New Ways to Get Rich
BROCKWAY, GEORGE P.
The Dismal Science NEW WAYS TO GET RICH BY GEORGE R BROCKWAY During the last couple of years a new fungus has been swelling in the dark of the financial moon—the securities futures market, or...
...As this comes to pass, more and more of our money will be frozen in nonproductive speculation...
...Once the market is in operation, it offers a field day for big-time gambling on a sure thing...
...You simply pick up a piece of change for guessing right...
...What is being valued is not the corporations that issued the paper but the traders' guesses about what the Federal Reserve Board will do next...
...The commodities markets are gambling dens for millionaires...
...Why not a market in options to buy futures, thus stabilizing the futures market...
...After all, the stock market itself is said to stabilize the cost of capital and help General Motors to plan production...
...Enterprisers deal with the future all the time anyhow...
...The business press is fond of pointing out that everyone who guesses Volcker is in a good mood is matched by someone who guesses he is in a foul mood...
...you don't hear them squeal...
...Also the same is the uneasiness aroused in the breasts of ordinary citizens by the extraordinary winnings of the traders...
...Of course, if you guess wrong, you take a bath in the trough...
...What fascinates people about stock index futures is that the big trades are dictated by computers, and when they aren't" down" they still have an aura of magic...
...Stocks that are highly volatile are said to have a high Beta characteristic, and the Beta Index is a weighted average of the 100 most volatile stocks on the Exchange...
...You may worry so much that you decide to hedge your bet by selling stocks short...
...When the gap is big enough (maybe only a point or two), arbitragers will buy in the cheaper market and sell in the dearer .It'sariskless gamble, but you have to act fast, and you have to have access to an enormous amount of money to make the game worth the trouble and expense...
...Yet the stock Exchange itself could scarcely exist if it were not inherently volatile...
...And when we read in the business press that the securities futures market stabilizes the stock market, which stabilizes the cost of capital, we know we are in the land of make believe...
...Fortunes accumulated very fast...
...Unfortunately, it does matter...
...We don't have to take this claim seriously to see that, in the end, someone winds up with some actual bacon to sell to someone else who has not been persuaded by Jane Brody to give up the ingestion of animal fats...
...Let's say you purchase a contract to buy and, come March, the price is 73.4 cents a pound: You sell your contract at that price and pocket the difference, or $3,800, less a trifling brokerage charge and taxes...
...An even more potent factor in the misuse of the money supply is the resurgent takeover wave, which must carry off upwards of $100 billion in its undertow...
...Trading to take advantage of gaps is an old way of making money...
...If I were crazy enough or shrewd enough to play the commodities markets, I'd go in for pork bellies, because that solemn game appeals to my sense of the ridiculous...
...On a recent day, some 40 million shares were traded in the last few seconds before the market closed...
...The old curse (variously said to be Chinese, Jewish, or Hungarian) can be paraphrased to read, "May you live in volatile times...
...The more trading, the more volatility...
...There'll be big gaps for sparks to jump...
...It takes time to do business, and during that time the prices of things change unpredictably...
...It's all done in seconds, as compared with months or even years a half millennium ago...
...It is disingenuous or ignorant to contend, as many do, that the market is an efficient way of valuing the nation's industries...
...Recently a vice president of the New York Stock Exchange, which usually pictures itself as sedate and conservative, talked pretty smugly during a TV interview about a new "product" the Exchange is pushing...
...In a rational world, the value of a nation's industries would be a function of what they produce...
...The uneasiness is certainly justified...
...the function of distance was to open gaps in information, and consequently in prices, that enabled well-informed experienced traders to buy cheap and sell dear...
...And if prices rise, the increased value of the warehouse will offset the money lost on the stocks...
...A successful "product"—one that has, as they say, a great deal of sizzle—is one that is extra volatile...
...An offhand remark by Chairman Paul A. Volcker will trigger a bigger rise or fall in the market than any conceivable news about actual production...
...Given the record, it will not be surprising if the managers of these funds are tempted by the stock futures markets, where the winnings can be two or three times those of the stocks themselves...
...You don't have to feed the pigs...
...Now, it is true that stock market futures have some slight appeal to people engaged in productive enterprise...
...The gaps that open between the markets are not exactly the doings of the famous invisible hand...
...The Dismal Science NEW WAYS TO GET RICH BY GEORGE R BROCKWAY During the last couple of years a new fungus has been swelling in the dark of the financial moon—the securities futures market, or markets...
