Teacher pay: Sketching a win-win solution | IN 60 SECONDS


Amid this spring’s teacher walkouts, the
outlines of a sensible deal on teacher pay seem pretty clear. First, there’s a need for additional taxpayer
support. Terrific teachers are woefully underpaid and, in many states, average pay should be substantially higher. Second, an across the board increase isn’t
the whole answer. Some lousy teachers are currently overpaid,
even as exceptional teachers are wildly underpaid. Current pay scales simply
don’t create room to use or appropriately compensate teachers who are doing great work. New taxpayer investment should help change
that reality. Third, retirement benefits for educators
cost twice as much as those for other workers. Teachers need to do their part, and agree to overhaul outmoded and expensive pension systems. Doing so will help free up substantial dollars for teacher take-home pay. Such a deal on taxes, pay systems, and pensions
involves short-term sacrifices. But such a bargain has the potential to yield
big benefits for students, teachers, and taxpayers. Do you think we should raise teacher pay? Let us know in your comments. Also, let us know what other topics you’d like our scholars to cover in 60 seconds, and be sure to like and subscribe for more research and videos from AEI.

Leadership: Does it pay to be nice? | IN 60 SECONDS


All right. Anything in my teeth? As a former professor who taught entrepreneurship, I often get asked: “What are the secrets to good leadership?” Here’s one piece of advice: Be nice! Now,
niceness might seem like a naive strategy, especially in this climate. It
feels like our society today has become a battle of competing pessimisms.
Wouldn’t an actively nice leader seem out of place? But that’s exactly the
point! These days, warm heartedness is radical and unexpected… and it turns out,
also very effective. In one 2013 study, researchers found that a positive kind
leader is judged to be 132 percent more effective than an unpleasant leader. Now,
niceness does not mean we need fewer disagreements – or less debate. Business
and policy require a healthy competition of ideas. But our intellectual contest
should be fierce and friendly at the same time. So leaders: Get nice! It will
help you build a sustainable success and a better world! To learn more about the
competitive advantage of being nice, click the links in the description below.
Also, let us know what other topics you want AEI scholars to cover in 60 seconds.

How Buybacks Have Warped the Stock Market & Boeing (w/ Dr. William Lazonick)


MAX WIETHE: Hello, everybody. Welcome to Real Vision’s Interviews. I’m Max Wiethe, sitting down with Dr. Bill
Lazonick of the Academic-Industry Research Network. As well, Bill has been an economics professor
at many different academic institutions over the course of his career. We’re here today to talk about your recent
book that you’re publishing, Predatory Value Extraction, and to understand how stock buybacks
and the warping of the stock market has really disrupted what is actually driving stock gains
over the past three to four decades. Thanks for coming in today, Bill. WILLIAM LAZONICK: Okay. My pleasure. MAX WIETHE: Why don’t we just start out with
what you do at this? It’s a nonprofit organization, which focuses
mostly on economic research, if I’m not mistaken. WILLIAM LAZONICK: Yeah. Basically, I’ve had a career as an academic,
been a professor at various universities, as you mentioned, and I set this nonprofit
up, this 501(c)(3) nonprofit up almost 10 years ago, to do research outside the university
for a variety of reasons, and I’ve been working with a number of people, now it’s about 15
people who I’m working with regularly who are in various parts of the world who have
worked with me, some for as long as 20 years to do research on how companies become innovative,
how they create products that people want to buy at prices that they are willing to
pay, and can compete on national and global markets. What happens once they actually become successful
to the profits that they make, so the profits are really outcome of some value creation
process. That makes these companies successful, which
I can get into how that works. Basically, once they are successful, there
is a huge pot of gold there in these companies, and if someone can say, that’s mine, and take
that money, they can become very rich. If it’s not theirs, someone’s got to talk
about that. That’s what I do. A lot of the changes that I talk about from
going from companies retaining their profits and reinvesting them in their organizations
to what I later, in the ’90s, called downsizing the companies and distributing cash to shareholders
not just as dividends, but stock buybacks, a lot of that transition took place in the
1980s when companies started articulating and imbibing this idea that company should
be run for shareholders. I was at Harvard Business School in the mid-1980s
when that ideology came in in 1984, no one was talking about that at Harvard Business
School. 1986, they were. There was an easy explanation for that. 1985, Harvard, went out of its way to hire
the guru of maximizing shareholder value, a guy named Michael Jensen. I came out of economics by that time. I had been in the Harvard Economics Department
for over a decade and a half, I was now at Harvard Business School. I saw that no, those aren’t the people are
creating value. Shareholders are just buying and selling shares
on the market. People have gone to work for these companies,
often for decades. They are the ones who create the value. We as taxpayers, have supported these companies
with the infrastructure and knowledge, we should get a decent tax rate back. This ideology is not an ideology that’s being
put forward or it’s being put forward as an ideology of value creation, but it’s actually
an ideology of value extraction. I started researching that and learning about
how that was going on and did that, within the university structure, often with collaborations
on people not just looking at the United States, but places like Japan, Korea, various countries
in Europe, then got into looking closely at China, India, and trying to understand basically,
what we’re talking about is capitalism. How countries get rich and what happens when
they get rich and whether there is a way in which we can explain, particularly what’s
going on in the United States, of this extreme concentration of income at the top and the
loss of middle class jobs, extreme income inequality. I started this organization outside the university
for various reasons. In, I think it was 2010, there is an organization
that started up which has its offices probably about a 10-minute walk from here, called the
Institute for New Economic Thinking which started it up and I’ve gotten through this
organization, the Academic-Industry Research Network. Various grants from them to do research, they’ve
