The Wall Street Fandango

Investors look up to their Wall Street stockbroker with adoring eyes…they see him as the kind family doctor providing them with a helpful service. Bill Bonner points out, however, the only purpose they serve is to separate a fool from his money…

If a man wants to drive a nail through a 2×4, he does so without pretense or illusion. Unless he knows what he is doing, he will split the wood or bend the nail and make a mess of it. But as soon as he goes beyond the stretch of his own arms and the reach of his own eyes, beyond his own private world, he is in a different world, a world where he can imagine the most extravagant things. Nothing is ever clear or certain in public, and every error is someone else’s fault. That is why so many men prefer the public world…it is so surrounded in fog that he thinks he sees half-naked nymphs hiding behind every tree and stacks of $100 bills under every cushion.

Many industries have arisen and thriven on the appeal of these illusions. Today, we take a look at one of them: Wall Street.

What is Wall Street’s purpose? "To allocate capital efficiently," a traditional economist might say. But economists are merely victims of their own silly theories. A communist economist would snarl and spit. Wall Street’s function is merely to aid the capitalist as a lackey aids a knight – he would say — to help the greedy bastard onto the backs of the working class.

One might just as well ask the question: Why are there giraffes? To which we can only honestly answer: because they have not been exterminated yet. All animals – including humans – exist only because they have not yet become extinct. Wall Street exists because it has not yet disappeared.

We doubt that this sort of reductionism is very useful, except that it provides a solid footing upon which to begin our climb. We want to get up out of the mist…up to the heights, where the air is clear and we might actually see something. For the problem that most investors face is that they do not see Wall Street for what it really is… but as a sort of mirage, which changes shape depending upon what theory you use to look at it.

"Where you stand depends on where you sit." If you sit on the board of GM or another major cash-hungry corporation, your stand on Wall Street is fairly obvious: it is a worthy and necessary ally. If you sit in an office of Goldman Sachs or Merrill Lynch…or in any other office of the financial industry…you are sure to view your Wall Street as generous and benevolent employer; it puts your children through private school and pays for your house in the Hamptons. And if you are the typical investor, you are likely to look upon your Wall Street stockbroker as though he were the family doctor; he provides a necessary and helpful service. Like a doctor, he is a phone call away, ready to fly to your aid and comfort. He even wears a tie and drives a nice car. He is a professional. He is there to help.

The Wall Street Illusion: Your Stockbroker Is a Quack

You are not wrong; he provides a valuable service. But before you send a thank you note, you should realize one thing: your stockbroker is probably a quack.

Medicine is a science, of sorts. Progress is cumulative. Over the years, doctors have learned what works, and more often, what doesn’t. Give a patient enough strychnine and he is unlikely to pay his bill. Gradually, doctors learned not to do it. Even a bad doctor has at his fingertips the results of thousands of years of trial and error, including a few years of real scientific research and observation. He can still make a mess of things; but there is no reason why he should, except for simple incompetence or a diabolical urge.

But the financial industry is not the same as the medical industry. Both claim positive results. As to medical science, we have no reason to doubt it; we’ve seen some of its wonders first hand. But the claims of the financial industry are mostly a swindle.

If you are to make money from your Wall Street placements, you must ask yourself, dear reader: whence cometh the lucre? One possible source is other investors. If some other investor’s pile were to go down, yours might go up. Wall Street promises as much; practically every advertisement for a mutual fund claims that it does better than its peers. Even if they all went down in actual, real value…they nevertheless crow that their "relative performance" beat out just about everyone else. A doctor might similarly advertise that his patients died in less agony than his competitors; generally, he has the good sense to refrain from mentioning it. Nor is he likely to bring it up. For medicine is not a zero-sum game. Until recently, when they were done in by their own gluttony, Americans lived longer each year. No one had to die at 20 so another could live to 80. They could all live longer.

