A Unified Theory Of Greed
I think I am getting close to what may become a Unified Theory of Greed.
I am not speaking of the ordinary, everyday, run of the mill greed. We are all greedy for love, admiration and money. But I’m talking about an exaggerated form of greed. Almost insane greed.
What brings it to mind is an article from the “New Yorker” by David Denby. Denby recounts how he became caught up in the swirl and hullabaloo of the New Era and the New Man.
“The New Economy,” he writes, “seems to be producing a New Man who, in imitation of the economy itself, is going through wrenching changes in the way he lives, works, buys and interacts with other people…greedy, obsessed and ignorant.”
The New Man is no more greedy than the Old Man. Nor is a socialist, like Mugabe, anymore greedy than the capitalists. Both have insatiable appetites.
The difference between the New Man and the Old one is that the New Man believes his greed will pay. Which brings me back to my Unified Theory of Greed, or UTG.
At certain times, the natural constraints which prevent people from doing nutty things as a group are temporarily (and I would like to emphasize “temporarily”) removed. It is as if the owner of a liquor store in downtown Baltimore had gone home without setting the alarm or locking the door. All of a sudden, crime would pay.
That is what the Bolshevik coup d’etat in Russia in 1917…and Marxist ideology generally…accomplished. The House of Romanov collapsed. The alarms had been turned off. The cops all went on vacation the same week. Gone were the limitations imposed by tradition and civil society. All of a sudden, if you were in a position of power and you didn’t like this or that — you could change it. If people got in your way…kill them. Or better yet, put them to work at your own grandiose projects. Anything was possible. And the more ruthless you were, the more likely you were to get what you wanted. Greed for power was set free. Marxists were not constrained by normal morality (a bourgeois affectation), nor even by science — as I have illustrated in a series of letters.
Not only that, but the Marxists thought they were doing something great…something good…something worthwhile.
Revolutionaries had the freedom to experiment. The freedom to screw up in a major way. Both Nazis and Communists conducted grotesque experiments — on other humans, on society and, again as documented in these letters, on the natural world around them.
Yesterday was the anniversary of the beginning of the student and worker uprising in Paris of 1968. The revolutionaries claimed they were acting in the name of liberation. Even today a socialist newspaper in Paris calls itself “Liberation.” Socialism has always offered a perverse sort of freedom — the freedom from the constraints that keep people from doing severe damage to one another. What the ’68 revolutionaries really wanted was the freedom to enslave others — as their fellow liberationists had done in other countries throughout the globe.
As long as crime paid, there was no shortage of criminals.
Private property is a similar constraint against environmental damage. People tend to protect the value of what they have. When they are desperate, of course, they will draw down their capital…like farmers who are forced to eat their seed corn to avoid starvation. But they are strongly motivated to avoid it. People typically protect their own environments, in other words, and work to improve them without being nagged to do so by Leonardo DiCaprio, Bill Clinton or any of the other largest resource consumers on the planet.
But take away the private ownership of property and it’s anything goes. All of a sudden, crimes against the environment — like killing the very last elephant in order to sell the ivory or cutting down productive fruit trees for firewood — become paying propositions. Greed goes on steroids.
But today’s letter is not about politics or the environment. It is about money. Or, more specifically, about how the UTG interacts with the financial markets. That is, how the elimination of normal constraints revs up greed to nearly insane levels.
“In this boom period,” Denby tells us, “you have the illusion that if you can just grab hold of the flying coattails of the New Economy investments you have the chance of getting rich very quickly…in the Internet age an ideally informed person would never sleep at all but would trade the markets and chase news and rumors through the links 24 hours a day.”
Why? Greed pays. And it pays because an important constraint has been removed. That constraint is the cost of money. It is the “hurdle rate.”
An investment only really makes sense if it can produce a stream of income that exceeds the hurdle rate. That is, if you build a new website for $1 million. And it produces a profit after expenses of $50,000 per year…and interest rates are 6% — you are losing money. You are not making enough to clear the hurdle. You are not even able to pay for the cost of capital.
Ceterus paribus, mutatis mutandis…you’ll go bust. And society will be poorer — because the capital was wasted.
This requirement — of clearing the hurdle — makes sure that capital is not wasted. It is a limitation on greed. You can only employ money in projects that make sense economically and financially. And since there are relatively few projects that can clear the hurdle, it can be seen as a drag on economic growth.
Obviously, the lower the interest rates, the lower the rate of return you would need to make an investment worthwhile. But wouldn’t it be nice if investors could be liberated from this constraint altogether?
Ah…here’s my hypothesis: liberation from the natural constraints causes mass greed bordering on inanity.
What if money were free? If the hurdle rate were reduced to zero you wouldn’t have to worry about getting a return on your capital. It would be a whole new ball game.
What if money were less than free? All of a sudden almost any project would make sense. People would invest without regard to profitability at all.
“Ultra-cheap equity capital,” writes Jim Grant in the latest issue of “Grant’s,” “brings down society’s hurdle rate. For the Internet-related class of 1998-99, in fact, the effective hurdle rate was reduced to zero or less, a rarity in a profit-directed economy.”
And guess what, the initial effect would be a flurry of activity that would look a lot like economic growth. Money would be raised and spent. People would be hired — with options handed out liberally. Offices would be rented. (Grant also reports that a quarter of all the leases in Manhattan during the first quarter of this year were taken by dot-com companies.) Everyone would get a desk, a phone…a computer. GDP would go up…
But the companies would not be very profitable.
