Despite all the talk of Lean Startups, millionaire app developers, and Shark Tank, we are less of an entrepreneurship economy than we were in the 70s. So says a new Brookings study(PDF).
Really? Before we had the iPhone, the Prius, Google, and Justin Bieber? Before MTV, Atkins, Pokemon, and Clear Pepsi?
When there were half as many obese adults and twice as many Germanies? That was our entrepreneurial heyday?
Apparently so. We talk about startups as job creators. But we don’t give them priority. Our question is, why?
The evidence, co-author Ian Hathaway says, “is pretty overwhelming.” Big, old firms are driving job creation and economic activity. Young firms like Twitter (though they may get the headlines) are employing less than a quarter of us.
By our estimate, about three-quarters of private-sector employees and nearly 80 percent of total employees (private + public) work for organizations born prior to 1995. This is especially remarkable considering the volume of product innovations and household-name businesses that have emerged in the last two decades.
How is it that so few jobs are coming from new businesses?
One reason is familiar to anyone who has held onto a job they hate just to keep the health insurance. Fear of going bankrupt because of an injury or illness isn’t good for risk-taking.
Now that even Republicans are saying, “keep your government hands off our Obamacare,” maybe the House GOP will decide that 50 tries to repeal it are enough.
But let’s not get distracted arguing about so-called “entitlements”; they aren’t the big problem. It’s our whole attitude toward risk-takers.
We pay lip service, but we don’t work to find the best risk-takers, extend them low-interest, long-term credit, and then share their risk and minimize it. We cling to myths about who is credit-worthy. Hint: the next Steve Jobs won’t look like Steve Jobs.
We also have a failed vision of how to take on risk. Young, new firms based on new ideas are more likely to fail, more likely to need long incubation time, and less likely to quickly become profitable.
The rate of new firm formation has fallen by half during the last three decades, and has contributed to the decline of American “business dynamism…”
In short, fewer firms are being born, and those that are born are increasingly likely to fail very early on, as are firms that survive into young- and medium-aged years. Those that are old, on the other hand, tend to persist, allowing them to constitute a larger share of economic activity in the United States over time.
The American Dream lives in the idea that you can start with nothing and create something that makes the world a better place and maybe makes you rich as well.
We talk about it, but we don’t put our money where our national mouth is. We don’t take on the reasonable and necessary risk of investing in the boldest and brightest among us. Here are some of the reasons:
Few entrepreneurs are trying to build something that will grow and last. Look at a Google search for “build company to sell”: not one top 10 result talks about it being a bad thing.
In short, not many companies are trying to be the next Facebook. They’re trying to get bought by Facebook, the way Instagram and Whatsapp did.
Serial entrepreneurship is fine. But you can’t build an economy on disposable companies.
Instead, big banks are taking the 2 trillion-plus the Fed has paid them and putting much of it into reserves. Quantitative easing was based in part on the hopeless notion that massive amounts of free cash, no conditions attached, always brings out the best in people.
Instead, banks have disproportionately used it to benefit themselves, investing in large-cap stocks and big funds, not lending to the new small-caps the economy needs.
A friend of mine, former editor of a leading financial site, told me the investor buzz lately is about emerging market small-caps. The American Dream is alive, it seems, and getting funded in Bangalore and Buenos Aires.
It’s hard to get a business loan when you already have 30 or 40K in student loans to pay off. Some just give up when the banks say no, without realizing they’re more likely to get startup funding from family and friends than a bank or angel investor. Such investments are a challenge for all but the richest families.
So why not help parents who co-sign loans for their children starting small businesses? A tax credit or insurance against loss would allow parents to invest in their children’s talent and ambition without risking their retirement savings.
Surely if we can let banks use taxpayer welfare to pay tens of millions to CEOs who caused the financial crisis, we can help parents invest in their kids.
The new Obama model, where repayments are a low, fixed percentage of monthly income, is like that of the most successful lender in the world, microcredit pioneer Grameen Bank, which has a 97% repayment rate.
It works so well that Grameen stopped accepting donations in 1995. They are one of the most consistently profitable banks in the world. Another big reason for their success? They lend mainly to women.
We underestimate the value of women as an economic power in ways that, well, hardly qualify us to lecture others. Few of those big, older firms employing 75% of us are run by women.
You’d expect all those bearded hipsters and the moneyed old guys who want to hang with them to find such blatant sexism as outdated and noxious as Clear Pepsi.
But Issie Lapowsky of Wired found one “angel investor” saying “I don’t like the way women think,” and another proclaiming he doesn’t invest in women he doesn’t find attractive.
As I revised the above I had to ask myself, is this what I’m accusing us of: being short-sighted, greedy for quick and easy profits, more eager to make a quick buck off our students and graduates than invest in them, and unfair to women who want to create new jobs, new products, new services, and new ways of doing business?
Yes, but saying it will just make some people defensive, so let me ask it this way: is there any good reason not to do the following and do as much of it as possible?
I haven’t discussed the value of raising the minimum wage. To those OldCaps who insist that it kills jobs, the New Capitalist reply (which is also Reality’s reply) is simply: you’re wrong.
1400 different studies show no effect on employment. Every time Congress has raised the national minimum wage, two things have happened: Republicans screamed and unemployment stayed the same.
Plus, consumer spending usually rose, since poor people spend more of their income. What’s more, most small business owners favor an increase in the minimum wage.
This issue boils down to a question about democracy in a capitalist society. Do America and the world continue to move to a system where a few giant entities create most of the jobs and products and set most of the rules? That’s China.
Or will the land of opportunity set an example of doing what is both right and profitable? Our failure to invest in women is the clearest sign of our failure to treasure the best of ourselves.
It’s great that women are speaking up and “leaning in” and all. (Facebook and its COO are model New Capitalists.) But in a larger sense, women shouldn’t have to lean in, should they?
How much better than a man do you have to be before male investors consider you good enough?[From TheNewCapitalist.org]
The recent Super Bowl ads were an example of companies selling a story about themselves. Coca-Cola, for example, is selling the word “happiness.”