Wall Street insists, however, that investing is like health care; it is not a zero-sum game. One investor does not have to die so that another can make above-market gains. We can all get rich. This is, of course, like saying we can all be above average. "Rich" is a relative measure, not an absolute one. Compared to most of the world, almost all Americans are already rich. But most of the world doesn’t live next door or drive by in a new Mercedes on his way to work. We compare ourselves to our neighbors – who also invest via Wall Street and who also insist that their investments go up more than ours. Suppose, for example, that one year everyone’s investments double in value – except for one poor schmuck whose portfolio rose only 10%. Ten percent is still a very good return. But the poor man would feel like a total failure nonetheless. He’d be lucky if his wife didn’t leave him for her tennis coach.

The Wall Street Illusion: The Greatest Show on Earth . . . For the Spectators

Obviously, the whole thing is a con game…guaranteed to disappoint at least half the players, even under the best of conditions. Al Gore was shocked that half of all students performed below the average. Investors are alarmed when – in good times – half of them don’t keep up with the average gains…and they’re disgusted in bad times, when all of them lose money. And, over time, all of them are destined to lose money, (compared to the general market itself) for the cost of the Wall Street casino must be paid. Brokers, analysts, deal-makers, financiers, fund managers, account managers – all the financial intermediaries who make up the Wall Street industry – draw salaries and pensions as long as they draw breath. That money, too, must come out of investors’ pockets, so that over the long run, the average investor’s real return must be lower than the actual return from the investments themselves…and many, including most of the little guys, will actually lose money. Still, they take a leap of faith – for they believe every word of Wall Street’s hustle – and then, every time, they come crashing down on the pavement as if they had jumped out of a 23rd-story window.

It must be depressing to investors. But it is the greatest show on earth for spectators.

Not only is investing not a science, it is not even an art. It is more like holding up liquors stores or seducing the rector’s wife. Sometimes you get away with it. Sometimes you don’t. But you’re generally better off if you don’t. For there’s nothing like success to set up failure. As soon as you get the idea that you are such a smooth operator that you can pull off a job like that; you’ll be planning the next one when the cops pull up.

The typical investor in public markets has no idea what he is doing. Putting his money into a stock or a mutual fund brings him a temporary happiness. He sees himself as Kirk Kerkorian making a bid for GM or Warren Buffett shrewdly moving on an insurance company. "I bought Google," he tells his wife. His chest swells. He feels a crown of authority upon his head, for he has mastered the most sacred and most powerful rite of our time; he has gone to Wall Street like Sir Galahad to Camelot.
He does not know of the misery awaiting him…and that he is not a hero, but just a chump…an insignificant speck of dust on Wall Street’s white shoes.

The Wall Street Illusion: The Perceived Nature of Investing

The whole thing would be depressing if there weren’t something gloriously comic in it. Wall Street is doing nothing evil; it is merely doing its job – separating fools from their money.

The root of the problem is the nature of investing itself – at least, the public form of it as practiced by most investors and as tempted by Wall Street. The idea of it is that a man can get rich without actually working or coming up with an insight or an invention by careful study or dumb luck. All he has to do is put his money "in the market" by handing it over to Wall Street, and poof! – by some magic never fully described it comes back to him tenfold. He must see his broker as Christians see Jesus at the wedding feast. He casts his dough upon the water of the Lower Hudson and East River…and it comes back multiplied into really big money.

There must be some science to it, he imagines…some cumulative wisdom like the periodic tables or the logarithmic scales that investment geniuses have come up with years ago and that – like penicillin or quinine – are now available to him. But it is not so. Instead, the whole edifice of Wall Street is built on a lie: that you can get something for nothing. What you actually get, of course, is nothing for something. But it takes you so long to figure it out that by the time you’ve realized you’ve been had…you’ve been had.