been one of the one of the main funders of the research. I pulled together, this group of people, many
of them who are doing PhDs, now have academic jobs. Some of them are mid-career, who were in touch
with basically all the time. It’s almost a virtual organization but we
can write about things that have been going on historically, can write about things like,
let’s say, the Boeing crashes that have occurred more recently. We have a certain level of expertise that
I don’t think actually is things quite unique in terms of academics and really digging critically
into business and saying, not just the dark side, but the bright side. How businesses become successful. That’s what we’re mainly interested in, is
how you can understand the way the central institution in our economy, the business enterprise,
some which grow to be bigger than whole countries, small countries, how they actually can create
value, share the value with their employees, not just because they wanted to show the value
of in place, because it helps those employees get some incentives to be more productive. It’s the result of them being more productive,
how you get this positive dynamic going on in these companies, which we call retain and
reinvest and how we can all be better off as a result. Then critiquing a lot of what’s going on in
the last particularly last 30, 40 years, in people who have often very little role, if
any, to play in these companies claiming those profits of theirs, and even more being able
to lay off 5,000, 10,000 people and claim. The stock price goes up and they gain, how
that can happen. The book that just came out this past week,
which with a colleague of mine, Jang-Sup Shin, who is a professor of economics in Singapore,
he’s originally from Korea, it’s called Predatory Value Extraction as you mentioned. The subtitle summarizes the book, it’s How
the looting of the business corporation became the US norm, and how sustainable prosperity
can be restored. By sustainable prosperity, it’s a shorthand
for stable and equitable growth that we want. Growth, it’s stable employment, equitable
distribution of income, which we have neither of those. We want to get productivity growth, which
can support those things. Right now, we have sagging productivity growth
problems, real problems of many US companies competing in global competition, partly the
because of what I call the predatory value extraction, this looting of the business corporation. That has been something that we’ve been doing
a lot on this group of mine and getting a lot of visibility for that research through
various outlets because it strikes a chord with a lot of people who are saying, where’s
all this inequality coming from? MAX WIETHE: Well, that visibility, I came
across your New Yorker profile, and I got to read about some of the research you had
done and it really sounded like something that I felt would resonate with a lot of our
viewers here at Real Vision. We’ve covered buybacks, and we’re very interested
in what’s driving the stock market. You mentioned briefly before that you’re not
just looking at the bad, looking at the predatory value extraction, you are also looking at
what makes these companies good. That’s really how you started out your book,
was looking at the theory of the innovative enterprise, as you call it. I think that’s a great place for us to start. WILLIAM LAZONICK: Well, yeah. Trying to summarize in a 30-second something,
that’s going to be another book because there actually is a real problem if you’re trained
as an economist as I was. I’m a PhD economist, got my PhD at Harvard
early 1970s. Things have basically in this regard have
gotten worse since then. Economists generally, PhD economists, do not
understand how business enterprise operates. They see the states, they see the markets
and in fact, what is being taught in introductory economics courses every year and it’s been
taught to millions and millions of people since a guy named Paul Samuelson wrote his
introductory textbook in 1948 is– and I’m not going to get into this other than just
state it because as I stated, it’ll sound totally absurd– it’s actually being taught
that the most unproductive possible firm is the foundation of the most efficient economy. They call that perfect competition, of course,
then they say, well, that doesn’t really exist. Then the whole mindset of economists is that
oh, competition is imperfect so we have to move through policy, through business, what
business does and make it more perfect, so that we get rid of monopolies that we just
have lots of competitors out there who are all competing the same way, producing commodities. Now, if we actually had that state of affairs,
we’d be living in poverty. The reality is that well, first of all, that
building even a small business enterprise is in many ways, a heroic feat. I would tell students when I’m teaching students
if you can start a company and can keep people productively employed, pay them a decent wage,
let’s say for 10 years, that must mean you have something that people is buying, some
product that people out there are buying. You’re probably going to do quite well, you’re
going to do quite well for you, and they’re going to what? Profitable employees. How do you get to that point that actually
you can be around for 10 years? You can’t do it by doing what everybody else
is doing. You can’t do it just by saying, well, here
with the market says you should do in terms of technology prices, you have to make an
investment in learning. Now, obviously, in some companies that we
can see that on their financial statements, it’s called R&D. That’s not the only type of learning that
goes on. In fact, if you take the S&P 500 and you look
at how many of those companies is one of the 500 largest companies United States, only
about 210 of those do any R&D at all. About I think it’s something like 38 of those
companies do about 75% of all the R&Ds so it’s some pharma companies, aerospace companies
like Boeing, companies like technology like Apple, etc., but any organization, including
your little organization here, people are learning how to make the product, how to do
it better. If you’re going to survive, it’s because you
have might be a neat short, might be a mass production market, but you’re going to be
able to produce a higher quality product and you’re going to get a larger market share,
you’re going to then cover the costs of the people and which are often the fixed costs
that you’re investing in, not just buildings and get up competitive advantage. That’s what I basically study how companies
do that. It’s when you’re talking about companies that
grow to be 10,000, 20,000, 30,000, hundred thousand people, you’re talking about credibly
complex social organizations. When they work well, when they’re actually
over a sustained period of time, generating a high quality product that they can get economies
