The Daily Show with Jon Stewart had an interview with Jon Cramer of CNBC today, as you may have viewed or at least heard mention. While it convinced me that Cramer and his network are not worthy of sainthood, I felt that Stewart had some ideas about stock markets which clashed with my own.
CNBC could be an incredible tool of illumination for people who believe that there are two markets--one that has been sold to us as long term--put your money in 401ks, put your money in pensions and just leave it there. Don't worry about it. It's all doing fine. Then there's this other market, this real market, that's occurring in the back room, where giant piles of money are going in and out, and people are trading them and it's transactional, and it's fast, but it's dangerous; it's ethically dubious, and it hurts that long term market.
So what it feels like to us (and I'm speaking purely as a layman)--it feels like we are capitalizing your adventure, [...] but you go on television as a financial network and pretend it's not happening.
People routinely underestimate risk, and this apparently holds true with retirement plans. These were advertised as safe, but it didn't turn out that way this time. So, Stewart is right that average workers are being treated like piggy banks for investments, and this is wrong. But I see no problem with day-trading "giant piles of money". That's the awesome part of computerized financial markets. It allows capital to flow where it's needed, instantly. Sure, risk can be high, but it's perfectly within the rights of a trader to make investments with his idea of acceptable risk. The capital has to go somewhere, and even treasury bills, oil, and gold are not immune to drop in value. And the workers expect a decent return; otherwise they could have taken the original retirement capital and stuck it in a bank (and hoped it didn't fail). So you have to invest somewhere. When everything goes down, the people and the companies are screwed. Whoever sold earliest in the crash won. The winners may have moved to cash, bonds, Netflix, or Walmart. You may ask, "But who won? Where did all the money go?" I don't know the answer to that. It wasn't a zero-sum game it seems. I suspect most of the money was fake, all the CDS-related* borrowing creating the illusion of more money than was actually issued. Maybe it goes nothing like this:
A: "Sure, I'll pay you the 2 trillion next quarter!"
B: "OK. I'll write that on the company balance sheet."
...
A: "So, about that money."
B: "Oh, sorry. I don't have it on me, but here, take this CDS, I just created it as a package of a few other CDSs I had lying around. It's just as good. 'Po-tay-to'?"
A: "Yeah, yeah, 'po-taw-to'. But I want 4 trillion next year."
B: "No problem, Mr. A, sir!"
I don't believe that there was anyone who didn't see there was a problem. Real estate values were skyrocketing, coinciding with people over-leveraging on mortages. What many did not know about was the crazy credit default swap fiasco*. The downturn was going to come, but there was no way to tell exactly when, because it is only eventually triggered by someone coming to the conclusion that is about to happen. You want to pull out of an investment when you think it is rising slower than something else, within your preferred trading time frame. If you can stand to be in the market for another 50 years, you might as well stay in so that you don't miss the eventual upturn. But shorter term, if your portfolio is about the same as the Dow Jones or the S&P 500, when it reaches a peak and is about to crash, you would want to get out and switch to something that's not going to fall as much. So, enough people sell, and it's a chain reaction as sellers accept decreasing prices for the opportunity to get out, and the remaining bullish investors buy up bargains (maybe they're just looking for a rally the next day).
Now, I have never watched CNBC, not being a subscriber to cable, so I don't know how bad it is, other than the fact that it employs Cramer, who bragged three years ago about spreading baseless rumors for profit, as shown in a clip during The Daily Show's interview. But is the network really in a position to predict unlikely events correctly and remain believable? Wouldn't it end up affecting the market with its uncanny accuracy? Trading is based on knowing information that will affect the future value of an asset. If everyone knows and takes it into account, the market price will reflect its proper future value.
Or the doomsday predictions come too early and CNBC looks crazy, so everyone stops watching, and the network folds. I'd love to have CNBC reporters be tougher on mismanaged firms, but it already has a formula for what works to stay on the air, so I can't imagine them changing it. But surely I can't be more cynical than Stewart? He's probably not serious at all. He knows Cramer and the rest will never change, but it makes for a nice episode that could boost ratings and ad revenue for the show. (This revelation was found in an unabashed graphical prelude).
But what if all the companies in a sector are corrupt? Say some heavy-hitting strikes a serious blow Bank A's stock price. Maybe Bank B, that's just as bad or worse, is now in a position to buy Bank A. It would almost be better to have two bad banks running around than one. Stewart was right when he said that CNBC is not a regulatory agency. It is up to the F.T.C., S.E.C., Congress/President, and whoever else is in charge, to protect these companies from themselves so that the working class does not have to bear an unreasonable risk. And this includes some unfortunate bailouts so that we can still have working ATMs and get responsible loans. Bailouts are terribly inefficient, but I there are some companies that if brought down today would take swathes of others with them (some say this has already happened). It would also be nice if eventually companies could figure it out themselves, but our trust in them needs to be earned back before they are given the chance. And don't ever let them get too big to fail again!
Jon Stewart is appealing to a populist sentiment that plays well with his fans and others who are frustrated with the poor economic situation. But it would be irresponsible to outlaw day trading, in essence setting a speed limit on money. This would reduce total wealth in a way, since it is can be described as a function of the total amount of capital and the speed at which it changes hands**. Only the person controlling the money and the regulatory bodies can determine what the actual investment should be, and bad choices can and will frequently be made in the pursuit of reward.
*Look it up if you don't know what what on earth a CDS is. Wired had a good article on it.**
Ex. You and your friend each have a farm and pass a dollar back and forth in exchange for 80 of your onions and 100 of his beets per year. If you start passing it twice as fast, all of a sudden you can afford 200 beets. Score!
