Eat the Rich: A Treatise on Economics (5 page)

This is your stock dividend. Oh, and because you’re one of the owners of the corporation, you get to vote. This means that once in a while you receive something in the mail called a proxy statement. The proxy statement allows you to give your vote to the people who are paying themselves enormous bonuses. Either that or you can travel to the corporation’s annual meeting (held in Indonesia this year) and stand up in the back and ask shrill questions like some Ralph Nader nutfudge.

You rarely buy common stock for the dividend and almost never (unless you’re buying 1,000,001 shares) for the voting rights. You buy stock because you have one of those opinions mentioned earlier. You think other people will think this stock is worth more later than you think it’s worth now. Economists call this—in a rare example of comprehensible economist terminology—the Greater Fool Theory.

Speaking of folly, you can also invest in the commodities market. This is where you buy thousands of pork bellies and still don’t know what you’re going to have for dinner because, in the first place, you’re broke from fooling around in the commodities market and, in the second place, you’re not completely insane. You didn’t actually have those pork bellies delivered to your house. What you did was buy a “futures contract” from a person who promises to provide you with pork bellies in a couple of months if you pay him for pork bellies today. You did this because you think pork-belly prices will rise and you’ll be able to resell the delivery contract and make out like a…perhaps “make out like a pig” is not the appropriate simile in this case. Of course, if prices fall, you’ve still got the pork bellies, and won’t your spouse be surprised?

The reason you go broke in the commodities market—or die from the cholesterol in sausage—is because you’re betting you know more than the actual producers and consumers of the commodity. Take the less-risible example of feed-cattle futures. Ranchers have a pretty good idea of how their cattle raising is going: They can count the calves. If it looks like a good year, the ranchers will sell cattle futures early so they don’t suffer from weak prices when all that beef comes on the market at the same time. Burger King has a pretty good idea how the hamburger business is going. And they know how many cattle it takes to make all their burgers (about two). If it looks like a bad year for Whoppers, Burger King will put off buying cattle futures to take advantage of the coming beef glut.

This leaves you to buy high and sell low
*
. The producers and consumers of a commodity know a lot about that commodity’s market, and you know your investment portfolio is filled with rotting meat.

When you buy a “future,” you’re actually making a third kind of investment that’s neither debt nor equity. That is, nobody owes you money, and you don’t really own anything yet. What you’ve bought is one type of those allegedly supercomplex and supposedly ultradangerous items called derivatives.

You remember how in 1995 a semieducated young wanker in Singapore, fiddling with derivatives, brought England’s noble, ancient Barings Bank to its knees, and now everyone in the House of Lords is selling fish and chips. And you heard how in 1994 the treasurer of Orange County, California, picked up a derivative hitchhiking on Sunset, drove around the corner for a little fiduciary slap and tickle, and the next morning an entire suburb of Los Angeles awoke to find that its streets and sewers had been sold at a bankruptcy auction.

Considering the way things turned out for England, Orange County, and you in the commodities market, derivatives do seem daunting. But, in fact, all that the three of you did was make deals with other people in the market.

A derivative is a deal
about
buying or selling rather than the buying or selling proper. When you own a derivative, what you own is a bargain that you’ve made. You’ve promised to pay or charge a certain price for a certain thing to be received or delivered at a certain time. Where it gets confusing is that this promise itself can now be bought and sold.

Derivatives are so-called because they “derive” their value from other more straightforward investments, such as just plain owning cows, Orange County, Singapore Slings, or whatever. These things are known as the underlying commodities. The derivative is the deal. The underlying commodity is what the deal’s about.

Derivatives are risky. But risky is the point. Derivatives are a way to buy and sell risk. Big risks mean big rewards. Some people can afford more risk. Some people like more risk. And some people are as chicken as I am.

You’re into derivatives whether you like it or not. Your adjustable-rate mortgage is a derivative: You got a deal on a loan that was cheaper, at that time, than a fixed-rate mortgage. In return, you’re taking a risk. Your risk is that the amount of interest you’ll pay in the future will be derived from a formula involving the prime rate, T-bills, and the chairman of Chase Manhattan’s boxer-shorts-waistband size. In this case, the underlying commodity is banker fat.