of scale and get the low unit costs, even as they’re paying their employees more, and
they’re giving them employment stability, you’re getting productivity growth, it has
a big impact on the economy, particularly if lots of companies are doing that. If we look at a time historically, when American
companies were really very good at this value creation, innovative enterprise, it was a
fast forward two decades, when there was much more set of norms that prevailed that once
you hired people, you kept them employed over their career, it wasn’t a contract, but it
was basically in practice, you could see it by defined benefit pensions that were not
partible that had to do with how long you stayed with the company. You could see it at the blue collar level
with collective bargaining and sometimes enforced by unions but this was so that you would get
a labor force that showed up every day and cooperated in mass production, but you also
saw it at the white collar level without any unions, that companies crane people, and they
want to retain them. We had that system, which actually made the
US the world leader in the international economy, the US got the challenge by that in the early
19, late in the ’70s and ’80s by the Japanese, but the Japanese actually did that, perfected
that system. Now, that system doesn’t work quite as well
anymore in any case, because we live in a much more open system environment, much more
global value chains. China’s not really competing with the same
thing as the Japanese system but this way in which you understand innovative enterprise,
not just the level of the enterprise, but the whole ecosystem that supports it is changing
all the time. We’re talking about a moving target. Just that part of the research and that part
of the documentation, that part of the argument that that’s a real challenge for anybody who
is looking at these things seriously, and we look at them seriously because we’re academics. We looked at seriously, as I do, coming out
of a training in economics where I know that most economists actually don’t have the slightest
idea how to do that research or were doing because they think the market should just
be allocating resources. I just thought at this point that just by
making one more comment, because one of the markets that of course is looked to allocate
resources to alternative uses, is a stock market. The fact is that historically the stock market,
that’s not been the role of the stock market in United States. The stock market has been the way for private
firms to allow their owner entrepreneurs or their venture backers, capitalists backers
or private equity backers, to exit from having the money tied up in the company. You do that by going public on the stock exchange. If the stock exchange is liquid enough, then
you have no problem capitalizing your investments, and that’s the main function of the stock
market. The other side of that, historically, is that
you can then use the stock markets to separate ownership control, you can break the link
between the original owners who build up a business and the ongoing management of the
business. Here, I’m very highly influenced by a business
historian who I got to know after I had done my PhD, he was at Harvard Business School,
named Alfred Chandler wrote a book called The Visible Hand, The Manager Revolution in
America Business, which was published in 1977, won the Pulitzer Prize in history, and really
ended at 1920 as a historical book and said, by 1920, or in the 1920s, you had people who
were not the founders of business running companies, they were managers. What made those companies strong is that those
people came up through the business through the stock market, the old owner entrepreneurs
got out of the way and now, you could move up to the company, to the top of the company
being an employee, which is basically this situation today, except now some companies
go public much quicker and the founder stay around. Basically, the stock market’s rule is really
fundamentally historically to separate ownership control, not to fund company. That’s one of the implications, or big implication
of the research we’ve done. MAX WIETHE: There was one exception that you
mentioned in your book, which I thought was just too interesting not to bring up here,
just in that late ’20s, where the companies that realized that the stock market had gone
too far, actually sold stock and it was one of the only occurrences ever that a company
had a secondary issue of stock on the market and they had a cash surplus that they were
able to weather the Great Depression with and it actually worked, but since then, you
don’t see it at all. WILLIAM LAZONICK: Well, you see it– because
we don’t get into much of the details of some of the research we do, you see them in biotech. Certainly companies are going public on the
stock market around where I live in Cambridge, Massachusetts. There’s a lot of them, we call them product
list IPOs. They do an IPO. They’re a research entity. They might have some investment from Big Pharma. What happens there is people make lots of
money in those companies they want, they never produce a product. It’s not that you can’t use the stock market
that way, although, and we saw it also in the internet boom of the late ’90s, the dot-coms,
often it’s very speculative. If companies are sound companies, they can
generally grow organically, not be exposed to the stock market until they actually have
that growth secured through their own profits and then can control their own growth because
they have as long as they can control the profits and reinvest them a significant amount. They can then leverage that with debt, by
the way, the world– I won’t get into this, but it also totally says throw up my Danny
Miller because debt and equity are not substitutes, debt is a compliment to the equity that you
retain in a company. What you’re referring to there is probably
the biggest period or a period of ’28, ’29 when companies actually sold shares on the
market is that all the speculators were out there, the companies that had become dominant
on the New York Stock Exchange in the 1920s now had a lot of profits. They were paying their workers better, but
they were just awash with cash. They actually started lending that money out
on the New York call market for 10% to 15% for people by their stocks on margin speculating
up, and then they sold the shares at the higher prices and paid off their debt. The Japanese did the same thing in the 1980s. It’s financial engineering, but it’s actually
to solidify the corporate Treasury to pay down debt or to just put money in the corporate
Treasury which then became very useful once you get slow demand in the Great Depression,
just to say right now, we have an article– hadn’t been published yet but it’s on debt
finance buybacks is just the opposite. You’re actually using debt to finance buybacks