Never mind the depletion of groundwater and freshwater aquifers in places like High Springs, Florida, and Mehdiganj, India. Never mind the obesity epidemic and the effects of high-fructose corn syrup on children.
Stories can tell you what to ignore as well as what to focus on. And sometimes those stories are complex. Coca-Cola also is using its power to help women start small businesses around the world. The happiness they want us to focus on is real, too.
As traders and investors, it’s important not to get caught up in the story of how a particular trade is going to make you money. You start to focus on any evidence, any price tick, any change in your favorite indicator, that seems to support your bullish or bearish position.
You ignore evidence to the contrary. “It’s just a little drawdown! It’ll come back, it’ll come back!”
On any jobs Friday, you’ll hear some pretty wild stories getting tossed around and often tossed right onto the trading floor. This week there’s a boneheaded article in Forbes claiming that the CBO says Obamacare will cause job losses. It doesn’t.
But to read Scott Gottlieb’s article (which, in combination with his great hair and teeth, should get him on Fox News), millions of us are going to be so healthy from Obamacare we’re going to quit our jobs to take up extreme sports full time.
One of the big stories of our time, of course, is the financial crisis. It’s actually many stories, depending on your role in it.
Right down to what you call it. The credit crisis, the financial meltdown, all that fuss in 2009?
How about the Second Great Depression? After all, if we’d responded to it the way we did in the 1930s, it could have been worse this time. We faced a bigger, emptier bubble and greater inequality than in the 1920s.
The story we tell determines the decisions we make about a situation. It even determines how much courage we can summon.
After the crisis, many people chose not to put their money in the markets at all. A friend of mine just told me yesterday he keeps his in a bank account and “under the mattress.” So do a lot of people.
It’s hard to argue against his fear. If you’re not well-informed, i.e., you haven’t gotten an empowering story to guide you, you’re in trouble from the moment you open a brokerage account.
Victims give up, they get used and abused further by forces larger than they are; they are not in control.
Heroes, no matter how dire the circumstances, are in control of their own minds and never give up. They don’t take any $&?*! from anyone, or any market.
So the first step is to understand a situation clearly by telling yourself the truth about it, even if the truth doesn’t make you feel good at that moment. And especially if the truth seems complex and boring to get through.
Remember, liars rely on your willingness to lose focus, get bored, and just hand over control to them. My broker, Paul Brittain, is one of my best teachers; so is MrTopStep’s CEO, Danny Riley, and our little group of honest and profitable traders. Most people aren’t so lucky.
So in the interest of a little Friday truth-telling, here’s one of the best explanations of the credit crisis around. It takes 11 minutes. If you want a great movie about what really happened, check out the Oscar-winning Inside Job.
Happy Friday, and keep an eye on the stories people tell you (and try to sell you) and the ones you tell yourself, especially the ones that have become habit (I have trouble with my weight, I’m not good at math, I’m shy, etc.).
Don’t let them control you and whatever you do, don’t let someone sell you bubbly high-fructose corn syrup and tell you it’s a bottle of happiness.
Guard your empowering stories like they’re money. Because one day soon, they will be.
I was talking this week to one of Chicagoland’s leading custom home builders about the changes in his company’s business model since the credit crisis. That crisis had wiped out many competitors, who were mainly investors, sort of like house flippers (remember that?).
When they folded, they left their craftsmen out of work. Lakewest kept and expanded its workforce, who are, as you might imagine, skilled, motivated, and loyal. In short, his business model centers around keeping his workers doing work at the peak of their ability.
What the stock market or even interest rates do barely touches his business. Anything short of another crash means little to him. His economics are the demand for homes in Naperville and the well-being of his employees and family.
The New Capitalist view is that the purpose of an economy is to help people create opportunities for dignified, meaningful work and through that work, a chance to pursue happiness.
But the nearly 160% rise in the stock market since March 2009 has enriched shareholders. A $10,000 investment in the SPDR S&P 500 Index ETF [SPY:NYSE] in January 2009 is now worth $20,400.
The problem is, the effect of that hasn’t trickled down to the rest of the economy, which is doing better by many measurements, but not fully recovered from the self-inflicted wound we call the Great Recession.
To borrow from President Reagan’s famous question, “Are you 104% better off today than you were in 2009?” Some of you, yes. Most of you, no, at least not in money terms.
As this viral video makes clear, we simply don’t realize how unequal we are. Studies show 92% of Americans agree that wealth is too concentrated in the hands of the wealthy. But even those people don’t realize how bad it is. It is 1929 bad. It is almost “Let them eat cake” bad.
Those 104-plus-percent gains that we talk about? 95% of that money went to the 1%. Most of it went to a fraction of that 1% that you could fit on a cruise ship.
Sure, they invested the most so they should get the most. No one argues that. But should that be the main way we measure how well we are doing? Is that what we built this machine called an economy to do?
After all, retail investors, the so-called Mom and Pop with their E-trade accounts, haven’t returned to the U.S. equity market in a big way and those who are investing are preferring small-caps and international stocks much more than they used to. So are the mutual funds that cater to retail.
In other words, the stock market is really two markets, one for big institutions and a different one, with different priorities, for retail.
Trading is best done amorally. There are limits, but when Warren Buffett does a major buy in Exxon-Mobil, he isn’t donating to the Destroy our Oceans and Suppress Middle East Democracy Fund. He’s just saying, as long as we’re still running on dinosaur remains, might as well take some of those profits and move it to better hands.
In the same way, my trading corn doesn’t mean I love Monsanto and GMO monoculture infestations. My trading cocoa doesn’t mean I support child labor. If I boycotted every product that had cruelty in its supply chain, I’d be naked, hungry, and homeless.
My trading can’t directly change macroeconomic reality, so why should I look to the news to tell me how to trade?
Take yesterday’s drop in the stock market. Was it caused by a collective New Year’s hangover? Was it because of the Fed? Or in spite of the Fed?