Now that we've become experts on every kind of investment, we can figure out what the triumph of free-market capitalism really means. What it means is euphoria and panic. If investments are okey-dokey, we’re all making a fortune selling Pfizer shares to each other. Convenience stores put twenty-dollar bills in the
TAKE ONE/LEAVE ONE
tray. The World Bank gives toasters to Africa. If investments are not-so-hotso, we throw up our hands and declare bankruptcy. Jobs get so scarce we have to pay to baby-sit for other people’s kids. And the Salvation Army goes up and down the Bowery taking soup back from bums.

The investment business is based on people being able to do what they want with their money. They may want to do some odd things. “People put their money where their thoughts are,” said one investment banker I interviewed. This means that there are a lot of men who are, so to speak, in financial topless bars, sticking millions of dollars into the G-strings of lap-dancing debts and equities. “If a thing can move freely, it can move stupidly,” said another investment banker.

This is how booms and busts develop in the marketplace. And these booms and busts can have larger consequences, such as in 1929 when stocks were crashing, banks were collapsing, and President Hoover was hoovering around. Pretty soon, you could buy the New York Central Railroad for a wooden nickel, except nobody could afford wood. People had to make their own nickels at home out of old socks, which had also been boiled, along with the one remaining family shoe, to make last night’s dinner. So the kids had to walk to school with pots and pans on their feet through miles of deep snow because no one had the money for good weather. My generation has heard about this in great detail from our parents, which is why we put them in nursing homes.

Our own kids will probably be shunting us off to the senior care facility when we start telling them about the Asia crisis. Back in 1997 there’d been a bull market in stocks since the apatosaurus roamed the earth. Inflation scares were limited to newspaper stories about silicone breast implants. The unemployment rate was so low that if your dog wandered into a McDonald’s, it would wander out wearing a
TRAINEE
badge. And Asian economies were even stronger than ours. They had some kind of “Asian values” thing going on, involving hard work, thrift, respect for the family, and fortune cookies that read, “Confucius say: Do your homework.” Plus, countries in Asia had smart government policies, such as “Export everything.” The world was getting calculators, stereos, and VCRs. Asians were getting rich. Everything was wonderful.

Then somebody attacked the baht. Currency traders snuck up behind Thailand’s legal tender and stabbed it with a chicken-satay skewer. They hit it so hard, it thought it was a Mexican peso. They tore it into little pieces, wadded them up, and started a huge spitball fight on the Bangkok stock exchange that caused all of Thailand’s stocks to go running home to Mother.

What the traders really did to the baht was sell it. Investors in international currency markets started looking at Thailand’s economy. Maybe the world had as many calculators, stereos, and VCRs as it wanted. But the Thais were borrowing money overseas to produce more—borrowing so much money that Thailand had a balance of payment deficit even though it was exporting everything. Some of those smart government policies turned out to include, “You’d better loan money to a certain general’s son if you’re smart.” Thais couldn’t buy calculators, stereos, and VCRs—they’d all been exported—so Thais bought overpriced real estate and cockeyed stock issues. Thailand had risky debt, bad debt, and worse equities. Maybe owning baht wasn’t such a good idea.

Currency traders sold baht. The government of Thailand bought baht, using the foreign currency it had from exporting calculators, stereos, and VCRs. Thailand did this to keep the baht from being “devalued.” Devaluation simply means admitting that your currency is worth less compared with other currencies, but no government likes to do it. When a currency is devalued, imported raw materials—stereo ore and barrels of unrefined calculator numbers—become more expensive. Inflation rises. Foreign investments—VCR farms—lose value. Stock prices fall. Everything goes in the toilet.