that don’t– so now, not only do you not have productive investment that is going to generate
returns related to the buybacks, but you have debt on your books that you have to pay off. There was actually a very good article in
CNBC yesterday on Oracle and Larry Ellison and them getting into trouble. Actually, it’s an article that fits everything
we say about companies getting into trouble by just trying to boost their stock price
through buybacks and not investing in the products of the future. MAX WIETHE: Well, you mentioned a period of
time when we did have innovative enterprise, which was that that post-World War II era,
the decades following that we as America, we grew at an astronomical rate. What was different about that time that allowed
that innovation to occur that we haven’t seen today? WILLIAM LAZONICK: Yeah, well, so first of
all, I think it was the financial sector was highly regulated. They used to talk about 3-6-3 banking, 3%
was what you got if you put your money in the bank and let that out to its prime customers,
corporations at 6% and the other 3% was when the time of day when the bankers went to play
golf. That’s actually what prevailed into the 1970s. The ’70s changed a lot of this in terms of
the financial sector. In terms of the companies themselves, there
was a norm that set in that once you employed people, if you just started laying those people
off, you’re not going to get good people to join your company, that you are building this
company by investing a lot of vertically integrated activities. It could take decades to build a company you
would invest in research, if you’re a research oriented company, not just in research and
development of corporate research labs, very long term research that could result in products
in the future, but no one really knew when they were doing the research, even what closed
products will result in. In companies more generally, you just treated
your workers better because you wanted those workers to show up every day, give the customers
good service, and that became the norm. Companies that didn’t do that are not company
people would want to work for. Unfortunately, that was mainly a white man’s
world. Even up until the Civil Rights Act, companies
had marriage bars where they could tell women to leave quite legally from the company if
they got married. Harvard Business School didn’t admit women
to the MBA until 1964 when they saw the writing on the wall with the Civil Rights Act, that’s
now over 50 years old but that’s not that long ago. Also what– we have a book coming out on what’s
happened to African-American employment over the last 50 years. One of the things that happened in the 1960s
and 1970s, there’s still a big demand for blue collar labor in the US. This is just before the Japanese impact started
to occur. There’s expansion, particularly the automobile
industry of blue collar work. If you could get a semi-skilled blue collar
job, that meant you’re on the assembly line and you’re represented by union, you had very
good pay. Well, whites were the children of blue collar
whites were moving, going to university, often free tuition, or very low tuition and moving
into white collar work. Blacks who had been, of course, in a less
privileged position in the United States or much more disadvantaged position, there was
a big push helped by also by the setting up of Equal Employment Opportunity Commission,
to move those people up in the companies from unskilled jobs to semi-skilled jobs. That started to work. Unfortunately, I think one of the reasons
why the system was not maintained in the 1980s was because, in fact, as those jobs get challenged,
I think of it had been more still a white male society, the companies might have– there
might have been more of a consensus, but we need to retain and reinvest. It fed into it. Well, no, we can buy take responsibility for
people we don’t care about. I think in the end, we can see what’s happened
to the white blue collar worker now downward mobility, lower life expectancy, opioid crisis. It hurt everybody, but I think that that fed
into it. What I’m trying to get at here is there are
lot of social influences on what companies do and how they act and what the norms are. Those norms changed. Then they changed dramatically in the 1980s. As I said, what I saw at Harvard Business
School that Harvard Business School went away from this notion, which they really had retained
and reinvested and call it that, to yeah, it’s good to downsize and distribute. That’s what they started teaching the students. That’s what the students started getting jobs
on Wall Street and be able to make a lot of money by participating in that, as if it’s
all about value creation. That’s when things went from really changed. That’s when you went from having stable and
equitable growth coming out of the practice of these companies, these companies to contributing
to unstable employment in equitable incomes, and actually in the end, in many industries,
say in productivity growth, loss of international competitiveness. MAX WIETHE: You talked about the maximizing
shareholder value, but also it was coupled with changing regulations. You really think it was more of the changing
regulations or this new economic theory which really was the driver, or obviously, it was
a combination of both, but they’re both major factors. WILLIAM LAZONICK: Yeah. There was a lot of changes in the institutional
environment which are often regulatory that fed into this. The creation of NASDAQ in 1971, out of basically
the National Association of Security Dealers automated system, you had all these security
dealers around the country trying to sell small shares and small companies. There was no national market nor liquid market. The Security Exchange Commission in 1963 had
a special study of the potential of companies being able to go public more quickly if there
was a national market for more speculative companies. The impetus to that was that there were a
number of companies which were called glamour stocks, which they get on the market in the
late ’50s and ’60s coming out of military technology that started catching people’s
attention that you could use this for commercial purposes. Of course, then you had the rise of Silicon
Valley. Silicon Valley, actually got named that name
the same year that NASDAQ was started in 1971, where you had all these things startups going
and taking a lot of the technology. They’ve been done in corporate research labs,
and developing, in this case, semiconductor chips and people leaving one company to another
and then being able to get listed on the stock market, Intel, which was founded in 1968,
was listed in 1971. By comparison, Hewlett Packard, which was
founded in 1938 in Silicon Valley, the heart of Silicon Valley was really an old economy
company right into the ’90s. The HP way was you never laid people off. That’s how you got innovation. They didn’t go public until I think it was