That is not to say you can’t make money on Wall Street. You can, in fact, make a bundle. But the surest way to do so is by being in the investment industry yourself…by offering the rubes and lumps "investments" that they buy. Then, you too can make a six-figure salary…along with such large bonuses that you can afford a house in the Hamptons, an apartment in Manhattan and a vacation in Europe at least once a year. You can even make money on Wall Street as a simple investor. But for that you will have to do a lot more than just be "in the market." You will have to treat your investments as though you were driving a nail through a 2 x 4. You will have look upon it not as a public investment, but as a private one. You will have to look at the company, not the stock. You will have to do a lot of serious research and thinking…or pay attention to someone who does. In short, you will have to earn it.


Bill Bonner
The Daily Reckoning

May 06, 2005 — London, England

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

"This is the greatest crisis facing the country that people can do something about," says Ben Stein in Forbes.

Stein is talking about people who fail to save enough for retirement.

"With less than 20% of U.S. workers now in employer pension plans (many of those plans are on shaky financial footing) and with Social Security typically replacing less than 40% of pre-retirement income, personal saving has never been more important," continues Forbes. And yet, few people save any money.

"Savings rates have never been lower," Forbes explains. "In 1999, the national savings rate dipped below 3% for the first time since 1959, according to the U.S. Commerce Department. It has been declining further since then, and in 2004 it was at a mere 1%. The low savings rate, coupled with large deficit financing by Asian banks, is dangerous for the U.S. But it’s more dangerous for individuals."

People are forever crying alarm about this or that. There is a crisis in health…a crisis in moral values…a crisis in the Middle East…or in the newspaper trade. For all the whining and gnashing of teeth, there is usually little that can be done about the emergency, and if it is left alone, it generally takes care of itself in its own way.

Forbes: "Nearly 28 million U.S. households – 37% of the total – do not own a retirement savings account of any kind. Among the households who owned a retirement savings account of any kind as of 2001, according to a 2004 report by the Congressional Research Service, the average value of all such accounts was $95,943. That number was distorted by the relatively few large accounts, and the median value of all accounts was just $27,000.

"The median value of the retirement accounts held by households headed by a worker between the ages of 55 and 64 was $55,000 in 2001, the CRS says. To that, Stein adds that just 11% of all Americans have retirement savings of $250,000 or more."

You can jabber to people about saving money until your jaw falls off; they’re not going to put an extra dime in a savings account – not when property prices are going up at 10% per year and the Fed is still giving away money. But, eventually, the "crisis" disappears – when money gets tight…and house prices fall. Of course, that’s when people wish they had saved money. That’s when they’ll really need it. That’s when the whining really begins.

Saving – like manufacturing – is one of those pre-empire virtues that was once an important part of the American economy…but seems to have gotten exported. The Chinese now make our products and do our saving for us. They save more than 25% of their income. According to Ben Bernanke, they now have such a glut of savings, they are thankful to us for taking it off their hands.

As a percentage of GDP, consumer spending in China is only half what it is in the United States.

But what goes around comes around. When the U.S. real estate bubble pops…some of that old virtue is likely to make its way back home. Americans will save again. Whereas they put aside only a penny on the dollar now…they are likely to set aside 10 cents or more. The savings crisis will be over. A new crisis can then begin: a depression.

More news, from our team at The Rude Awakening:


Eric Fry, reporting from Wall Street…

"To complete this week’s Orange County trifecta, today we contrast the respective trajectories of a master-planned city in California with a large coffee retailer and find these two really aren’t that different…"


Bill Bonner, with more views:

*** We just received this note from Vantage Point Investment Advisory’s Jonathan Kolber:

"On the island nation of Iceland, a small pharma-tech company that’s less than a decade old is set to turn the world’s most profitable industry inside out with patents on pharmacogenetic technology that could prove bigger in importance and impact than antibiotics. Soon, this pioneering firm will introduce a new breed of pharmaceuticals. And I’m not talking about a cure for the common cold, here – I mean drugs for major ailments that are killing us by the millions…

"Once this company rolls out just the first of these new miracle meds (a heart attack drug is already in the later stages of FDA approval), everything mainstream medicine knows about pharmacology and medical treatment might well be rendered obsolete. If just this ONE DRUG gains mainstream acceptance ( estimates the company will sell up to a billion bucks worth per year), early investors could easily make five or six times their money…"

*** Uh-oh…we thought we heard a bell ringing. A developer from Miami has announced plans to build the tallest condominium ever put up. The proposal – which may never be approved – is for a concrete structure of 110 stories, 1,200 feet tall, on the Miami waterfront.