What’s more, the whole mood, character and aspirations of the nation would be…shall I say…corrupted by greed:
Denby: “The current period of speculative energy has a unique character of high-mindedness and hope. The usual desire to get rich quick has merged with the sunrise ardor of creating a new way of buying, communicating and doing business…
“The…flamboyance of `80s Wall Street has been replaced by the earnestly hip Silicon Valley entrepreneur in black clothes. It’s the investment culture itself that’s been wild and perhaps frivolous: the millions flung by venture-capital firms at questionable ideas for startup companies; the increase in the price of technology and biotech stocks by mulitiples of twelve, twenty, or even forty within a six-month period; the obsession everywhere with the market. People trade tips at the newsstand; a man exultantly shouts out the name of a Scandinavian telecom (“Ericsson!) as he passes me on the street…”
Welcome to the New Era.
Paris, France May 4, 2000
*** Well, this is the big day. The productivity numbers come out today. If the numbers are bad — it will mark the end of the New Era. Productivity is supposed to be rising thanks to all those millions of lines of code and computers. If the numbers are good…well, they must be wrong…
*** Yesterday, as the “Financial Times” put it, a “Strong Economy Hits U.S. Markets.” Markets have been hit by worse. The logic behind the headline is that the evidence of a strong economy, which emerged yesterday, caused investors to worry that higher interest rates are on the way.
*** Indeed, Greenspan is supposed to speak to the Chicago Fed today. And he’s expected to “prepare the market” for a 50 basis point rate hike.
*** The Dow fell 251 points yesterday — representing nearly $300 billion in capital loss. The money, by the way, did not go into the Nasdaq, which also fell — 78 points.
*** The Dow closed more than 500 points below its level of a year ago.
*** What especially worried Wall Street was the news from Minnesota, where it was discovered that fast food restaurants were so short on labor that they were offering sign-up bonuses. Stock options should be next.
*** The decline was broad as well as deep – 2,139 stocks declined, as opposed to only 823 that advanced. There were 70 stocks hitting new lows on the NYSE, while 34 hit new highs.
*** Bonds fell, too. But bonds still look like a good way to ride out the bear market. Greenspan says he’s not targeting the stock market. But if stocks really start moving down in earnest, he will be forced to lower interest rates. Too many people and too many businesses now depend on stock prices. Bonds will rise.
*** Gold rose $2 yesterday. But the bull market in gold stocks seems to have ended within 24 hours of its beginning. Gold stocks went nowhere.
*** Meanwhile, the euro fell below 90 cents. “My gut feeling is that it will go lower,” said a VP at Barings Capital in New York.
*** Value investments keep popping up here and there — to entice any Graham and Dodd investors who are somehow still solvent. The U.K. company, British Energy, for example, is down nearly 50% this year. According to Deborah Orr of “Forbes,” it has a capitalization of only $1.8 billion and trades at less than two times cash flow. You can buy it now for only about 6.4 times earnings.
*** And in Mexico, Sanluis sells for just 4.2 times earnings. Sanluis is a silver manufacturer. Is it a good company? I don’t have a clue. But it’s definitely a cheap one.
*** Meanwhile, further south, but on the other side of Alexander VI’s Papal Line, a company in Brazil, Unibanco, sells for just 6.63 times earnings. Pretty cheap — especially for a bank.
*** No one can predict the future — as I often point out to state the obvious and as a necessary caveat to my own forecasts — but it seems much more likely that any of these stocks will double over the next five years than it is that CSCO will double.
*** CSCO, by the way, was included on a list of “maturing high-flyers” by Steve Leeb in “Personal Finance.” Oracle, Immunex, Qualcomm and Sun Microsystems also made the list. They are huge companies priced as though they were growth stocks. Not to say they don’t have some growth left in them…but hardly enough to justify an average P/E of 132.
*** People do not buy these stocks because they necessarily have faith in the company itself. These stocks are often bought as proxies for the new technology. They allow the buyer to be a part of the great New Thing — without having any idea of what the New Thing really is. Said Merrill Lynch’s leading Internet analyst, Henry Blodget, “The leading stocks are proxies for the growth of the Internet.” You gotta believe…
*** I have been following the Zimbabwe story with amusement. You have to admire Robert Mugabe, Zimbabwe’s president. He lies well. Mugabe wants to hold onto power. Not an easy thing to do. He’s been running the country for 20 years, mostly running it into the ground. So, to distract attention from his own mismanagement, he has made an issue of the land owned by white farmers. Britain, looking for a peaceful solution, offered to provide money so Mugabe could seize the land, pay the farmers for it and then distribute it to people who would vote for him. But even that was not good enough for “Comrade Bob,” as he once liked to be called. “They can keep their money,” said the Marxist politician who has taken billions of dollars from the British and others over the last two decades. “It’s our land…we will take it.” And then…”They have insatiable appetites, the capitalists!”
*** Socialism is alive and well on America’s college campuses. too, according to one DR reader and denizen of academia. Our correspondent reports on a “Temper Tantrum …on the lawn of Penn State’s Old Main. Their Righteous Cause was cessation of university investments in companies that produce sneakers, etc., in Third World sweatshops (which of course provide the best employment opportunities in the Third World). Penn State President Graham Spanier (who used to be one of them) offered encouragement and ordered Old Main to be kept unlocked overnight to give the campers access to indoor plumbing. April showers made for unhappy camping in leaky tents hastily put up by amateurs (what a shame), and a scattering of Liberal Arts faculty (middle-aged hippie freaks with tenure) stopped by to lend encouragement…the whole thing fizzled out.”
*** Comments on “painting the tape”…”jamming”…and the work of the Plunge Protection Team…seem to surface after every major upside reversal. It could be that the markets are heavily influenced at key junctures by big players with their own agendas.
At least one DR reader believes the whole financial system is rigged. He sent me the following extract from “United States Banker’s Association Magazine,” 1924:
“By dividing the voters through the political party system we can get them to expend their energies in fighting for questions of no importance.
It is thus by discreet action we can secure for ourselves that which has been so well planned and so successfully accomplished.”