a 1957. I think that one of the reasons they went
public in 1957 was precisely Hewlett Packard were now looking at not just being the only
people who control that company, brought managers up. There wasn’t so much finance at that point. They were still a very careful company in
terms of growth. You started getting this market where you
could put companies on Stock Market Watch more easily. That then meant that you could get things
like the dot-com boom, you could get things like these biotech startups that I’ve talked
about. MAX WIETHE: It changed the reason that people
own stocks. Was that owning stocks now– WILLIAM LAZONICK:
Yeah. Then the other thing was that if you held
stocks in the 1970s, you had a problem because there’s no inflation. Then people started saying, and also there
was global competition. There’s a question, can you pay dividends? The stock market was not doing very well throughout
the 1970s. There was the change into fixed commissions,
which was actually forced upon the New York Stock Exchange by– in 1975 by NASDAQ, there
was very important was the Employee Retirement Income Security Act, ERISA, which was 1974. Now, that was actually impetus to that was
a bankruptcy, and a particular case, Studebaker, the auto company got bankrupt in the ’60s,
their employers were left with their defined benefit pension so there was a movement for
defined benefit pensions to have some backup by the government. That was the impetus behind it. However, you had the other side of that, how
were the fund managers in this case, mainly the companies that ran the pensions like GE’s
pension. How are they going to get enough yield to
fund the pension when you have all this inflation? There was lobbying basically to clarify under
what was called the prudent man rule, which was part of a risk of what a fund manager
could invest in without being liable for if they lost money for being too risky. On July 23rd , 1979, the Department of Labor
which was overseeing ERISA clarified that you could put a certain proportion of your
pension fund into risky assets like venture capital, and not violate the prudent man rule
and not be held liable for taking undue risk with your– MAX WIETHE: Other people’s money. WILLIAM LAZONICK: Yeah, other people. From that moment, there has never been a shortage
of money for venture capitals in the United States. It’s always been a question of what are good
companies to invest in. We always find things like the dot-com boom,
it happened actually in the mid-1980s. They call it vulture capitalism, venture capital
just setting up companies just to go public in then not being worth much. You had a lot of that going on. The problem really has not been any lack of
money. The institutions made the money flow more
easily through the system. There’s certain amount of that that you want
money to be able to flow through the system but how it flows through the system is another
question. Now on that particular issue, because what
happened at that point, buybacks we’re not being done. If you are a company, you are paying out dividends. You were– the last speech by a guy named
Harold Williams, who was the head of the SEC when Ronald Reagan got elected and then he
resigned, he had some time to go in as the chair of the SEC was to security dealers,
this was called the corporation as a continuing enterprise. This was 1981. He said, corporations are paying up too much
dividends, they have to reinvest more. That was before stock buybacks became a problem. Now, companies have been doing stock buybacks,
which is something that I spent a lot of time researching over the last decade. There’s a major regulation that actually just
led to what I call the looting of the company, company tried to do stock buybacks. Sometimes they did through tender offers,
I’m not talking about it but sometimes, they just went to the open market and did repurchases. The Security Exchange Commission, their lawyers
said well, is that manipulation of the market? It looks like manipulation of the market to
me. There was a rule proposed that would have
tried to limit– not ban them, and they were never really illegal, but limit them. It was proposed three times, but never adopted. Then once the Security Exchange Commission
changed under Reagan, they put a guy named John Schad from Wall Street as the head of
the commission. He believed in Chicago economics, efficient
markets, the more markets sloshing around through this system, the better of what as
he stills says today, capital formation. That’s not capital formation, it’s the money
sloshing around through the system. They adopted really under the radar without
public comment in 1982, in November of 1982, a rule called Rule 10 B18, which was totally
obscure until some academics written about it, but until the research that we did say
this is when you allow buybacks to occur on a massive level, and we call rule 10 B18 a
license to loot basically. It now said you can do massive amounts of
stock buybacks with a safe harbor against being charged with manipulation. Even if you exceed that safe harbor, you won’t
necessarily be charged with violation. It turns out right to this day, the Security
Exchange Commission doesn’t know whether you’re ever exceeding it because they don’t collect
the data on the days of buybacks, but some people do. Then that was a regulation which basically
created a whole new instrument, on top of dividends. Not instead of dividends, because they haven’t
been instead of dividends, but on top of dividends, our data shows this to take money out of companies,
and it’s one that’s favored by people who want to go into the company, get the stock
price up, and then cash in because if they can time the buying and selling of shares,
they can make more money than they would otherwise. In the book, we have a framework for looking
at this looting, which, so it’s the core of the book after we get through the theory of
innovative enterprise, the critique of shareholder value and ideology, the role of the stock
market, not what people think it is. We get into how is this predatory value extraction
occurring? We have a framework where we talked about
one chapter is the value extracted insiders. There are the CEOs and top executives who
are motivated by the way they’re paid, stock based pay, stock options, stock awards, which
are structured in a way as a stock price goes up, you cash in. There’s a long history of stock based pay,
it goes back really to 1950 in the United States, that we’ve gone through that history. I won’t go into it now but then we talked
about it a bit in the book, where basically it was a capital gains tax dodge up until
it was eliminated in 1976. It really came back in the 1980s. Stock based pay, actually, not because of
the large corporations, but because of Silicon Valley startups that were now using stock
