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U.S. Firm Supplied Nuclear Black Market (AP)U.S. Firm Supplied Nuclear Black Market
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(Warning: some financial math ahead.) A Ponzi scheme, named after its early 20th century inventor Carlo Ponzi, is a form of pyramid scheme. Basically it involves selling a nearly worthless security to a small group of investors, with the promise of great returns if they promote the security to more investors, and so on, ideally, forever. Like any pyramid scheme or chain letter, of course, it eventually collapses when it runs out of suckers. The first ones in get rich, and the last ones in (much greater in number) get shafted. As we all know, the stock market is focused on the short term, and fluctuates wildly in response to a single quarter's earnings, external economic events, even rumour. If you look at it holistically and long-term, however, it has all the markings of a century-long Ponzi scheme, the most lucrative, and potentially most devastating, in history. Let's take a look at the US S&P 500 as a surrogate for the entire stock market, the entire market for equity securities of listed public corporations. The index goes back to 1917, but was revamped in the 1940s and recalibrated so that the index for the average of 1941-43 was 10. It slowly rose to 100 over the next 50 years, and then to 1000 over the next 12 years. This broad index earned, in 2003, about $55 per average share of the component securities, using GAAP (generally accepted accounting principles). So at its current level of about 1100, it has a P/E (price-to-earnings) ratio of about 20. That means investors are willing to pay $1100 now for a share that will theoretically 'pay back' $55 next year, and hopefully successively more in future years, to justify the 'present value' of $1100. To think of ir another way, it's like a bank charging you $55 this year, $65, say, next year, and so on for at least 50 years, as 'interest' on a loan of $1100. The 5% interest in the first year isn't very attractive for such a risky 'loan', but since future 'interest' will be dependent on (hopefully rising) earnings, there is the prospect of a very lucrative return eventually. So the S&P 500, like all equities, is said to 'discount expected future cash flows'. A general rule of thumb says that the P/E ratio approximates the annual expected growth in earnings, so that means the investor in the market is expecting earnings to grow by close to 20% each year, essentially forever. How is that possible? Well, it isn't. Earnings grow because (a) prices increase, (b) costs decrease, and/or (c) volume increases. In a 'free' market economy, prices are determined (theoretically, now) by competition -- new competitors will enter the market, and/or existing competitors will adjust their prices, to the point that their return on invested capital is just high enough to justify the investment risk. That level, in a low-inflation economy where the alternative 'risk-free' investment in GICs and bonds is only 2%, is roughly a modest 7%, with the extra 5% compensating the investor for the risk implicit in equities. And, in the long run, volume can't increase -- there's only so much market for anything, and once it's saturated, earnings should therefore level off at a flat rate. Let's suppose we've more or less reached that state now. Let's also set aside the fact that the $55 earned last year by the average share is likely considerably inflated -- there are undoubtedly some more undetected Enron-type exaggerations out there in some of these 500 companies, and GAAP allows capitalization of stock options and other near-fraudulent practices that significantly overstate 'true' earnings. Is the $55 a fair return on investment in these companies? To answer that question we need to calculate what the investment is. According to the S&P, this $55 represents a 17% return on investment. In other words, the net assets or 'book' value of the average share is $55/17% or about $325. We already indicated that a reasonable return, given the risk, was 7%, which on $325 would be about $22 per share. Why are stocks earnings $55 per share when in a 'free' market they should only be earning $22? To answer this we need to look at the three components that make up ROI (or more correctly, return on equity -- ROE). These three components are: Margin (profit/sales), Turnover (sales/assets), and Leverage (assets/equity). Leverage can be inflated by excessive borrowing, which companies can get away with in times of low interest, but which boomerang when interest rates spike. Leverage can also be inflated by stock buy-backs, where the company essentially uses excess cash flow to buy back its own stock and hence increase the value per share of the remaining stock -- but this is a form of cannibalization, and leads to the same imbalance between debt and equity. Neither is sustainable. Turnover can be increased by lowering inventories, factoring and off-balance-sheet financing, but ultimately tops out -- you need to have a certain amount of money tied up one way or another in assets to be able to run an effective business. So you're left with Margin, which ultimately is the only explanation for the enormous ROE of $55/share, when in a free competitive market someone should be willing to accept $22/share. The truth is that the market, and big corporations, are far from efficient. Many industries are heavily subsidized by governments to the tune of billions of dollars in kickbacks -- er, I mean, support payments -- per year. Big corporations also work as oligopolies to prevent smaller companies from entering their markets and charging more reasonable prices for their products. We, the consumers, are in fact