We all know the reason: Miley Cyrus. OK, I can’t back that up. But it’s about as good a “reason” as any other you’ll see on TV. The market dropped because it dropped. That’s all we know for sure that actually is so.
What we can do is identify the trend for a given time frame and follow it while maintaining contol over the only thing we can control: our thoughts.
And a trader’s thought should be this. If the markets are divorced from the reality we live in—and they are—then let’s accept it. Successful traders don’t worry or much care what the Fed does or doesn’t do or what the overall sentiment or buzz says. Many of them don’t even prefer one economic theory.
They follow price. They use logic on the field, compassion off the field, and humor always.
We don’t need to know a lot of the things we think we need to know. Because we often find out, after knowing them for sure for years, that they just ain’t so.
When I wrote last week’s “Marx, Keynes, Friedman, Rand, and now Francis?” I hadn’t yet learned that Pope Francis had been named Time‘s Person of the Year. I had just seen this picture on Facebook with a quote from his first Evangelii Gaudium.
I thought, “What a concise and correct argument. This man has not only a true moral compass, but impeccable logic.” It’s one of the best critiques of supply-side theory I’ve read.
When Francis calls the trickle-down theory an “opinion, which has never been confirmed by the facts,” he’s not relying on scripture or morals. He’s arguing facts. Nothing pope-y about it.
Specifically, he is saying that it is a proven fact that the pursuit of goodness, kindness, and happiness for the many is more profitable than the pursuit of mere money.
Is that true? Well, here’s one fact about money. When personal income is below about $60-70,000 US per year, people’s happiness goes down the less they make and goes up with increased income. But around $65K (depending on the study), the curve flattens and rises very little as you go into the millions.
Sure, going from 100K a year to 400K is a big change in material circumstances, but it brings headaches with it, too. And going from $5 million a year to $10 million a year doesn’t make you twice as happy. In fact, it doesn’t make you happier at all.
So if we accept it as fact that money, by itself, is no guarantee of happiness and that those who have a lot of it do not automatically become more generous or altruistic (another fact: the middle class gives a greater percentage of income to charity), then should we really base our whole economic system on that assumption?
The writers of the Declaration of Independence changed the words “life, liberty, and property” to “life, liberty, and the pursuit of happiness” for a reason.
What if, instead of making money our main economic goal, in the hope that it will bring happiness, we just pursue happiness directly? Pursue happiness, and money will come as an inevitable side effect? Is that possible?
If that still seems impractical to you, consider that our moral values didn’t start out as a way to help us get into heaven or judge others or have philosophical debates. They were the rules for survival. They stood between us and death.
Don’t lie and people will trust you and protect you when you’re in danger.
Share what you have and next time you have nothing someone will share with you and in this way we can survive the hungry times.
Be kind and life is more worth living. You’ll need that will to live when things get hard.
We passed on such truths because we had seen others die from forgetting them.
At some point in our evolution, we had the luxury of straying from those rules of survival. We began to think that lying and cruelty were more profitable and a better investment, because sometimes they were.
Now, many people say sharing is socialism and kindness is weakness.
We still value these things, but we don’t automatically see them as profitable. Lay off workers or outsource operations and your stock will soar. Your only duty is to your shareholders.
Before we go off on the evils of capitalism or corporations, let’s remember that we are part of the problem, every one of us. No one has the right to blame or judge. Not when protesters buy their poster board at WalMart, drive gas-powered vehicles to the march, and wear T-shirts made in what some call sweatshops and workers call “better than my other option, slavery.” We’re all evil capitalists, like it or not. And thank God we are.
A while back I wrote about how the markets seemed divorced from reality. The steady stock market rally since March 2009 (despite Obama’s repeated attempts to destroy America) has not mirrored an equal increase in quality of life for the middle class and poor.
Stephen Colbert had a great insight into the disconnect. Bloomberg recently reported that companies rated the worst in customer service also had the biggest growth in their stock price.
There is a growing global movement of what some call New Capitalists. We believe that the world prospers when we count profits in terms of happiness, not only money, which has a mixed record as a source of happiness.
We believe the main function of an economy is to help people create opportunities to live dignified lives, doing meaningful work.
We also believe in real results. That’s why one of our self-evident truths is that morality is nice, but people generally do the right thing only when it seems less expensive than doing the dishonest, unkind thing.
If we are to believe that Pope Francis meant what he said, and did just throw down a great economic challenge to a billion Catholics and perhaps a few billion others, then those of us who agree with him must find a way to make markets better reflect reality.
That reality is that we prosper when we are kind, generous, honest, and living out of an abundance mentality. Not when we engage in cruelty (intentional or not), selfishness, and exploitation. When we fall into a scarcity mentality and play life as a zero-sum game.
In other words, when we are creative, rather than just competitive.
We must find a way to make goodness profitable. Like the moral truths of our ancestors, it is not just a nice idea, but a matter of survival.
In his first major letter, Pope Francis had some strong and clear criticism of the excesses of capitalism as we currently practice it. He goes well beyond the now-routine call for compassion for the poor. If he continues to force Catholics and all people to consider his economic views seriously, he may end up having a greater impact than Ayn Rand.
Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably bring about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naive trust in the goodness of those wielding economic power and in the sacralised workings of the prevailing economic system.
Let’s keep in mind that his 20-year-old Renault, his residence in the guesthouse rather than the papal apartments, and his long-time advocacy for the poor notwithstanding, Pope Francis is the head of probably the world’s wealthiest institution, whose American dioceses alone spend over $150 billion annually, mainly on hospitals and educational institutions. The wealth he controls dwarfs that of any corporation.
The church began as the state religion of the Roman Empire and just kept growing from there. Its Medici popes and their allies created modern banking in the West, and it sanctioned the great source of European wealth for the last 500 years: colonization.
As the first pope from one of those former colonies, Argentina, Francis has a lifetime of experience dealing with the corruption of predominantly Catholic politicians, church officials, and business people. He has called the idea that slavery is over a “cock and bull story” and says that slavery is an active and systematic force in the lives the homeless of Rio de Janeiro, of garment workers in Bangladesh, and migrant farmers in the US. By any reasonable definition of slavery, he’s right.
