Good news! A report in the paper a few days ago said that all of the wealth that was lost when the financial markets collapsed during the Great Recession a few years back has now been recovered. This occurred thanks to a large increase in the stock market, and to a lesser extent by a more modest increase in housing prices. Before you go hog wild and start investing in the market, or even engaging in a bit more consumer spending, please read the fine print. Most of the gain has come from rising stock prices. The wealthiest 10% of American households own approximately 80% of all stock. The rich are again getting richer. Yes, the wealth has “returned,” unfortunately, it went to fewer people than it came from. Increased wealth from the slight rise in housing prices (far more Americans have their primary wealth tied up in their homes) was much less, but still positive.
Here’s what will happen (if I had some extra money, I’d wager it all on this). The increase in stock market values will lure some of the marginal investors, the little guys, back into the stock market in order to share in the gains. It would be foolish to miss out on this rising tide of wealth after all. When enough of them have invested, the more savvy investors will start selling short, in essence betting that the market will go down. Then it will go down. They’re called “market corrections” but they really just divert money into the “correct” pockets (hint: it’s not your pocket). Those who have sold short will again see their wealth increase, while the little guys will again lose wealth. But the wealth didn’t really disappear; it just relocated to the bank accounts of those people who are wealthy enough to know how to game the system.
I first stated learning about our nation’s stock market at an early age, when I was taught that it was a mechanism that allows a large group of small investors to own shares of large corporations. We choose to invest in companies that have a bright future, so that our wealth can increase as the company profits from its good business practices and decisions. It sounded like a fine idea to me. I owned stock in a local manufacturer long before I was licensed to drive a car. Its stock price (mostly) rose steadily, and they sent me a little dividend check every three months.
It’s odd how as we get older, we begin to get a fuller picture of how things really work. When I was in graduate school, I was actively engaged in the full-time study of financial markets in pursuit of an advanced degree. In order to keep current on financial affairs I subscribed to The Wall Street Journal and looked it over daily for new nuggets of information that would further my education. One day I was reading the story of a man who had attempted to “corner the market” in potato futures. His plot was discovered and he was banned for life from trading in the commodities market. When asked for his reaction, it was reported that he shrugged it off, responding, “It doesn’t matter. We’re all just gamblers. I’ll find somewhere else to gamble.” He wasn’t an investor in his nation’s future but instead just played his hunches for profit, even if it required breaking the law.
That was an eye opening moment for me, but it didn’t quite open them wide enough. After I graduated, I wanted to get a job in the financial industry, so I applied at one of the largest and most prestigious brokerage houses. I was interviewed and tested. Turns out that while I was technically well versed in the subject, I wasn’t considered to be a top-notch salesman, which is the primary requirement of the job. I’m way too honest with people to be an effective salesman. A friend of a friend that I knew from college did get a job with the same firm. He had graduated with mediocre grades studying marketing, which is considered the lowest academic group on the business school totem pole. I was in the top ten-percent of my class studying finance (a more challenging discipline). I heard that he did very well in his career because he could sell.
I had an earlier experience in college that also proved eye opening. The first history class I took included the happenings in the Roman Empire under the first emperors. The information on debauchery and excessive over-indulgence was far more than I had ever been taught by our sanitized textbooks and old movies. I love history, especially when you can explore it in more depth and get to the root of issues. I was at my local library the other day and saw a book entitled Smuggler Nation that was written by a history professor at Brown University, so I took a chance and picked it up. It has been an eye opening experience as well.
I’ll probably be writing more about this book later, but for now I can say that illegal smuggling is heavily intertwined with our nation’s history. The Boston Tea Party is considered a primary seed of our nation’s quest for independence. But it had more to do with the population’s preference for lower cost tea smuggled into the country through the Dutch than for a desire for self-determination. The American Revolution was financed from profits made by smugglers. John Hancock is known for his prominent first signature on the Declaration of Independence, but the Hancock family fortune was derived in a large part from the profits made by smuggling. Another signer of the Declaration was Robert Morris, known to history as the “Financier of the Revolution.” Care to guess where his fortune originated? If you guessed “smuggling” then you’re catching on. In later years, Morris was financially wiped out by unwise land speculation and spent some time in debtor’s prison. Sometimes you’re lucky, other times, not so much.
During the War of 1812 (which has its primary roots in illegal trade) it might have been possible for the U.S. to conquer all of Canada because the defending British troops there were cut off from supplies and on the brink of starvation. They were saved by profit-mined Yankee farmers (who were also smugglers) when they drove herds of cattle north across the Canadian border and received three times the price that they could have gotten locally. It always pays to read the fine print, especially history’s fine print.
In other news, the number of Americans seeking unemployment aid fell again, driving the four-week average down to its lowest level in five years. We now have a rising stock market and increasing job growth. This follows closely on the heels of a tax increase on our nation’s highest wage earners. This is exactly opposite of the prediction made during the most recent election by those who pushed for a tax cut for wealthy “job creators.” Wouldn’t it be nice if voters could possibly retain this information for at least four years?
However, I don’t really see that much improvement in our local economy, especially among lower wage earners. This group of people also had a “tax increase” which was actually a result of a temporary cut in social security taxes that was allowed to expire at he beginning of the year. The result was that the group of people who could least afford to pay more taxes saw their take-home pay decline. Retailers that depend on this group of consumers, such as Wal-Mart and Family Dollar Stores, forecast that their sales would suffer. Despite this prediction, Wal-Mart stock has increased since the beginning of the year, while Family Dollar’s stock has actually fallen slightly.
Another recent story in the financial news details the return of American manufacturing jobs. Companies including General Electric, Hewlett-Packard, and Apple are relocating some of their overseas manufacturing back to the U.S. because of huge savings in transportation and logistics costs, combined with high productivity of American workers. But exploring the fine print tells us that the items being manufactured cater to the high end of the market. Of course, that’s where all of the money is. Our products designed to sell to our nation’s poorer workers are still manufactured overseas by even poorer workers.
Do yourself a favor and don’t stop learning. Dig deeper into the roots of stories. Explore historical contexts and above all, read the fine print.
Robert Morris, known as the "Financier of the Revolution,"
wealthy smuggler and unwise land speculator
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