We hope it goes forward. Great real estate booms often end with the construction of the tallest building ever built. And what better to mark the beginning of the end for America’s empire of debt than construction of the tallest condominium ever, called "Empire World Tower." Yes, that it the name the developer has given it. If he is lucky, he will not get permission to build it. If he is unlucky, and gets the go ahead, he might as well declare bankruptcy now and get it over with.

*** Another show trial is taking place – and this inquisition has Dennis Kozlowski, ex-CEO of Tyco, on the rack. The rubes and lowlifes love this sort of thing. Journalists fight for a front row seat. Prosecutors – eyeing a place in the next race for mayor or attorney general – strut and crow before the press as if they were national heroes. Michael Milken, Leona Helmsley, Martha Stewart, and Ken Lay…the "crimes" are usually not worth mentioning. But the torments are many – and vastly entertaining to the masses.

Kozlowski is accused of spending shareholders’ money on himself. Isn’t that what you’d expect him to do? If the shareholders have a problem with it, why don’t they take him to court? Instead, the thing becomes a federal case – which is to say a farce and a circus.

*** Yesterday was a holiday in France – Ascension Day. Paris was "dead," said a friend. It was great. You could find a parking place.

*** A reader’s comment:

"Your advice the other day – to buy in Brazil – very frickin insightful. A Brazilian national working here at Google – just bought property there for $2000 a few months ago -says it’s gone up to $6000. I’m in Southern California – renting – watching hovels next to LAX get appraised at close to a million…trying to control my urge to join the masses in line at them mortgage broker.

"Dude – in case this just happens to be something you could advise me on – I’ve been researching water treatment technology for almost five years now – I’ve long since known that the water treatment applications that dramatically reduce water and chemical usage will be key for many industries over the next century – and a major public relations issue for golf courses now. So, here I am – feeling like I know what folks best solutions are. And there the affirmation of my instincts is pouring in –
as demand for this particular type of technology are one of the primary things China is desperate to import – but I just can’t seem to get to the people who would care.

"I see these Chinese government contracting job bulletin boards for hundreds of large scale industrial and commercial applications…even Las Vegas is like trying to find life in another solar system. I couldn’t find golf courses to GIVE a $75,000 system to for FREE – for a year – just for being our first flagship courses in that state. No – it’s not untested – it’s been installed in six courses, and reduced total operating costs by 30-50%!!

"HOW is it possible – that I can hand people a solution to their biggest problem on a platter – that will PAY for itself in one year – and continue to give them the best return they could get on any investment – not to MENTION the PR praise and relief it would bring them.

"I sure appreciate it when a guy like you – who is well respected by other guys – continues to emphatically affirm everything I’ve already tried to advise them of myself….

"Of course you’ve heard of Jim Rogers. He’s been kind enough to offer me his insights – since I first emailed him raving over his books – which, for gods sake, I should have read in college – instead of the Communist Manifesto…then I wouldn’t have spent my classes doodling ‘go Lenin’ in
the margins of my notebook.

"Anyway – thanks for continuing to beat your head against the wall on their behalf. My head imploded permanently sometime back during one of the Bush Jr. and Gore debates. The moment Dean went yodeling down in flames in Iowa – I went gray and started to smoke crack.

"From, Your personal peanut gallery. Sorry I could no longer fight off the urge to add my two cents – and then all my loose change."