The Paper God That Failed

I've been speculating for quite some time now that the stock market is, basically, a sucker's game – unless, that is, you are an insider, in which case it's not a game at all but an easy way to separate people (primarily of the middle-class persuasion) from their money. Right, sure – all too easy to dismiss as the rantings of a paranoid blogger. But listen to Gail Marks Jarvis, a personal finance columnist for the Chicago Tribune, writing in yesterday's paper: “... the average investor has finally wised up and understands he can't beat those guys.” This is not her talking, but someone who e-mailed her on the issue. What she says is this: “Many individuals have come to see the stock market as a rigged game, with Wall Street using the small investor and taxpayer as pawns.” And get this – pension fund managers, no less, “sense that Wall Street has conjured up increasingly complex products that investors can't understand because they are opaque – or designed specifically so that only those who constructed them can analyze them and derive a profit.” Or, one might say, it doesn't differ in principle from three-card monte.

Now, what's remarkable about this is that a columnist writing for an establishment newspaper is bringing it up – not as an example of right-wing tea-party paranoia, but as a perfectly respectable, or at least understandable, point of view. She's not arguing, in other words. And this, to me, seems like a breakthrough of sorts. It's all about seeing the man behind the curtain labeled “Wall Street”, and seeing that the emperor of the same name is wearing no clothes. Why, if this idea catches on... imagine! The stock market might revert to once again being the plaything of the rich, with the more modestly-endowed keeping safely out of harm's way. This is the way things used to be, if you go back far enough. I'm not sure if the “Roaring 20s” were the first stock market craze for the middle class, but they certainly set the pattern – now we have day traders working frantically at their kitchen table, between the toaster and the butter dish. And they actually think they can do better than the insiders, who have computers capable of making billions of calculations per second loaded with every conceivable piece of relevant data on every firm on the Stock Exchange pumping out buy/sell/hold recommendations. Of course, I've heard it claimed that the pachyderms in the business are at a disadvantage because they don't have the agility or flexibility to make quick decisions and act on them – not to mention which, their decisions involve large enough chunks of stock that they can actually impact the market... whereas this cannot be claimed for any one day trader, or, I would guess, for all day traders combined. But I say that whatever advantages might accrue to a small, kitchen-table investor would be more than outweighed by the sheer volume of information the big guys have at their disposal. Plus, there are economies of scale involved as well. A stock “flip” that would not be worth doing if you had 10 shares might be very well worth doing if you had 100,000. And it's the cumulative sum of those flips that constitute a large portion of the typical day's profit.

But there's more to it than information and flexibility. In this business, it's not what you know, or even who you know – it's who you _are_ that counts. Someone one commented that all trading is insider trading; the rest isn't trading at all, but gambling. From the point of view of the outsider, the stock market is pretty much the same as a casino. In a casino, the results are (allegedly) determined randomly, according to probability. In the stock market, the results are anything but random but, because you (the outsider) have little if any information to go on, they might as well be. One is reduced to buying stocks the way some people bet on horses – because they like the name. I would imagine that the very best-informed day trader or independent investor is still woefully ignorant compared to the average insider. And this doesn't mean that the outsiders can't occasionally make money – but it has to be attributed more to dumb luck than to smarts. Of course, any successful gambler is convinced that he (or she) has developed a “system” of some sort; some of them even write books about it. And, according to probability theory, some of these “systems” are going to work – some for quite a long while. But eventually, they're going to crash, and the “genius” who came up with them is going to wonder what went wrong. And I'll imagine there are any number of “geniuses” out there who thought they had it patented when the Dow was at 14,000 – only to find, soon afterward, that the situation was totally out of their control, and they didn't, in fact, know anything.

Add to this the high probability that, the higher you get in the stock market pecking order, the less of a gamble – the less speculative – things become, until it gets to the point where everything is pretty much of a sure bet. And why is this? Simply because, as many people now believe, the stock market is a rigged game, and the small investor (i.e., the outsider) is no more than a sheep for the shearing.

Take the recent (or still current, depending on who you believe) financial crisis. The Dow plummets. People start to sell. It plummets some more. More people sell. And no one knows where the “bottom” is; it is 8,000? 7,000? 2,000? Maybe it will go all the way to zero! So panic sets in. And finally the day dawns when all the “little guys” have fled the market, having taken substantial losses, and that's the point at which the big boys move back in. (They were, by the way, the very first to sell, which is what set things in motion in the first place.) So they buy back in, at bargain prices, and sure enough, the Dow starts creeping up again – attracting, first, the least timid outsiders, then the moderately cautious ones, then the conservative ones, who might even be tempted to take money out of bank accounts (or out from under mattresses) and sell their gold in order to get back into “the market”. But here's the point – their money has already gone into the pockets of the big players, who have already realized a tidy profit and stand to make even more... until the day dawns when the market is, once again, full of midgets who don't know anything, and the cognoscenti are flush with cash (and enough residual stock to start the next round with). At which point, some stunt is pulled that turns things around and starts the next decline... and the process just repeats itself, with dull familiarity. It's this constant churning that works to the advantage of the insiders and the disadvantage of the small investors – and the government, needless to say, is complicit in the churning process. How could it not be, since it has become no more than a wholly-owned subsidiary of Wall Street? If you can find me more than a half-dozen high-ranking members of the Obama administration, or a half-dozen Congressmen, who aren't owned – lock, stock, and barrel – by big business and banking interests (both domestic and international), and Wall Street, I'll eat my hat; I just don't think it can be done.