...This $11 billion, invested in "products" that neither are products nor produce products, is unavailable to productive industry...
...the publisher sent the manuscript to press in January...
...If you contract today for a $ 10 million warehouse to be ready a year from now, you worry that by that future date the real estate market may have tumbled so that your competitor can buy one standing empty for $8 million and be in a position to underprice you...
...The local bookstore orders its Christmas stock in July...
...There, what is traded is the right to buy a bundle of stocks already a couple of markets away from anything you can get your teeth into...
...As I write this, the price for next March is 63.4 cents a pound...
...Those who run futures markets pride themselves on developing what they call "products" that will appeal to traders...
...The New York Times estimates that $ 11 billion is now committed to the stock futures markets alone...
...Again, this is a claim we don't have to take seriously...
...The most prominent of these trades guesses about the future of the Dow-Jones Index...
...Beta Index futures, it is hoped, will be not only volatile but sizzling...
...Indeed, favorable news of production is likely to cause the market to fall, because it is thought likely to frighten Volcker into tightening the money supply and raising the interest rate in order to try to exorcise the inflation banshee...
...Thenif prices fall, themoney you gain by selling short will offset the value lost on the warehouse...
...As far as enterprise is concerned, the stock futures markets have caused the money supply to fall $ 11 billion...
...Bit by bit they all have been seduced into playing the market, where they are managed by "experts" with an eye to churning the accounts and so picking up a fraction of a point here or there, day after day...
...In The Wheels of Commerce, the second volume of his trilogy Civilization and Capitalism, 15th-18th Century, Fernand Braudel makes much of the fact that the first large Renaissance fortunes resulted from long-distance trade...
...the printer and paper manufacturer have to order their machines years ahead...
...The bigger the gaps, the more trading...
...IntheworldofWall Street, the nation's industries are merely an occasion or an excuse for buying and selling pieces of paper...
...Obviously, when you hedge a bet you narrow your possible gains as well as your possible losses...
...Like the arbitragers of today, they used other people's money: partnership funds, bank deposits, and ultimately credit, some of it not unlike junk bonds...
...Since the stock futures market is an organized way of selling short, it is convenient for businessmen with heavy commitments they would like to hedge...
...but the similarity is merely superficial...
...Commentators will intone a few traditional homilies about the effects of high interest rates on industry, but what really matters is that a rise in the interest rate reduces the capitalized value of every income-earning asset...
...It can all add up, just as a vegetable market makes a tiny profit on sales but a tidy profit on investment by turning its inventory almost daily...
...There is much fluttering in economic dovecotes if the GNP varies in a year as much as 2 per cent from its secular trend line, yet the stock market can rise or fall that much in a single session...
...Conscience-stricken brokers (there are some such) claim that the trading stabilizes prices and so helps farmers plan...
...you never even put up any real money...
...The implication is the shaking and baking all evens out and doesn't matter...
...The resulting Ice Age will leave our industries, once a justifiable source of pride, high and dry...
...This trading is said to be similar to that on the commodities exchanges, where you can bet on the future price of sugar or platinum or pork bellies...
...Otherwise there wouldn't be any trading...
...As the market has risen with the fall in interest rates, the results of this activity have been spectacular...
...That's a giggling amount of bacon to bring home...
...For various reasons, a gap will open from time to time between the futures market and the prices of the underlying stocks...
...and you can sell any time before if you think the price is right...
...on Black Tuesday in 1929, only 16,410,000 shares were traded...
...A brief four or five years ago, 40 million shares made a big day on Wall Street...
...The stock market futures are something else...
...The unit of trading is acontract to buy (or sell) 38,000 pounds of the stuff (which I suppose is a carload: a carload of book paper is 40,000 pounds) at a specified price at some future date...
...The money wasn't earned in haulage...
...Not so long ago, college endowment funds, pension funds and the like were invested almost exclusively in high-grade bonds...
...It is called the Beta Index...
...Today's buy and sell orders are programed, which seems different from human agency (though programers are presumably human...
...and you may be ready to do this because you want the warehouse to do business in, not to speculate with...
...But the principle is the same...
...The more volatile the markets, the bigger the possible gaps...
...It would be hard to imagine anything less like a tangible product or more airy-fairy than the chits that are traded...
...It has a better claim than Marx's elaborate analysis as the method of primitive accumulation that made capitalism possible...
Vol. 69 • September 1986 • No. 12