not simply to separate ownership control, but also to pay people as a mode of compensation
and not just people at the top, they were paying people down through the organization
and actually, what the reason they’re often paying people in stock was because they want
to lure them away from in the ’80s and even in the ’90s, from secured employment in the
old economy companies. MAX WIETHE: Like the HPs and IBMs– WILLIAM
LAZONICK: If you think of pharma, Big Pharma, one of the reasons Big Pharma started having
problems with their corporate research labs and doing really invest original research
and new drug development was not just shareholder value ideology, but a lot of their best people
now, there was an institutional framework for startups, for products that take billions
of dollars and 10, 20 years ago through, it wasn’t really appropriate but there’s a way
of just going to a startup, getting lots of money, making a lot of money, much more money
that you can make as a research scientist in, well, in the pharma or at Lou Center,
HP or IBM, etc. These companies started themselves trying
to change to that new model of stock based pay. This then, at the old economy companies often,
when they weren’t paying stock based paid down through the organization, this then led
them to adopt that as the main way in what they were paying top executive. Then one by one, these companies changed their
own internal ideology. Later, we’re going to talk a little bit about
Boeing, but Boeing did that in 1997 when it merged with McDonnell Douglas and brought
in a lot of people who were much more imbued with shareholder value ideology as a way of
running a company than the existing management of Boeing. It changed in different ways, different places. Hewlett Packard, it lasted the old economy
model into the late 1990s. Even though Hewlett and Packard who had founded
the companies were no longer active in managing it in the 1990s, David Packard, the year before
he died, published a book called The HP Way, which said, we don’t fire people here. We keep them employed, we find other work
for you. Then at the back of the book, he had looked
at all the innovations we did over the decades with this model. That then gave it some legitimacy until they
brought in a new CEO. Her name was Carly Fiorina in 1999. She went with the flow and turned it into
IFR company, a company that’s shareholder value oriented. You had these changes going on that. If you hadn’t had that change in the regulation
at the Security Exchange Commission in 1982, well, you would have had to have at some point,
but that’s when it occurred and what happened then is that the agency itself turned from
being a regulator of the stock market, in this case to being a promoter of the stock
market. It started being promoter of the stock market
by allowing companies to do something that was contrary to the original mandate, and
supposedly, the current mandate of this SEC, and that is to eliminate fraud and manipulation
in the stock market. Open market repurchases, I would argue are
nothing but a manipulation of the market and they’re legal. Hence the license the looting, legalized looting
of business corporation and they’re massive, which I could go into. MAX WIETHE: Well, we’ll get into that with
the example of Boeing later. I think it’s a fantastic example. It’s really visceral, especially with what’s
happened recently. I wanted to get into some of the accomplices
that these value extracting insiders have you bring up to, which are the value extracting
enablers, and then also the value extracting outsiders. I think both of them are equally implicit
in this process. Why don’t we start with these enablers? WILLIAM LAZONICK: Beyond the value extracting
insiders, then the framework of the book, we then look at the enabler. We put our money into securities to a certain
extent, increasingly not as individuals but indirectly through pension mutual funds, and
they hold about 60% or 65% of all the stocks outstanding, stocks still tend to be concentrated
among the top 10% of income earners in the population, not everybody holds stock, but
a lot of our stock is controlled by pension funds and mutual funds. Let’s say the case of pension funds, I would
argue if you’re running a pension fund, just from the point of view of those 2,000, 4,000
stocks or whatever you have in your portfolio, first of all, you’re not going to know what’s
going on with those shares, you can’t possibly know. What you should want in general is a set of
rules that say okay, when companies can afford to pay dividends, they should pay dividends
and then under the rules for savings that we have, they’ll accrue tax deferred until
people want to make use of that money, pull the money out if you have a pension that’s
accumulating through dividend payments coming into the pension. We don’t want buybacks because buybacks are
people who are timing the buying and selling of shares now, and what we want is them to
pay out a reasonable amount of dividends and reinvest in the company so that if and when
we sell the shares in the company at some future date, change our portfolio, those shares
are likely to be worth more rather than less. From an individual point of view, that should
be the same. If I have hundred thousand dollars and then
putting it into the stock market, I should put it in– unless I think I have some particular
insights on when companies are manipulating the market, I should put it into dividend
stocks and I should look at companies that are reinvesting and I should have a notion
of what an innovative enterprise looks like, which I’m not going to get from studying economics
generally, but from understanding the fact historically how businesses become successful
and put it into those companies. Now we could make mistakes, but I would say
if you had a portfolio of those shares, you would do better. Now, of course, one of the reasons we don’t
do it ourselves is because we can get diversification and expertise, etc. from the fund managers,
but that’s how fund managers should be behaving. In fact, what turns them into enablers is
the fact that they’re being judged by the yields that they can get. In here, you can say quarter to quarter, I
don’t think everything is quarter to quarter, but it often is in this world. If someone else is getting a higher yield,
and you’re not getting it, you might not be the fund manager for all. Everybody is looking to get those higher yields
so they start trying to figure out where are the companies that are going to get this price
boost and they stop thinking or even trying to understand of course, because of the way
they’re trained, not just now in economics department, particularly business schools,
they’re just going to be thinking about how you diversify, get a high yield, etc. They’ll just go with the flow. They become enablers. Now, here’s again regulation that made them
more powerful enablers is that in the 1980s, there was a movement in the name of shareholder