Now, as I've said on other occasions, there are worse things than the stock market – or any securities market of any sort – being under the steady, firm hand of the Regime. For one thing, it means that none of them is ever going to collapse. There will be gains and declines, which are part of the churning process – the “a middle-class outsider and his money are soon parted” process. But of what use would it be to those in charge if the entire structure came tumbling down? This is their primary cash cow – their life blood. So there are mechanisms in place to reel things in when they even hint at getting slightly out of control; both "ceilings" and "floors" are determined in advance -- but of course that information is only available to the members of the inner circle; the rest of us have to guess.

So the system in these times depends on the, what I will call “trickle-up effect” by which surplus cash is periodically harvested by the elite and stored up in barns. When one considers the tax burden, and the corruption burden, and the government waste and inefficiency burden, on the middle class – clearly the bulk of their labors go to feed their masters in New York, Washington, and so forth. As comfortable, tranquil, and anesthetizing as life might be for middle-class Americans, they are really only enjoying a fraction of the wealth they create through their labors; most of it is siphoned off, at a hundred different points and in a thousand different ways. This is why I refer to the lot of the American middle class as “glorified slavery” or “slavery lite” -- they are, in fact, working for other people the bulk of the time – the faceless, nameless elite and their proletarian wards – but are left just enough to imagine themselves prosperous, and – what is more important -- “free”.

And this is what makes this article remarkable. Someone is actually calling out the financial establishment in an establishment newspaper – or, at the very least, quoting a number of people who all have the same suspicions without tarring them with the usual brush that has been working overtime on the tea partiers, Glenn Beck, etc. Jarvis calls it a “protest movement”, and points out that even stock market rallies have lost some of their power to tempt the unwary. And people have also come around to the idea that the banks and the government are in close collusion – and, in fact, might even be two different facets of the same entity. And what this adds up to is that the cash cow – at least a small portion of it – has gone on strike. The problem is, what, then, do people do with what little they have managed to save? When I was a kid it was all about banks and savings accounts; it was a red-letter day when my father actually started buying stocks, and even then they were individual stocks, not mutual fund shares. It was nothing like the craze of the 1920s, but it was something, at least – and the middle class gradually climbed on the bandwagon and never looked back... until now.

And I'm not claiming that the stock market, or the whole concept of publicly-held stocks, was a scam from the start. The chances are that there were once perfectly legitimate reasons why someone would seek capital, and investors, to back a legitimate and promising enterprise. And there are still cases like this, I have no doubt. But the core of the thing has degenerated into a game, and a scam – not the wild speculation of the 1920s, but a slow drip upwards of wealth... and it's disguised, of course, under a cloak of “volatility” and “unpredictability” and “chaos” -- but if that is so, then why do some people always seem to wind up on top? And why are they always the same people? And why are they always insiders? If the playing field is truly level, you would expect the large players to take as many hits as the small ones – but this never seems to happen. And in fact, in an enterprise of this magnitude, it's hard to see how it could. After all, there has to be control – iron-fisted in some cases – to keep centrifugal force from taking over. It's like foreign policy – behind all the apparent chaos there's a mailed fist. The dividing line can be operationally defined as the difference between knowledge and ignorance – or, to put it another way, between being loss-proof and being win-proof (or, winning only if you're unusually lucky). Any village idiot these days can provide names of financial and business entities that made out like bandits as a result of the “recession”; they are obviously on the up side of the line, as are all the people who, through it all, managed to – shazam! -- buy low and sell high in the stock market. The people who feel used, exploited, and done to... well, they're below the line, and they're in the vast majority, of course... and the “tea party” consists of no other type. But at least the tea partiers and the people whom Jarvis cites are vaguely aware of their situation; everyone else is a sheep to the slaughter.

See, I don't think you have to know all the intricacies of the market to know in whose interest it is operated. It has become all too obvious of late – and in a way, this is a good thing. Because if enough people lose faith in the stock market, they will start seeking out other means of preserving capital. They might even start demanding that the interest on bank accounts keep up with inflation (and that it not be taxed)! They might take an even more serious look at gold and other metals. In other words, things of real value might become popular again, now that the paper god has failed.