More important, his message, though not original with him, is finding resonance around the world: An economy doesn’t exist simply to help a few people get rich by exploiting others. An economy exists to create opportunities for everyone to have dignified work and a productive, decent life.
With both the wealth of the most powerful CEOs and oligarchs and influence over the life and thought of over a billion people, he has the power to nudge the global economy a little bit, as do other very wealthy men like Warren Buffett, John D. Rockefeller, or George Soros.
When you get to that level of wealth and influence you start to think in centuries rather than years about economic cycles, looking for the next Industrial Revolution, the next information superhighway, the next New Deal, the next supply side.
Francis seems to be doing more than continuing the call of his predecessors to care for the poor. He is looking to reform systems and ideologies, not just individual morality. He’s beginning to sound as though he wants to use his power and have an impact. And the hysterical reaction from Rush Limbaugh and Fox News suggests that he is.
Remember that every new economic theory or movement came in response to a previous system that had turned into a system of suffering. Marx, Lenin, and Trotsky rebelled against serfdom and the exploitation of factory workers.
Keynes rebelled against unchecked, devastating boom-bust cycles (and no, he was not a socialist).
Friedman rebelled against excessive and stifling (but not all) regulation. He, too, was misinterpreted; he never claimed that the natural reaction of people who got rich in unregulated free markets would be to trickle generously down on others. He simply pointed out that asking corporations to make society better was like asking a refrigerator to teach your child to ride a bicycle. Simply not designed for the job.
In 2013, fewer people yearn for or expect a complete free market. A free market doesn’t have TARP bailouts, or the government’s (now obviously beneficial) takeover of General Motors. And if the free market means the kind of joblessness and hopelessness and insurance-lessness that 2008 brought, and a level of inequality not seen since just before the Great Depression, most middle-class folks are willing to say, to hell with some fantasy of a free market that can never actually exist. I want a decent job and I need to see a doctor.
Pope Francis does not reject the idea of a free market, just the idea that markets don’t need sensible regulation to avoid excessive greed and corruption as we have it today, not just in the developing world, but in rich countries as well. Whether or not we are seeing the beginning of Francis economics, one thing is clear. Old capitalism has grown corrupt and ineffective at solving the real problems of human society and we need a new capitalism, one that values our shared human values.
Mitt Romney may have meant something perfectly nice when he told a voter, “Corporations are people, my friend,” but in a post-Citizens United America, it sounded elitist. Still, he may have been onto something. Corporations bring out the best and worst in people. So do markets.
We all know the trait that separates successful traders from those who suffer the slings and arrows of outrageous fortune is the ability to control emotion. But what if you’re kind of a drama queen or an adrenaline junkie? What you want and what you are supposed to want will always be in conflict.
As with all things, you have to find a way to make doing good feel good and doing foolish things feel bad. Not after you’ve done it, but while you’re doing it and even when you’re still thinking about doing it.
When trading, you have to learn to enjoy the feeling of calmly following your method. When I day trade, I know I’m doing it right when it feels like deeply relaxing meditation. It’s a flow state that is physically pleasurable. It also allows me to stand apart from the madness of the crowd and choose my punches.
And that’s what makes trading with emotional detachment feel good. As I often advise people (including myself): If you can master your own emotions, then the emotionality of others becomes your secret weapon. I like that edge and I’ve trained myself to want it.
A scene from Oliver Stone’s Wall Street: Money Never Sleeps shows how much you can end up paying for the luxury of indulging your ego and refusing to admit that the market is going against your position.Shia LeBoeuf’s character refuses to get out of a losing trade.
The scene touches on a number of factors that drive us to trade emotionally: our family, our childhood, our desire to show off, the sudden change when what seemed like a huge amount to risk seems a reasonable drawdown to ride out, the inability to think straight.
By the way, note the language I’m using. “Against your position,” not “against you.” It’s never personal with the markets.
Also note that I said “pay,” rather than “lose.” You don’t lose money. You pay it to the market: a small amount for the chance to be in the trade. Plus a possibly larger amount for the drama that comes with staying in the trade too long.
Contrast that with this short scene from Trading Places, as smart a commentary on money as you’ll find. Eddie Murphy’s character reads the emotions of the people behind the prices and the other numbers.
It’s a great reminder that whatever method works for you, it works only to the extent it can show you the human emotions driving the herd. If nothing else, it’s worth watching just to hear him say, “GI Joe with the Kung-Fu Grip.”
Economic and financial numbers always have people behind them. They are metrics by which we measure ourselves. But don’t think for a moment that they are accurate measures of who we are.
GDP is a number that is supposed to tell us how successful a country is. Our GDP dwarfs all others. Yet one-fourth of all American children will have a time in the coming year when they don’t know where their next meal will come from. One-fourth will go to school hungry at least some of the time.
GDP is a number we like because we can calculate it. And because we can calculate it, it gives us a sense of control, of knowing what’s going on. It represents some of the things that make us happy, but it doesn’t calculate many things that matter.
To put it simply, if you can remember in detail what the market did today—the opening price, your entry and exit points, what the MiM showed, your P/L—but you don’t know what your kids did today in school, you are not measuring everything you need to measure to have a happy life.
This morning, the markets are holding their breath waiting for the nonfarm payroll report, also known as the “jobs number.” I think it’ll give the market an excuse to rally next week, but whatever it does, let’s not forget that each of those numbers is a person, a family, an employer who has to let someone go, an employer who can finally afford to hire, a person who won’t be going to work Monday. It’s one of the big questions: Does an economy exist to create good jobs or stock bubbles?
For another way to think about the idea that the numbers represent human emotions and desires, I’ll close with an Oscar-winning documentary, Born into Brothels. I highly recommend you spend an hour this weekend watching it.
