“Behind it all was a man who could not bear to hear that Elvis still surpassed him, or that Madonna had won a Grammy when he hadn’t. He could force hard deals and millions of dollars out of Motown, CBS and Sony in face-to-face confrontations; he could fire his manager and his lawyer, after years of service, without a trace of sentiment; he could beat Paul McCartney to the Beatles’ back catalogue and exploit it ruthlessly, despite their friendship. He performed with his elder brothers for 18 years, then left them as brutally as he had always up-staged them…What show business required, Michael Jackson had also learnt, was to give them what they wanted. If they demanded fantasies, he would provide them. ‘The longer it takes them to discover who I am, the more famous I will be’…His glitter jackets, the tabloids claimed later, hid a body that was half-starved, subsisting on painkillers. Though he was worth $1.3 billion, said the Sun, he died with debts of $300 million. [More reputable sources put his assets at $500 million and net worth at $200 million.]”

The Economist
July 4, 2009

Readings

“Just why is there so much debt in the Anglo-Saxon world? Bankers and regulators know well that it is in nobody’s long-term interests to have allowed borrowing to a position where the US now owes far more, as a multiple of the economy, than at the start of the Great Depression. The answer is capitalism’s dirty little secret: excessive lending was the only way to maintain the living standards of the vast bulk of the population at a time when wealth was being concentrated in the hands of an elite. The amount by which the elite has benefited is startling, and illustrates the problem with lightly regulated free markets: the rich get much richer while the rest do not get richer at all…The net worth of US households, including their houses and after counting debt, was $50 trillion in March, according to the Fed. Not a bad tally for 306 million people: $165,000 each. However, the cost of servicing this debt as a proportion of income, even with record low rates, is at a 30 year high, above 15%, as incomes have stagnated”…Financial Times, July 1st.

“Goldman Sachs Group is once again expected to report stellar earnings this week, to the envy of some rivals…Goldman is known on Wall Street for its sophisticated computer-trading platform. It has become a dominant player in high-frequency trading, in which computers use complex formulas to conduct rapid-fire trades in markets around the world. In the week ending July 3, Goldman accounted for 24% of all program trading on the NYSE, making it No. 1…High frequency trading has become one of the fastest-growing strategies on Wall Street, accounting for more than 73% of stock trading in the US this year, up from 59% in 2008…WSJ, July 13th.  [The casinos remain quite open!]

“The top 25 US originators of sub-prime mortgages—the toxic assets that sparked the global financial crisis—spent almost $370 million in Washington over the past decade on lobbying and campaign donations as they tried to ward off tighter regulation of their industry. The study shows that most of the top 25 originators, most of which are now bankrupt, were either owned or financed by the nation’s largest banks…Financial Times, May 6th. 

“It is not quite the Armageddon that was being predicted after Lehman Brothers became America’s biggest corporate bankruptcy last September. But this recession is still on course to be second only to the Depression in terms of companies going bankrupt…Economist, July 4th. 

“Battered Real Estate Trusts Book a Blockbuster Quarter: Real estate investment trusts staged their best performance in their history during the second quarter on growing perceptions that most reits, many of which seemed imperiled just a few months ago—are out of immediate danger. The Dow Jones Equity All REIT Total Return Index, which tracks 114 publicly traded REIT stocks, rose 28.9% in the April-June period…WSJ, July 1st. [Note: Indices are unmanaged measures of market condition that cannot be invested into. Past performance is no guarantee of future results.]

“The S&P/Case-Schiller index of house prices in 20 American cities fell again in April, but at a more modest rate. Several cities saw prices rise. Dallas notched up the biggest monthly increase of 1.7%”…Economist, July 4th. [A special section in the July 11th edition said “Texas’ unemployment rate, at 7.1%, was 2.3 points below the American average. Housing repossessions are still very rare; the state budget is still in surplus even as California and New York teeter on the edge of bankruptcy.”]

“A Much Needed Shareholder Victory: US corporate boards frequently but misguidedly behave like Victorian parents. Shareholders who are seen but not heard are spoken of with affections; willful ones are scolded like rowdy children. Corporate law encourages their attitude by limiting shareholders’ control of directors supposed to represent them. But plummeting stock prices are spurring normally docile shareholders to rebel. In a return to form after the Bush years, the SEC has sided with shareholders by proposing to boost their ability to nominate directors—not a day too soon. Anyone wanting companies run by a self-serving, self-recruiting cabal could hardly improve on this incestuous system”…Financial Times, May 22nd.

“Social Enterprise—The Fledgling Fourth Sector: Is it possible that a whole new, distinct fourth sector is developing right before our eyes? The modern business world has up to now comprised the private for profit, public/government and non-profit sectors. But today there is a blurring of the lines between these sectors. There is also a burgeoning global movement, known as social enterprise, which straddles all the other sectors”…Financial Times, June 15th.

“America has had an inauspicious start to the 21st century, to put it mildly…The economic crisis has revealed the fragility of its financial system. Great investment banks have crumbled to dust. Financial wizards have been exposed as frauds or fools. A country that once lectured the world on the ‘Washington consensus’ of deregulation and privatization is busy re-regulating Wall Street and nationalizing Detroit. America has got ever deeper into debt, unable to kick the habit of living beyond its means….Foreigners will not finance Uncle Sam’s indulgences forever.”

