Tuesday, February 15, 2011

Is The Stock Market Obsolete?

Felix Salmon, a blogger at Reuters, posted an interesting Op-Ed this weekend in The New York Times

These days a healthy stock market doesn’t mean a healthy economy, as a glance at the high unemployment rate or the low labor-market participation rate will show. The Tea Party is right about one thing: What’s good for Wall Street isn’t necessarily good for Main Street. And the Germans aren’t buying the New York Stock Exchange for its commoditized, highly competitive and ultra-low-margin stock business, but rather for its lucrative derivatives operations.

The stock market is still huge, of course: the companies listed on American exchanges are valued at more than $17 trillion, and they’re not going to disappear in the foreseeable future.

But the glory days of publicly traded companies dominating the American business landscape may be over. The number of companies listed on the major domestic exchanges peaked in 1997 at more than 7,000, and it has been falling ever since. It’s now down to about 4,000 companies, and given its steep downward trend will surely continue to shrink.

In other words, the days of stock exchanges may be numbered. As Salmon himself puts it, they've become a place for speculators and software-driven trading strategies that try to wring every inefficiency out of the markets.

It's true, the original intent of stock markets was a place to raise capital for a company and inefficient companies were punished, while efficient companies rewarded. The theoretical model includes an assumption that every investor can obtain perfect knowledge about the investments, and that no one has this information before anyone else does (insider trading).

But in an age where, to take uncover and take advantage of these microinefficiencies, one must either be a supercomputer or sleep with one, that model is clearly outdated. If in fact it was ever even valid, much less dated. It was likely quaint when those original marketeers sat under the buttonwood tree on Wall Street in 1792. 

So the connection between the performance of a company and its stock price has always been loose, at best, and probably irrelevant. So long as there was a human factor involved, however, there was a certain artistry to the valuation of a company and it usually hewed somewhere in the ballpark of what value should be applied to it. 

Recent history suggests this is no longer the case. As market meltdowns from the Reagan M&A bubble to the savings and loan meltdown to the dot.com bubble and the most recent mortgage crisis have demonstrated, the ability of computerized trading to sniff out the smallest deviations from perfect efficiency and exploit it has created less an exchange of assets trading, and more of a pessimist's paradise, a place where to be bad is to make money, and to have a heart and soul is inefficient. 

If you want to understand the current rising trend in American political thought about the dishumanity felt towards people who need a helping hand, I would suggest it begins and possibly ends with our stock exchanges. If a poorly run company can be savaged in the markets...and goodness knows, Lehman Brothers and Bear Stearns provide ample evidence of this...then a poorly run household deserves no better, in the eyes of these people. 

It's no illusion that as machines have risen to control the exploitation of these inefficiencies, people have taken a more mechanistic view towards their fellow man. It's also no surprise to me that as people have grown comfortable with the use and programming of machines to do this task, they too have lost their sense of purpose as human beings. 

Humanity has a duty to its civilizations to take care of and to assist its fellow men and women. As the Dalai Lama puts it, "Love and compassion are necessities, not luxuries. Without them humanity cannot survive."