democracy, for shareholders to not only have votes but exercise more power in companies. Now, on some level, you might think that’s
a good idea but if shareholders are just people who buy and sell shares, it’s not such a good
idea from my point of view. In fact, at the time, the push really came
not because more and more people were holding shares, but because shareholding was becoming
concentrated among a few big asset managers, which has become quite extreme now. You then have the question, well, what do
those asset managers do with the proxy votes to those shares? Now, an argument can be made that they’re
just holding the shares for you, why should they get to vote the shares? Well, it was ruled basically, yeah, they get
the vote the share, but in 2003, the SEC sanctioned a rule that says not only they vote the shares,
they have to vote the shares. That gave rise to two companies that want
to exist, that ISS, [indiscernible] shared services, the other, Glass Lewis that divide
up the market in proxy advising and have very small number of people working for them and
advising on massive numbers of proxy votes and then shareholder proposals. They then became part of a system where if
you could get them to advise in a particular way, then you could actually with a very small
percentage of the shares of a company have an outsized influence on the shares, and that’s
where the outsiders come in. They’re the shareholder activists. The one we write about in the book is Carl
Icahn has been around since the late 1970s. People like Paul Singer, Nelson Peltz, William
Ackman, there’s about a dozen of them, and I wouldn’t say in every case, they go in and
do damage. There’s a few of them who tried to get into
companies and cooperate with the companies in investing for the future, but in general,
the way they’re going to make their money is by getting them to pump money out of the
company and figure out when to sell their shares. That doesn’t mean they’re going to hold on
just for a month or two. They might hold it as we show with the case
of Icahn on Apple for 30 months and took out $2 billion in 3.6 billion in just buying shares
on the market. In that period of time, Apple did the highest
amounts of buybacks of any company in history. This was in 2014-2015 when Icahn was holding
in the shares, 45 billion in one year, 36 billion the next year. Apple actually is far outstripped that since
then. That was a game changer because now you take
an iconic company that actually, we document in the stuff we wrote when Apple had previously
gone to this shareholder value mode which was between 1985 and 1997 when Steve Jobs
wasn’t there. They almost drove themselves into bankruptcy. Jobs came back, it was retain and reinvest. We know the story. Now they have lots of money. He died and Tim Cook became the CEO. Since 2013, they’ve done 288 billion in buybacks. Just in case anybody thought that Warren Buffett,
who built up Berkshire Hathaway by protecting all those companies from the stock market
is a patient capitalist, he’s not. He’s now is the biggest, by far biggest, about
10 times the stake that Icahn has and he’s just a rabid cheerleader for stock buybacks
to increase his stay. What that means is you’re not going to replace
an Apple. It means that Apple is not taking money. It’s 288 billion just in buybacks since 2013
and investing in the Tesla’s and other companies of the future that it could be investing and
this is even with someone like Al Gore on the board, one of the longest standing board
members since 2003 who is, of course, we all know, not just the former Vice President,
but one of the main advocates for climate change. What Apple have done with $288 billion in
saying, we have a company that can hire the best people, that has an iconic brand name
that can compete globally and can move into new technologies if it had gone into green
technology, if it had gone in that direction, which it could have, it hasn’t. That’s a lost opportunity and you don’t just
recreate those companies to be in that position to have all this money, to have the ability
to track people, all that learning that’s available. We then get to these outsiders who have become
much more powerful, and were made much more powerful by this rule in 2003, this proxy
voting system where you can hold a very tiny fraction of the shares, still a couple billion
dollars, maybe of a company like Nelson Peltz at GE with never more than .8% or 1% of the
shares but get that company just pump all kinds of money out of the company for the
sake of shareholder value, and cease to have any potential to be that it had to be the
innovative company. It’s in the case of GE, it’s we rely on GE
as US as it’s the main– the really the big company in energy. What damage does that do to its ability to
compete? Actually, it’s losing markets, even in the
United States, so a Danish company investors. That’s the thing we look at it and we see
it again and again but we see that there’s now this whole configuration of the insiders,
enablers, the outsiders all focused on getting stock price up. Buybacks are the tool in which they do that
and we’re saying, hey, let’s stop letting them do this. Let’s change the rules, so that we have a
system that doesn’t allow this predatory value extraction and allows the value creation,
sharing the gains with the employees, paying us as taxpayers who help support this infrastructure
of knowledge, a decent tax rate so we can not only get a return on that, but invest
in the next round of innovation without the government going more into debt to support
the companies in innovation. That’s the model we have and well, that’s
the model we put forward but it’s not the model we have. We have this model, which is really deeply
entrenched now in what we call predatory value extraction. MAX WIETHE: Well, and I thought, also a really
interesting transition you did was from Carl Icahn as the corporate raider where he’s taking
25% stakes and now he only has to take less than 1% stake and people would suppose maybe
that that’s because they’re afraid of him becoming the corporate raider, but really,
all the incentives are aligned. He doesn’t have to, it’s really that he doesn’t
have to, not that they’re afraid. WILLIAM LAZONICK: Yeah. It was because of him that the term green
mail got coined. It actually only looked at it, only that he
puts [indiscernible] around 1982, ’83 and he went after a small number of relatively
small companies in that were locally based. He started getting control and/or threatening
control. All he had to do was threaten and then they
would buy him out green mail. They were doing that even before it got turned
green mail. Now, what is fine? We’ve looked at a few of these cases is that
within those companies, there were some people, there was actually– should we try to fight
him off? Should we let him in? There are some people who said no, okay, let’s