paying $55 for goods and services that could be sold for $22 and would still provide the corporations with a very reasonable return. If and when government subsidies end, oligopolies are broken up, and the market for goods and services truly becomes free and open, the S&P 500 should then generate $22/share each year, a 7% ROE, still an attractive return in a low-inflation economy. So we have a number of factors at work, conspiring to drive up stock prices in the unsustainable illusion that double-digit growth can and will continue forever, or at least until we're dead and it isn't our problem anymore. We have big corporations earning exorbitant returns, two and one half times a reasonable level given the risk, paid for by the taxpayer and consumer (the same people who then take what's left of their meagre paychecks and invest it, with insane trust in the brokers' unsustainable recommendations, in the stock market). And we have a P/E ratio that is already assuming that these wildly inflated, taxpayer subsidized, price-gouging levels of profit will continue to rise even further, at close to 20% per year, forever. Voilà, Ponzi scheme, par excellence. Let's do the math. Take the $22 per share that big corporations should be earning per share in a properly regulated and open market. Acknowledge that the assumption that these earnings are going to grow in the future, when markets are saturated, consumers, corporations and governments are already buckling under grotesque and unprecedented debt loads and cannot afford to buy or pay more than they already are. Discount that annual stream of $22 of earnings for 50 years at a reasonable 7% discount rate. Know what you get for the fair value of the S&P 500 with these calculations? About 300. That is what, when you strip out the growth hype, the subsidies, the price-gouging, and the unsupportable P/E valuation, the S&P 500 should be trading at. Not 1100. Eventually the Ponzi scheme will collapse. There may yet be time to con yet more foolish investors into believing that it will rise from 1100 to 1500 to 2000 or 5000 or higher, and if investors can be duped into believing that's what shares are worth, that's what they'll trade at. This scheme has been running for a century, and made many people millionnaires. But eventually we, or our children or grandchildren, will realize that the S&P 500 should be at 300, and since stocks always trade at what people think they're worth, that's where the S&P 500 will end up. The millions left holding the bag will lose most of their life savings, their pensions, everything. (Oh, and if you change the assumptions about inflation and interest rates, the above valuation doesn't change. Future values and discount rates both go up proportionally, so the inflation-adjusted present value stays the same.) Even the brokers can see the writing on the wall. They will now try to convince you that by wise investing you can 'outperform the market' by buying low and selling high, even if the market is ultimately doomed to do no better than go sideways. This is another great variant on a Ponzi scheme. It's the stuff that has hooked the new breed of gambling addicts called 'day traders'. For every investor whose holdings 'outperform the market' there will be, of course, at least one loser. But the magic of Ponzi is that it's always the other guy, the next guy, the not smart enough guy, who will get burned. You'd be better to play slot machines or buy lottery tickets -- at least the potential payout isn't overstated by 250%. In addition to the perpetual-growth Ponzi scheme, and the 'outperform the market' con, brokers also make scads of money from IPOs -- initial public offerings. As James Surowiecki has elegantly pointed out, the IPO is a scam by which an aptly-named 'syndicate' of investment firms ('underwriters') buy a mass of shares from the company 'going public', at about half the price per share they know they can flog them to gullible investors, many of whom rely on these very brokers for investment advice. They then dump their shares on these investors, knowing that the price will promptly drop back close to the IPO price. The underwriting brokers get rich, and the unsuspecting customers get burned. That's the reason Surowiecki and others, most recently Lawrence Fisher in yesterday's excellent analysis over at our mother ship Salon.com, have urged Google, potentially the most lucrative IPO of all time, to screw the brokers and either sell all the shares directly to the public by auction, or, even better, not to go public at all, and save the delirious investors the grief they will suffer when they find out Google has no direct line to God, and hence isn't worth a million dollars a share. Eventually we, or our descendents, will learn (or have no choice but) to 'just say no' to dysfunctional stock markets and all the evils they breed. Until then, we'll continue to be addicted to short-term thinking, the illusion of perpetual growth, paying too much for everything we buy, subsidizing public companies with our taxpayer dollars, downsizing and outsourcing and offshoring as 'productivity enhancement', and putting up with the atrocious greed, corruption and devastation of insatiable global corporations that pull the strings of politicians like puppeteers, all in the name of 'maximizing shareholder value'. It's addictive gambling with a staggering cost, it's insane, and it's fraud. |
Looks like all those pastel
PSPs Sony was showing at E3 were just a tease. According to an
interview in Japanese game magazine Famitsu, Sony claims the
various color PSPs were "just for reference. We plan to make the
system black." I wouldn't worry too much, though. I'm sure if the PSP
does well at all, color models will start showing up in no time at
all.