The whole 1970s experience in America was essentially the story of the dollar being devalued. We can’t blame the Thais for wanting to avoid a situation that could lead to disco and Jimmy Carter. Anyway, currency traders were glad to sell baht, so they sold some more. Aggressive currency traders even sold baht they didn’t own. They borrowed baht to sell, hoping to repay the loan later with cheaper baht. (This is called selling short. You can do it with stocks or, for that matter, with the car you borrowed from your neighbors, if you think you can pick up the same Saab for less before they get back from the Bahamas.) Traders figured that eventually the Thai government would run out of foreign currency. The Thai government ran out of foreign currency. Everything went in the toilet.

When the currency traders were done with Thailand, they started looking at other economies in Asia. Maybe owning Indonesian rupiah, Malaysian ringgit, and South Korean won wasn’t such a good idea, either. Malaysian prime minister Mahathir Mohamad blamed the ringgit’s devaluation on “Jewish speculators.” (You may remember how everyone in New York was going around saying, “Oy vey, sell the ringgit.”)

By October 1997, the currency-dumping spree had reached Hong Kong, and, although the Hong Kong dollar wasn’t devalued, the Hong Kong stock market took a TWA Flight 800. The Hang Seng index fell 1,211 points on October 23, with its shares losing $42 billion in value. This scared the pants off the Japanese market. The pantsless Japanese shocked the European markets, which took it out on the markets in Mexico and Brazil (on the theory, I guess, that undercapitalized wogs are undercapitalized wogs no matter where you find them). By Monday, October 27, the terror had reached the New York Stock Exchange. The Dow Jones Industrial Average went down 554 points because…because everyone else was doing it. It was the largest dollar decline in history and the largest percentage drop in ten years.

Then the market recovered. “Monday was very, very scary,” said David the floor broker. “We were worried about Tuesday. But after the Tuesday rally started, it was all forgotten.”

It turns out that on October 28, the American economy was still there. None of America’s factories or malls had been abducted by space aliens. American workers hadn’t forgotten how to flip burgers during the night. The market soared.

But was this just a “dead-cat bounce”? On Wall Street, they say—“Even a dead cat will bounce once if it drops from high enough.” The market skidded.

But Asian devaluations could be good. Imports will be cheaper. Inflation will stay low. The market jumped.

But Asian devaluations could be bad. Exports will cost more. Trade will suffer. The market plummeted.

What if Japan gets dragged down? The market plunged some more.

Who cares? All we sell Japan are
Seinfeld
reruns. The market leaped.

What about China? The market slid.

What about my beach house? The market bounced back.

“We’re rich!” I told my wife. “Get a Range Rover and a pasta machine!”

“We’re poor!” I yelled. “Sell the dog.”

“We’re rich again!”

“We’re poor.”

“We’re really poor.”

“Rich! Rich!”

“Poor! Poor!”

And on like that for several weeks, until my wife pointed out that our entire investment portfolio consists of ten shares of Eastern Airlines inherited from my uncle Mel.

The investment industry creates euphoria and panic. It moves astonishing amounts of cash around the world at startling speed with shocking results. Then it pays itself fantastic amounts of money. Companies registered with the United States Securities and Exchange Commission charged their customers $27.8 billion in brokerage fees in 1996. They made $30.7 billion trading for their own accounts, $12.6 billion underwriting stock issues, $10 billion selling mutual fund shares, and $84.3 billion doing things classified as, to use a technical SEC term, “other.” People on Wall Street don’t consider themselves seriously employed unless they’re “making a phone number.” Kids fresh out of business school are building indoor golf courses and dating Anna Nicole Smith. There’s an old stock-market joke about your investments: “The broker made money. The firm made money. Two out of three’s not bad.”

Is the investment industry just a bunch of pirates in neckties?

“Most of them are,” said a sales representative for a brokerage house.

“What makes you think they’re not?” said a financial analyst.

“I wish,” said a man who manages $2 billion of other people’s money. He was staring morosely at the yard-high stacks of annual reports and research materials on the credenza next to his desk. “I was out of town for two days,” he explained. “My secretary FedEx’ed me some other stuff.”