When you watch, it will be easy to just think the usual thoughts of pity and moral outrage. But try thinking like a New Capitalist for a bit. One of the self-evident truths of New Capitalism is that, other than some natural disasters, bad things always happen because someone is being paid to make or let them happen.
So the way to solve the problem isn’t to make moral appeals, but rather, to follow the money, find out who’s getting paid, and make it unprofitable for them to continue.
On February 2nd, the world will watch the Super Bowl. If it’s like previous Super Bowls or other major sporting events like the World Cup, 10,000-20,000 girls will be bought, sold, and used as child prostitutes during that weekend in New York and New Jersey. It’s an annual marketplace for child slaves. And as we all know, markets exist to satisfy a demand, profitably.
In some parts of the world, like India, you can buy a girl for less than the price of a pair of designer sunglasses. But in New York they are likely to fetch thousands, which explains why human trafficking is a $32 billion-a-year industry. The global market for human beings is now larger than the market for illegal drugs.
And as with drugs, the key is to reduce demand, to make it too expensive—in money, in shame, in social status, in political consequences—for men to buy, sell, and rape children or to let it happen rather than fighting it. Markets are people, indeed.
MrTopStep has been very clear about the direction of the stock market: we think it’s going up. I remember a chat Danny Riley (CEO of MrTopStep.com) and I had back when the S&P 500 had just broken 1700. Looking across the street, past the “L” tracks, at the CBOT building. Danny said, “I think it’s going to 1850.”
I had just mentioned I saw 1805 and 1830 on my chart. I went back to the chart and confirmed what Danny’s 35 years of intuition and experience had told him. 1850 is going to happen.
Does that mean you just buy and hold index futures or a stock ETF? If you have deep pockets or don’t want to check your portfolio often, maybe. But there will be a lot of volatility along the way, as traders play hurry up and wait, waiting for the next piece of important news. That volatility will mean added risk for everyone and rewards for a few.
If you trade the news, you’ve got a lot to choose from. Some of it might even be true.
Citigroup, BofA and other banks are hoarding cash and slowing their purchase of treasuries, on worries that the Fed will be tapering its purchases as well. Well, if they have a lot of cash on hand and they don’t want to put it into bonds, then stocks are probably what they’ll buy.
The Bank of England is talking about ending its stimulus measures because they are more confident about the British economy.
China’s manufacturing index came out higher than expected, pushing Asian stocks higher. Asia is, more often than not, a prelude to the US markets’ open. China being the world’s second largest oil importer, the news has also given crude a bump.
Shoppers may soon discover that most Black Friday bargains are actually a sham and nearly all major retailers post a higher profit margin on these days than average.
Some retailers have to be extra profitable, to cover some unplanned expenses. Wal-Mart has hired extra security guards to stop the rash of Black Friday brawls over crappy $40 tablets and cheap gifts for relatives they don’t like. WalMart still hasn’t paid the $7000 fine for the 2008 death of a shopper in a stampede.
There is one important piece of news, which will likely get overlooked in the short attention span theater this week. Rather than using low-interest credit to expand and hire new people, large companies are firing workers and reducing compensation.
Overall, the Obama economy has added jobs for 44 months straight. But unlike previous recoveries (and like the slow pre-war recovery from the Great Depression) the job growth has been disproportionately the work of small businesses and start-ups.
Major corporations, whose goal is to please shareholders at the end of every quarter, are choosing to cut payroll costs to make quarterly earnings look good. All but the looniest economists agree that this is bad for the economy in the long run. Even some CEOs agree. But major corporations still drop people to raise profit, adding to the bubble.
The New Capitalist definition of “economy” is “a system for helping people create opportunities to do their best and most fulfilling work.” By that definition, this firing of employees to hoodwink shareholders into thinking you’re profitable is terrible economics and bad business.
So what are we to do, when we have information overload made worse by unreliable reporting and outright propaganda? How can CNN remain the “most trusted news source” when even their couch is sponsored by BP? The answer trend-followers give is that the news is already priced in, long before it becomes news. In other words, if it’s news, it’s old.
Therefore, the wise strategy is simply to follow the trend. Don’t try to predict with 100% certainty, don’t chase it, don’t get emotional when it fluctuates along the way. Just follow it.
The market will tell you what is likely, but never certain, to happen. This is a matter of probabilities. Remember, the only thing bought and sold in any market transaction is risk—not crude oil, not corn, not the rebundled mortgages of middle-class families who have been lied to—but risk. Trading is not just a risky business. Risk is our business. We don’t fear or crave it; we buy and sell it.
What can we control and be sure of, amidst this blizzard of “couchable” news? A method we trust in, because we know it’s trustworthy. A while back I asked Jack Broz, one of the most consistent bond traders on the CME floor, how he stays so cool even when everyone on the floor is freaking out. He said, “With experience, you develop a method that you know works. Then you can trust it to do what it does and you don’t second-guess it.”
Out of the night that covers me,
Black as the Pit from pole to pole,
I thank whatever gods may be
For my unconquerable soul.
In the fell clutch of circumstance
I have not winced nor cried aloud.
Under the bludgeonings of chance
My head is bloody, but unbowed.
Beyond this place of wrath and tears
Looms but the Horror of the shade,
And yet the menace of the years
Finds, and shall find, me unafraid.
It matters not how strait the gate,
How charged with punishments the scroll.
I am the master of my fate:
I am the captain of my soul.
William Ernest Henley
The other thing we can control is attitude. Am I going to go chasing after every bit of news, every rally or selloff that the algos create to run the stops, wash out the scared and stupid money, then come back to where the price was an hour before?
No. Don’t chase markets, especially not on a week like we’re in for. Let the market come to the level you picked as your solid footing.
So I will focus, not so much on the news as on the two things I can control: attitude and risk.
I’ll be focused on limiting risk by using options. It’s not the only way or the best way. It’s just the way that will work for me this week. There are several ways you could use options this week.
A bull call spread in the e-mini S&P or crude oil would allow you to weather the volatility. Give up the false attraction of “unlimited profit potential” and go for the solid profit it can give you while it reduces downside risk.
