Fiddling while Rome burns?

More and more, I'm seeing a major disconnect between economic reality on the ground, and the behavior of our politicians and investors (who are inextricably linked in our 'political class').  I think it's a disconnect between people and things.  Let me explain.

Most investors today are not investing in people.  They're investing in securities, or stocks, or bonds, or debentures, or other financial instruments.  The price of those things is what occupies their minds;  the actual people behind them - the individuals who produce and distribute and buy the goods made by the companies whose stocks they trade, the individuals who open and operate and close accounts at the banks in which they invest, the individuals who earn their daily bread by working for the companies whose shares they buy - never really enter their thoughts.

However, those people are critically important.  Their habits shape and form companies.  To take just two examples from today's headlines:

• Brick-and-mortar retailers are having a terrible time, economically speaking, as consumer shopping habits change.  Business Insider claims that 'The retail apocalypse has officially descended on America', and forecasts closure of over 3,500 major retail stores in 2017.  In contrast, Amazon.com (which dominates online consumer purchasing in the USA) is doing well, and other retailers are racing to catch up.
• The auto industry, beneficiary of a controversial and (in my opinion) unnecessary bailout during the 2007/08 financial crisis, is struggling once more.  US vehicle sales are dropping;  Ford has just announced it will shed 10% of its global workforce;  General Motors currently has approximately 100 days' inventory of vehicles in stock, tying up immense amounts of money that it can't use to generate more revenue;  and used car prices are expected to fall dramatically, putting further downward pressure on bloated new car prices.

The thing is, those negative headlines aren't just about companies and their products.  They're about the people who produce those products, who are about to get hit with layoffs (and probably reduced earnings for those that don't lose their jobs);  and they're about the people who buy those products (who are, of course, the same as those who make them - and with many more of them out of work, there are fewer consumers able to buy.  What's more, given stagnant purchasing power in real terms over the past several decades, many consumers are tapped out in terms of their financial resources.  They're already using all the credit available to them, and can't qualify for more - so their purchasing power is being cut.)  Given that consumer spending 'accounts for approximately 70 percent of all [US] economic growth', any stagnation or reduction in the latter must inevitably affect our entire economy - and those who invest in it.  (The same problem is evident in other First World economies, too;  to cite just one example, see this Canadian article.)

Yet, while all this turmoil is affecting consumers and their economic outlook, the 'investor class' continues to make hay while the sun shines, ignoring the grim economic realities that (fail to) underpin their financial castles in the air.  Take, for example, this snippet:

It was an odd transaction from the outset: $14 million, double the going rate, for a 31-acre plot of flat, undeveloped land just west of Chicago. In the nine months since, the curious use of the space has only added to the intrigue. A single, nondescript pole with two antennas was erected by a row of shrubs. Some supporting equipment was rolled in. That’s it.

But those aren’t ordinary antennas. And the buyer of the property isn’t your typical land investor. It’s an affiliate of a company called Jump Trading LLC, a legendary and secretive trading firm that’s a major player in some of the most important financial markets. Just across the street, it turns out, lies the data center for CME Group Inc., the world’s biggest futures exchange. By placing its antennas so close to CME’s servers, Jump may be trying to shave maybe a microsecond -- one-millionth of a second -- off its reaction time, potentially enough to separate a winning from a losing bid in trading that takes place at almost the speed of light.

It’s the latest, and perhaps boldest, salvo in an escalating war that’s being waged to stay competitive in the high-speed trading business. The war is one of proximity -- to see who can get data in and out of CME the quickest ... “It tells you how valuable being just a little bit faster is,” said Michael Goldstein, a finance professor at Babson College in Babson Park, Massachusetts. “People say seconds matter. This is microseconds matter.”

There's more at the link.

