it a few minutes later is not investing.  Recently I read that the majority of stock trades are done by computers, not people.

Let's call a trade a trade

I've long been annoyed about stock market reporting that states "investors were" optimistic, pessimistic, pleased, irritated, delighted, or dismayed about some news and therefore the market went up or down accordingly. One of today's examples from finance.yahoo.com is

Investors retreated from Wall Street again, driven by worries about the nation's big banks and General Motors Corp.

But, investors don't react positively to news one day and negatively the next. Traders do. Investors are in it for the long term and will buy or sell according to trends lasting longer than a day. Traders are in for the short term whether it's minutes, hours, or days.

I had another insight into what investing thanks to Michael Gerson, "A Week of Revelation", Washington Post, 2009-03-04.

In it, he said that governments don't invest, they spend. Gosh darn it, governments do invest in education, roads, basic, and many support activities that people and businesses rely on in order to make money. We can see what happens in too many countries that don't invest. They don't have the human capital to build a strong economy when free schools are few and far between. Their businesses have higher transportation costs because of the poor quality or lack of roads. They have to rely on imports for medicines and technology because they have little basic research. And they don't have a civil society in which business can thrive because the police are ineffective or corrupt and bureaucracies are a tangle of competing interests.

It's easy to criticize government investing because no balance sheet shows the return on investment, a return that might not be seen for years or decades.

Are Gerson's investors really investing? Or are they merely providing liquidity for those who bought from investors who bought from investors ... who bought from the original investors who started an enterprise. We could consider any person who bought or sold shares a trader. They didn't start the companies they "invest in" or provide a dime of capital when the company started. As I wrote at the beginning of this paragraph, they do provide liquidity for the market. When any original investor wants to sell shares, there is a market for the shares. Of course, the persons who buy the shares want the same ability to sell the shares later. Without these markets less money might be invested in the first place.

Similarly, without government investment the stock market would be a shadow of itself. What would our country be like without the government investment in the transcontinental railroad, the interstate highway system, the Internet, and an educated citizenry.