If you’re trying to decide whether Japan’s positive economic news will be overshadowed by China’s and whether this means the yen will finally go up, cheap out-of-the-money calls with plenty of time on them is a way to be in the game with controlled risk, as well as a hedge if you are shorting the futures or playing the yen-Aussie carry trade.
You’ll find similar opportunities in every market. Corn is at record lows right now, for example.
I can’t tell the market what to do and I can’t control China. And I’m not Ben Bernanke’s speechwriter. And not even the Fed can get the banks to start lending and companies to start hiring and stop firing employees. But I am, as the line goes from Nelson Mandela’s favorite poem, “Invictus,” master of my fate and captain of my soul.
Or to put it less abstractly, I can choose to focus on following the trend and controlling risk using a sound method like options. I can choose to ignore the trivia of cable news and the temptation to fall into fear and greed.
If you’ll forgive a little rhyme with my reasons for urging caution in what is going to be a stormy week in the markets: I shall blend with the trend until the end, when it bends. I will not pretend that I comprehend what the market portends. Not even Ben can force banks to lend or employers to spend. On cable news we cannot depend to do anything but offend and condescend and pull stories out of their rear ends. I recommend that you, too, follow the trend, my friends. And ignore CNN.
Tomorrow Americans have a chance to give thanks, to each other, to the country, to the opportunities this miracle of a nation affords us.
Gratitude is not just nice. It is a key to sanity, to clear thinking, and to moving from thoughts of scarcity to abundance. Before you can have what you want, you have to want what you already have.
This is especially true for those of us whose business is risk. Gratitude is a way to stand on solid ground while you reach for that brass ring.
At the first level, scarcity thinking often leads to trading scared and investing with “scared money.” Scared money is any money you cannot afford to lose.
That isn’t a mathematical calculation. It’s an emotional calculation. Just because the bills are paid and you’re saving money every month doesn’t mean that $10,000 or $25,000 (or millions) you’ve put aside is “risk capital.” If your self-worth is tied to your net worth, if you’re secretly hoping to get that girl, drive that car, live in that zip code, or move in that social circle with the profits you make in the markets, then the risk of losing at trading is far beyond the numbers.
If you need to be right, to be smart and skillful and impressive, then you’ll take a $100 loss and turn it into $1000 in less time than it takes to brew coffee, just to avoid admitting you were wrong about the market’s direction at that moment.
However, if you come at it with the mindset of, “Right or wrong, I’m okay. Win or lose, I’m okay,” you multiply your chance of success.
If you come at it with, “Thank you for the chance to earn an income this way. Thank you for letting me be born in a place of opportunity. Thank you for the education that allows me to understand price charts and economics. Thank you for friends and mentors and a fast, stable internet connection,” you’ve got a good chance of success.
Because being able to say thanks means that you know you are more than your trading record, you are greater than your account balance. You can’t control what the market does or the world does. You can only control your own mind.
The Atlantic had a recent article titled “How Poverty Taxes the Brain,” about how the feeling of being poor, the worry about having “more month at the end of the money,” lowers people’s IQ an average of 13 points. That’s the same as the effect of chronic alcoholism.
Feeling poor makes you think constantly about the lack of money, leaving less mental bandwidth for thinking about other things, except as just more causes of stress. Everything seems hard to do, even impossible. And you feel as though you have to do all those hard things alone and without allies or support. Ever felt that way?
The researchers who wrote the article and the book it’s based on, Scarcity: Why Having Too Little Means So Much, found that people who felt they didn’t have enough money also tended to have more problems as parents and were less likely to take their prescribed medications. They had more marital and relationship problems. They had worse health. They drank more.
Understand, they didn’t study people in abject poverty. They studied people in all socio-economic levels around the world and the results were consistent: worrying about lack of money makes you less able to notice other things. It uses up your mental bandwidth. And it doesn’t matter how much money you have. It’s how much you think you should have and therefore, how much you think you lack. Just ask a former millionaire what’s on his mind.
People who lived in an attitude of scarcity also failed at simple tests of financial decision-making, like is it better to put off a $1000 repair on your car or find the money somehow rather than risk losing your vehicle? They had trouble saving. They had trouble resisting sales and “No payments for the first 6 months!” easy credit offers.
Is it any wonder, then, that you trade best when you aren’t worried about the outcome, when you’re able to tune into the market and follow a plan with discipline and joy?
It’s hard to hear what the market is telling you, if it’s being drowned out by the voices of fear and worry about money. These are the voices you hear when you live in scarcity, or as I sometimes call it, “Scare City.”
If scarcity is the disease, gratitude is the cure.
John Kralik was a lawyer who practiced on Wall Street for some of his career. In 2008, he was living in a tiny apartment that froze in winter and overheated in summer. He was facing a second divorce, $400,000 that clients hadn’t paid, and kids who kept their distance. He was 40 pounds overweight and just before Christmas, his girlfriend dumped him. Then came 2009.
He decided to start writing a thank-you note a day to people who had done him some good turn, whether a close friend (he still had some) or a Starbucks barista who remembered his name. In that year when so many lives fell into chaos, he rebuilt his. And it all started with gratitude.
The truth is, it always starts with gratitude. John wrote a book about it, called A Simple Act of Gratitude: How Learning to Say Thank You Changed My Life.
It’s an ancient idea. Every culture has had a Thanksgiving celebration of some kind. Of course, it’s something we ought to do every day, but setting aside a day to say thank you is a good way to reset our priorities and ask ourselves the questions that matter.
But when life finds you in “Scare City”—a place of helplessness, self-pity, and desperation, it can be hard to even think of people to say thank you to. You don’t know where to start.
Start small, start simple, start obvious. Are you reading this on a computer? Thank the people who made the computer. Thank Bill Gates and Steve Jobs and the engineers who wrote Windows and iOS. Thank the brilliant people who created WordPress (I do every morning.) Thank the coal miners who provide the electricity and the solar engineers who will soon (I hope) take over. Thank whoever made your coffee, ground your coffee, shipped your coffee, grew and picked your coffee. And thank the commodity traders who kept the price reasonable for your coffee, toast, OJ, and oatmeal, both for you and the people who brought it to you.