The article illustrates a financial ecosystem that ignores people, or 'boots on the ground', or 'brick-and-mortar stores', or any of the traditional measures of an economy.  Instead, it measures success in terms of microseconds, computers guided by artificial intelligence systems and a few experts making trading decisions on stocks and bonds so fast, and responding so quickly to one another, that small investors like you and I have virtually no chance of duplicating their successes.  If you hold shares in an IRA, or 401(k), or mutual funds, you're basically irrelevant to the stock market as a whole.  You and I simply don't count in these terms.  A few players make millions . . . the rest of us just sit on the sidelines, hoping to catch some of the crumbs as they fall from the players' tables.  The same applies to many smaller companies, investing their pension funds in stocks and bonds.  Unless they pay exorbitant fees to companies offering such high-performance trading services, it's as if they're driving a horse and buggy around the Brickyard, being lapped every few seconds by those in more modern racing cars.  We, as individuals, are in the same unenviable situation, as Gordon Gekko illustrates.

That scene was filmed 30 years ago, but its implications are as real today as they were then.  Small fry like us don't count to the 'investor class'.

And yet . . . and yet . . . we do count.  Because if we stop buying . . . if we don't have any resources left to spend, and therefore stop consuming . . . all those factories, all over the world, that produce goods for us, suddenly have no market.  All those transport companies, all those planes and ships and trucks, transporting goods from factories to stores . . . they no longer have anything to move.  All those retailers, whether brick-and-mortar or online, making money by selling us what we need . . . they have no customers.  And when that happens, what's the worth of all those stocks and bonds and financial instruments?  Zero.  A big fat zero . . . because they're all underpinned by our spending habits, and when those change or go away, the financial markets are left with no foundation at all.

That, ironically, is the problem.  You see, our politicians and financiers know that their prosperity is dependent on us going along with the present system.  Therefore, they do everything in their power to make us go along.  They 'deficit spend', running the country on loans and bonds, until the US national debt is all but out of control.  They pass laws making it easier for us to borrow, and borrow, and borrow, until we're up to our ears in debt with no practical way out of it.  In the worst case, as in the bank rescues of 2007/08, the government even buys up private debt in order to assist the banks.  That's what the Federal Reserve did when it bought trillions of dollars' worth of mortgage backed securities.  That lowered interest rates, which made mortgages more affordable to private citizens like you and I - but saddled all US taxpayers with the ultimate responsibility for those debts, because the US government bought most of our mortgages.  If we stop paying, US taxpayers are on the hook for the money.

Despite the change of administration in Washington D.C., the same old game is still being played out.  The politicians and investors are still running things to suit themselves, trusting that they'll be able to manage consumers like us into doing what's good for them, rather than what's good for us.

The only way to change that is for us to start putting our own interests first.  That means refusing to take on more debt than we can afford;  paying off existing debt as quickly as we can;  living according to our means, rather than our desires;  paying cash for any essential purchases, or buying them on a credit card that we pay off in full at the end of every month, rather than putting off payment into the future.  All these are financially prudent steps for our economic well-being . . . but all of them are anathema to an economy that depends on us becoming debt slaves, and remaining debt slaves for the rest of our lives.

I remain confident that our economy, nationally and globally, is riding for a fall in the long term.  Levels of indebtedness - corporate, government and private - are now so incredibly vast that there's no historical parallel for them at all.  I believe that sooner or later, the chickens must inevitably come home to roost, and when they do, hard times will be here for all of us.  I strongly suggest that we all plan and act accordingly.

(As an example, I've been working on getting our household to a point where we have enough food reserves to keep us going for two to three months.  We're just about there now.  We won't do more than that - we can't afford it, and we don't have enough space to store more food - but at least, if things get very bad for a while, we'll have that reserve on which to draw.  We may be able to buy only enough food for one meal a day, but if we can eat another out of our reserves, we won't go hungry.  I know more than a few people who've literally eaten into their reserve supplies during economic hard times over the past few years.  They're all grateful that they bothered to make preparations in the first place, and do so even more enthusiastically now!)

Peter