Read
[IGN via Portagame]
chrisabraham.com/2005/04/evil_man_in_bla.html
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 No one who has read The Boondocks has a neutral opinion about its writer, Aaron McGruder. You either love him or hate him, or vacillate between the two extremes. The twenty-something radical leftie is working on a Simpsons-style animated series that will air, ironically, on Fox, probably next year, and as the New Yorker reported last month, he's managed to outrage almost everyone of every political stripe, including other cartoonists who say that he's gotten lazy (the strip is now drawn by Jennifer Seng, though McGruder still does the writing), and that he's relentless to the point of being tedious and unfunny. He is the most banned cartoonist in history, with many of the 300+ papers carrying the strip having cut it at one time or another. But as I think the above strip from last week shows, McGruder's biting wit has lost none of its edge, and demonstrates a fearlessness that goes beyond even what Doonsbury and Bloom County achieved. |
 If
you're a regular reader of this blog, you probably know that I'm
opposed to unregulated 'free' trade, very worried about the
extraterritoriality of the WTO, NAFTA, Davos and other corporatist
captives, strongly opposed to domestic corporations 'offshoring' jobs,
using influence with the Bush regime and other right-wing governments
to circumvent social and environmental laws and responsibilities, and
a
great believer in taking the pledge to buy local, and in community
self-sufficiency.At the same time, I'm a strong supporter of the UN and other multi-lateral NGOs, and I believe that we each have a responsibility for the well-being of all the people and creatures of this world. Some readers have said this view is inconsistent, and I wasn't quite sure how to respond to such charges. Fortunately, Peter Singer, in his recent book on global ethics, I'll have more to say next week about Bush's fraudulent and despicable Earth Day media blitz, and the major media's shameless lack of critical evaluation of the utter nonsense that his propaganda machine has been churning out this week on the environment -- newspeak of Orwellian proportions. The first part of Singer's book deals with environmental responsibility, and his prescription for increasing it -- immediate ratification of Kyoto by the US and other holdout countries, and introduction of an emissions trading mechanism to make the realization of Kyoto feasible (subject to the need for some oversight on the disposition of the proceeds of such trading when it involves autocratic governments). The second part of the book deals with the global economy, and Singer adroitly tears apart the Economist's (and other neocons') naive assertion that economic globalization somehow benefits both rich and poor countries. He then goes on to prescribe a substantial reform of the WTO and the GATT, which could actually lead to more equitable distribution of wealth and more efficient production of economic goods, while safeguarding human rights, labour and the environment. Unfortunately, the multi-national corporations and corporatists who hold sway in the WTO would never tolerate Singer's prescription, since it would entirely divert the benefits of economic globalization from their pockets to those of the world's poor. The third part of the book deals with international law, and Singer lashes out at Bush for his unconscionable refusal to ratify the International Court of Justice, and for the UN's continued hesitancy to accept a duty (not a right) to intervene in situations of genocide and other humanitarian crises, even within a single nation. Singer is sanguine about the limitations and dangers of 'global government', but supports strengthening the UN to enable it to act as a 'protector of last resort', and including in its mandate the responsibility to supervise elections in all member nations. The fourth and final part goes back to ethical principles and proposes that countries must, in this world where national boundaries no longer have any logistic meaning, set aside national interest and embrace, once and for all, global interest, impartially. That does not mean cultural homogenization, but imposes a responsibility for the reduction of inequality, both of economic resources and personal rights and freedoms. Always the pragmatist, Singer concludes by worrying out loud about how the responsibility for a global ethic could be managed: It
is widely believed that a world government would be, at best, an
unchecked bureaucratic behemoth that would make the bureaucracy of the
EU look lean and efficient. At worst, it would become a global
tyranny,
unchecked and unchallengeable. These thoughts have to be taken
seriously. How to prevent global bodies becoming either dangerous
tyrannies or self-aggrandizing bureaucracies, and instead make them
effective and responsive to the people whose lives they affect? It is
a
challenge that should not be beyond the best minds in the fields of
political science and public administration.
I'd like to believe that this was possible, because if it isn't, we're in serious trouble. We cannot expect national governments to set aside parochial interests, especially when this entails accepting a responsibility that would, for the richer nations, inevitably lead to a drastic redistribution of wealth to poorer nations and hence a sudden and sharp reduction in, at least, economic living standards (if not necessarily well-being). But as John Ralston Saul has so eloquently argued, larger organizations and institutions, whether public or private, are almost always, and inherently, less efficient, less agile, more resistant to change, more hierarchic, and less transparent than smaller organizations. So the challenge is to achieve the best of both worlds, having organizations of global scope and authority and responsibility, but broken up into sufficiently small, autonomous and dynamic units that they are sensitive, resilient, responsible and responsive to the people and communities they serve. We can only hope that "the best minds in the fields of political science and public administration", wherever they are, are up to the task. |
townhall.com/columnists/robertnovak/rn20050205.shtml
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