So much hard work and creativity and generosity has gone into your day already! So many people to thank.
By the way, if you have any cranberries this holiday, thank the farmers who wet-pick the berries as they float in their massive bogs, seen in the photo above.
And as a thank-you to all of you, MrTopStep is happy to give you The Science of Getting Rich, the brilliant success classic by Wallace D. Wattles on how to train the mind to get rich and leave the Scare City mindset behind once and for all. If you haven’t read it, get ready to have your life changed. And if you really want to thank us, leave a comment, share this article, and pay it forward. Happy Thanksgiving.
Twitter’s (TWTR:NYSE) stock price took the fast route into overpriced territory yesterday, but that’s not the important story. There was a time when responsible investors would ask, “What do they make? What do they do?”
While the run to $50 a share is fueled partly by the now-familiar bubble thinking that “if everyone else says it’s worth this much, it must be,” that doesn’t make Twitter the new Pets.com. Perhaps it represents something more: an attempt to put a price on an idea, an idea so dangerous governments fear it and ban it, an idea so vital people risk jail to obtain it and spread it.
The idea? That we need not be alone, that together we are greater than the sum of the parts, that we can be an irresistible force for good. For fun, for inspiration, for collaboration, cooperation, even conspiracy to overthrow a dictator.
What began as a way to answer your friends’ what’s-ups is now a key to brand identity, celebrity, leadership and revolution in those three areas and others. Carl Icahn can tweet about Apple and affect its stock price. Anthony Weiner can tweet a picture of his junk and end his political career.
Justin Bieber alone reportedly uses 3% of Twitter’s server resources; he also just invested $1.1 million in startup ShotsOfMe, a potential Facebook rival. If he and his rivals for Twitter #1, Lady Gaga and Katy Perry, all decide to move their fans elsewhere, that’s nearly a fourth of Twitter’s user base. That’s how vulnerable Twitter might be.
By the same token, if all three tweet even subtle support for Hillary in 2016- and Perry’s open campaigning for Obama suggests she might–Chris Christie will lose the Twitter vote. And yes, there is a Twitter vote. How do you accurately price such power?
If Twitter (TWTR:NYSE) the publicly traded company fails, it will be because of a failure of the revenue model, not the underlying product. Because the underlying product is us, free to share our lives and thoughts, however boring or fascinating or awful or beautiful. That product is not a commodity and cannot be commoditized. It is an essential human experience, given a new pathway.
A failure of the Twitter stock will also reflect a failure of what I call old capitalism to measure what ought to be measured.
GDP is an example of this failure to quantify properly. If a country produces a lot of criminals, that usually costs society. An ounce of weed can put away someone for years, thanks to a misguided but profitable “war on drugs.” But we don’t count that cost in our debit column any more, because our prisons are so heavily privatized that prison corporation profits help boost our GDP.
We don’t count the loss of human talent, the cost to families, the cost of turning nonviolent offenders into angry career criminals. And needless to say, the largest publicly traded prison corporations are, as Motley Fool put it, “solidly profitable.”
So what do we measure to judge a company with no profits, a technology built largely out of open-source code and easily replaced by open-source alternatives? It exists because its users not only needed it, but largely created it. It was early Twitter users who created @username, #subject, and RT retweets, out of necessity. Necessity to do what? To talk to specific people (@), about specific things (#), and to share ideas worth sharing (RT).
Twitter wasn’t a case of “if you build it, they will come.” It was more like, lay a bare foundation, and they will come and build the rest for you and for themselves. It’s like the founders cleared a patch of a cornfield, and then people came and invented baseball and a way to broadcast the games worldwide.
How do we quantify such a force? You can tweet, “Tuna sandwich for lunch. #nomnomnom.” And you can tweet, “Held grandpa’s hand for the last time. #heartbrokenandgrateful.”
During the Rwandan genocide of 1994, a group of pastors famously wrote a letter to their leader, Pastor Elizaphan Ntakirutimana, who was later convicted of aiding the soldiers who massacred them. The letter said simply, “We Wish to Inform You That Tomorrow We Will Be Killed With Our Families.” And the next day, they were. It was 71 characters. If they’d tweeted it, who knows who else, besides the murderous pastor, would have gotten the message?
President Clinton has apologized to Rwanda for his failure to stop the genocide, so much that now he is hugely popular there. If he had faced a social media onslaught like President Obama faces today about Syria, he might have acted. Twitter gives voice to the desperately voiceless.
The activists in the Arab Spring revolts used Twitter and Facebook not only to coordinate themselves, but to tell the world what was happening. In Syria, when journalists were banned, cell phone videos, uploaded and retweeted, were the main source of breaking news. After Hosni Mubarak was overthrown, one Egyptian famously named his new baby Facebook.
It’s important to remember, however, that technology was not what made the difference. Much of the Tahrir Square protest was coordinated by a little-heralded woman armed with about a dozen borrowed cell phones. People who need to come together will find a way, even in the face of tyranny. Twitter happens to be a good way, right now. A decade from now, will we still be tweeting?
Probably not. So if Twitter represents just the technology by which people tweet, it’s not a good long-term investment. It may be profitable for a few years thanks to advertising, but if the ads are more of a nuisance than a source of entertainment and value, people will switch to an open-source alternative, which will be just as good. It’s the risk iOS 7 faces from Android.
The letter to shareholders included in the IPO filing seems aware of that, selling a mission more than a service:
We started with a simple idea: share what you’re doing, 140 characters at a time. People took that idea and strengthened it by using @names to have public conversations, #hashtags to organize movements, and Retweets to spread news around the world. Twitter represents a service shaped by the people, for the people.
The mission we serve as Twitter, Inc. is to give everyone the power to create and share ideas and information instantly without barriers. Our business and revenue will always follow that mission in ways that improve–and do not detract from–a free and global conversation.