The Economist
July 4, 2009

Reflections

Maria Bartiromo of CNBC recently hosted a top-flight panel of corporate, financial, advertising and civic leaders in a discussion of “The Future of Capitalism.” Reflecting the continuing secularized state of mind in most business and finance, there wasn’t a religious leader among them; that despite the fact our recent short-comings were moral in nature; moral risk continues to be a major concern; and the senior editors of The Economist have just written God Is Back as they know the pendulum has swung too far in keeping traditional morality away from our finances. Everyone seemed to agree when the opinion was expressed that our current crisis was caused by a half-dozen New York-based investment banks. No one seemed to remember Bernie Madoff did much of his “evil” in Palm Beach; Sir Allen Stanford was based in the Caribbean; Enron was in Houston; HealthSouth was in Birmingham; and California is bankrupt, as is General Motors in Motown. Each seemed to agree all our form of capitalism needs is a little fine tuning. All in all, it was a quite different assessment than the London-based Financial Times made in its recent series on the same topic. It thought capitalism was more similar to GM, requiring a major overhaul.

Our corporate leaders obviously have great self-interest in maintaining the status quo. And they just don’t seem to get how much more critical foreign leaders are of casino capitalism; particularly its primary goal of “maximizing shareholder value,” a theory even Jack Welch, who was on the panel, recently termed the “dumbest” business idea ever. It’s quite likely most foreign investors see Goldman’s “earnings” as more of a tax on their markets than wealth creation. Still, I’m not aware that anyone with the influence of Welch and the panel has come up with anything to replace shareholder gains as the Northstar of American business. That can’t be healthy for trade and America’s reputation around the world. It was as if these leaders are living in Hollywood, where the appearances created by public relations people blind us to realities behind the scenes. 

Ironically, I had watched a very sad movie about Michael Jackson’s life the night before. I was startled by the similarities between his life and our economy. As documented by The Puritan Gift, American capitalism began when admittedly self-interested industrialists still had some enlightened sense of the common good. It was the same with Michael’s father. While very tough on his young family, Joe initially seemed genuinely interested in helping the boys escape the near-poverty in which they were raised. But as time passed, he became a man obsessed; and the innocence of the boys hardened. Youthful ballads like “I’ll Be There” morphed into far darker thrillers as Michael divorced and remarried amid varied sexual allegations. Albums like “Bad” and “Dangerous” fore-shadowed sub-prime mortgages and credit default swaps. 

The popular media preferred the public relations version of Michael. The financial reports the following day did not care about the hard realities either. They simply focused on the fact Michael is selling more records in death than when alive, probably surpassing Elvis and John Lennon in death, as if that’s somehow important to them. But it reminded me that Goldman Sachs is again cranking out the profits, largely through short-term speculation, even though many pundits have pronounced casino capitalism dead.

Those who see life a bit deeper might actually wonder if it is a good thing for young people in today’s difficult economy to part with scarce financial resources for old pop that has lost its fizzle. Like Joe, Maria’s guests concluded the one principal around which we should live is “growth.” Apparently, they, like Joe, never heard the saying: “Growth for its own sake is precisely the philosophy of the cancer cell.” Our major problem today, both economically and morally, is that America has too many houses, too many cars, too much money, too much media and so on. Putting capitalism on more fiscal growth hormones will probably prove as healthy as putting Michael on a few more medicines. John Steinbeck wisely told us: “If I wanted to destroy a nation, I would give it too much and I would have it on its knees, miserable, greedy and sick.”

The tabloid reports of Michael’s “bankrupt finances” therefore reminded me of all those economic pundits who obsess that the United States is bankrupt, and therefore demand more growth. But that depends on whether you compare our national debt to our stagnant national income or our still vast national assets. Just as with Michael, those who compare debt to income, or GDP, believe our finances are in terrible shape. Those who can also see America’s vast assets are more grateful. We know that even now Americans enjoy $165,000 of net worth, after all debts have been paid, on average while the average person in the world has a net worth of $2,500.

Yes, we’ve probably promised ourselves the health care and retirements of those with $200,000 of net worth. But we also believe that although America is ageing, it probably has one more economic performance left. Sure, America recently suffered a fairly serious heart attack when its financial system seized up. But as with medicine, economists can do amazing things these days, particularly compared to what they used to be able to do. So we don’t grow overly anxious about our economy flat-lining, as it did in 1929. Still, it would now be silly to expect our economy to give the same energetic performance it’s given during recent decades when it was on massive doses of stimulants. But we may discover it can be pleasant when economies slow dance to Moon River rather attempt the constant high of a moon walk.

But of course, as Michael’s life and death have so tragically demonstrated, if casino capitalism insists on more and more material stuff, including drugs and money, the clergy who were rarely invited to the parties will be in abundance at the wake. 

Readings & Reflections is an email publication of The Financial Seminary, a non-profit whose sole interest is to encourage the reintegration of spirit and ethics into political economy and personal finances. While R&R is written by an investment professional who gladly submits this newsletter to officials trained in the intricacies of securities regulations, nothing in it should be construed as counsel to consider any particular investment opportunity. R&R is also posted on www.financialseminary.org, along with other articles and speeches by Gary Moore, the Seminary’s founder, and other contributors. Gary Moore offers securities through NPC of America (NPCOA), Member FINRA/SIPC. Gary Moore & Company, The Financial Seminary and NPCOA are separate and unrelated companies. The political, religious and ethical opinions contained are not endorsed by NPCOA. Opinions are not intended to provide specific investment advice and should not be construed as recommendations for any individual. To determine which investments and investment strategies may be appropriate for you, consult your financial, tax or legal professional. Please remember that investment decisions should be based on an individual’s objectives, goals, time horizon, and tolerance for risk. Furthermore, any listing of a vendor or product does not constitute an endorsement or warranty of the vendor or product by NPCOA. NPCOA is not to be held responsible for, and not be held liable for, the adequacy of the information contained herein. Past performance cannot guarantee future results.