Whether or not this specific technology or even this specific company last, the ideas Twitter (and Facebook and Google and even MIT and Harvard’s open courses and Wikileaks) represent are a genie that can’t be put back into the bottle.
We worry about privacy the same way previous generations worried about letting women vote, or desegregation, or globalization. Those things are here to stay. In the same way, the generation represented by the Twitter following of Justin and Katy and Lady Gaga (and even Barack Obama, the Arab nonviolent revolutionaries, and Pope Francis), accept and expect to share their lives to a degree that older people find weird and, for lack of a better phrase, OMG, TMI!
Geography means little now. You can study, flirt, and conspire on a Google Hangout. I coach my writing students via Skype. And when I’m lonely, I can send and receive tweets to and from anywhere except a few places. Those are places like North Korea and Yemen, whose leaders, like abusive husbands, don’t want their victims to know that a better life is possible. With cell phones now as cheap as $10, we shouldn’t bomb such places. We should flood them with cheap phones that tell people, you are not alone.
And that is the simple, elegant, and transformative business model of Twitter. The problem is loneliness. The demand is for a way not to have to suffer alone, or go through joys without sharing them. The supply? A simple way to share our life and thought and not be alone.
It is a demand that won’t go away. Loneliness has always been there, but now, we expect a solution. We expect life to come with a share button. Whether we’re announcing our marriage or breakup or vacation plans or calling for justice for a rape victim in a country like India that is unused to hearing such messages, sharing is the new normal. That is something we have already invested in as a society. It’s an investment we will hold onto lifelong. And it will pay huge dividends, long into the future.
Before we look to the markets to reflect the economic reality 99% of us live in, we should recognize that the big stocks and big traders who move the market are multinational corporations, not citizens of the United States or any other country.
They don’t pay much tax in the U.S.; their manufacturing is done overseas; the bulk of their employees are outside the U.S. And much of their stock is owned and traded by foreign citizens, banks, and funds or by other multinationals.
In 2005 and 2006, Citigroup sent secret memos to a few of its wealthiest investors, advising them on how to profit in the coming “plutonomy,” in which wealthy corporations would control Congress and the presidency and maintain a display of democracy while ruling in secret and arranging tax and other policy to benefit the wealthy. The memos were leaked. You can read them here.
If you read them, you see that Citi is not saying the plutonomy is a good thing. They’re just treating it as a fact. And here’s how to profit from it. That’s what investors do. We profit from whatever is available as long as it’s not too evil for your conscience, your PR or whatever legal authority can get to you.
Good traders don’t trade their politics. They accept that only the collective knows where it’s going to go next and only the collective knows why. Or maybe it doesn’t. Like most Americans, I lean towards liberal and Democrat. I’m not a fan of some Obama policies, like drone wars and a Trans-Pacific Trade Alliance that threatens U.S. sovereignty. But I didn’t for a second support the Iraq war and my health care plan would have been one sentence: “The minimum age for Medicare shall be reduced from 65 to -9 months.” Done.
But will I pass up a great crude oil trade because my last two vehicles were a 50mpg Honda and an electric scooter? No. Boycott cigarette makers? Yes. But nearly everything we touch has cruelty and exploitation in its history and we’re all accomplices to the crime. Our tomatoes are picked by slaves, our metals are mined by indentured miners, our chocolate is harvested by children. We need to change the system that makes such crimes profitable.
But until we do, the markets will simply allow us to buy and sell whatever is currently available in the system. Good traders know, the only commodity we ever really trade is risk. So far, we have not found a way to quantify the risk of corporate hegemony. Though it’s all around us. Just look at global warming. Even if you are one of the few crackpots who still deny it, you can’t deny the multi-trillion-dollar opportunity it represents.
Many people, including former IMF chief economist Simon Johnson, are wondering why the markets seem so unconcerned by the damage the Congressional Republicans are doing to the strength of the U.S. dollar and the reputation of the U.S. as a superpower whose word should be trusted and sometimes obeyed.
When Jay-Z flashed bundles of euros in a music video a few years ago, he was just showing what a lot of people were saying privately. Earlier, when Saddam Hussein suggested that he might demand payment in euros, not dollars, he didn’t just piss off the U.S. government. He angered Exxon Mobil and China Oil. After that, his fate was sealed.
The world has dictators worse than Saddam, who was for over a decade a key U.S. ally. Those dictators don’t sit on 10% of the world’s known oil reserves. Through all of that horrible, stupid oil war, Operation Iraqi Liberation (O.I.L.), smart, trend-following technical traders were blending with the markets profitably and treating the news as noise. Not because we don’t care. It’s because the market isn’t the place for caring. It’s a place to buy and sell risk.
Why do so many corporate CEOs seem unconcerned by the potential weakening of the U.S. government—a weakening as dramatic as the emergence of the U.S. in 1945 as the world’s greatest superpower and, through Bretton Woods, the dollar as the world’s ultimate reserve currency? Because U.S. power doesn’t really concern them.
In fact, a weaker U.S. government makes it easier to buy Congress members, accelerate the movement of taxes from the middle class to the wealthy, and have the U.S. military keep resources cheap and available.
The markets are not divorced from reality, or what Karl Rove calls “fact-based reality.” They have a separate but equal reality, where having a tax home in the Caymans and laying off workers are good things because they boost quarterly returns to shareholders. When Milton Friedman famously said that corporations exist to serve the interests of their shareholders, there was more to that paragraph. He also said, and that’s why corporations shouldn’t run things. Compassion is not always in the corporate interest.
Should it be? Yes. Can it be? As a New Capitalist, I say definitely yes. If and when we make compassion more profitable than cruelty. Until then, we slouch inexorably toward the plutonomy Citigroup’s top investors are preparing for.
While these two economies, the multinational corporate economy and the economy that affects American workers, businesses, and citizens, are not completely divorced, the two economies are separated and they’re seeing other people.
And they’re wondering if their differences are irreconcilable.