do this, we’ll get our stock price up and offered then their own stocks. You start getting this aligning, but sometimes
it was called hostile takeovers at the time because often, it was seen as hostile. The people who are running the company do
not want these outsiders so they say, well, they’re incumbent, they’re just protecting
their own interests. It could be that those companies are not being
run properly, but it’s not going to help to have someone come in whose only purpose is
to get the stock price up and using the ideology of shareholder value as to legitimize this,
you have to understand the principles of innovative enterprise. I think good executives do understand that. The only one case that that occurred relatively
recently that everybody probably knows about is Whole Foods. Whole Foods was known as now owned by Amazon,
but known as being a really good employer, charging high prices, but it was getting–
yeah, people going there, shopping there. In the fall of 2015, I was asked, actually
by someone in one of the presidential Democratic presidential Bernie Sanders campaign actually,
someone asked me why is Whole Foods, because I’ve been saying Sanders should talk about
buybacks. Why is Whole Foods, they’ve done about a billion
of buybacks? Why did they do that? I looked at it, I saw that in fact, in September
of 2015, Whole Foods had laid off about 7% of its labor force, about 1400 people. The stated purpose was that so they could
charge somewhat lower prices to compete with Trader Joe’s other premium brand. I thought unreachable, that means the other
93% of the people are going to have to work harder and I then did a calculation of what
they did in terms of buybacks per laid off employee, it turned out $727,000 per employee. If they hadn’t done the buybacks, they could
have kept those people employed, what their benefits if they’re 60,000, which is probably
high, they could have kept those people employed, and they would have had plenty of money to
lower prices, and they wouldn’t have forced people to work harder, who are the main people
that would have been much more rational thing to do. The reason they didn’t do that was because
they were being attacked by hedge funds. Now, when just before or just after they sold
to Whole Foods, the CEO of Whole Foods who was on the record of saying, and it’s one
of the few times I’ve ever seen this, calling those activists, a bunch of bastards, a bunch
of just– hardly anybody will speak out against him, he actually did. The reason he sold to Amazon which what they
used to call a white knight, there was someone there who could at least protect the company
then there was a logic in their business model. We see that going on still to some extent. Now, the other thing that changed with someone
like Carl Icahn, although he was making lots of money, he actually– when he ended up having
to take run TWA because the green mail didn’t work. That was he lost a lot of money in that. The notion is you get in, you get out. The other thing that changes as he became
wealthier, he didn’t have to rely on other people’s money so in 2011, Icahn Enterprise
is just his own money basically. That gives them even more power too because
he doesn’t need to keep his own investors aligned with the raid or whatever he’s doing. He always, right from the late ’70s when he
started doing this, called this money is a war chest. The more he has, the more the value he extracts,
the more of a war he has, the more power he had. I think the other thing that’s going on is
that on the boards of companies first of all, I think there are a lot of people just believe
in shareholder value. A lot of people on boards who don’t have the
slightest idea what those companies are really doing in many cases. You often can, without a proxy fight, just
influence people on the board to say, yeah, back doing more buybacks, back pumping more
money out, back things that are– do a merger or do an acquisition but do the acquisition
so we can get control of the money in that company and pump the money out rather than
do the acquisition so we can spend a lot of money to build that company up. You don’t really know what’s going on, the
bearing point, it’s like I can talk about an era back then when it was more retain and
reinvest, that’s still going on in some companies now. I think this conflict is still going on now. We talked about a tension between innovation
financialization, and you don’t really know how it’s being played out until you look at
these companies, but there’s much more forces are aligned for being played out on the financialization
side than on the innovation side. MAX WIETHE: We touched on a few examples of
places where stock buybacks and insiders, outsiders enablers have allowed predatory
value extraction to take over the place of reinvest and innovation. I think one of the most the best examples
right now that you can see, because it’s one thing to say the company isn’t innovating
anymore, or they’re not making as much money as they could be, but Boeing people are actually
dying because of this process of the financialization of what was really an engineering company
for so long, and I actually had a conversation with my father. He said they kicked the engineers out of the
boardroom. You brought it up earlier, I think it was
1997, they had that merger with what was the company? WILLIAM LAZONICK: McDonnell Douglas. MAX WIETHE: McDonnell Douglas, and I think
really just starting with that, and moving forward, what happened at Boeing, and how
did we get where we are today? WILLIAM LAZONICK: Yeah. Boeing was founded in 1916. It was a beneficiary of a lot of government
subsidy, including the couple of acts from the postmaster general office at 1925, 1930
that created subsidies for airlines to buy more advanced planes– I’ve written about
this in Boeing Emerged Along with Douglas as the innovators in– it was integrated wing,
all-metal fuselage planes in the depths of the pressure between 1930, 1932. Actually Douglas ended up doing better as
a commercial company in the 1930s and beyond. Boeing was much more oriented towards the
military side. Boeing then with their jumbo jets, was able
to emerge as a stronger company. That was lucky, there was a few other companies
and was able to then consolidate as the main, really the only big aircraft manufacturer
in 1997 when it acquired McDonnell Douglas. At that point, you had Airbus which had been
created from a consortium of European companies to be a competitor to Boeing which was rising
as competitors. It’s well documented that there were a lot
of financially oriented people who came into Boeing with the merger, some of them had come
from General Electric and they started pushing shareholder value. That year actually, 1997, significant to other
ways. That was the year in which the Business Roundtable
declared that shareholder value would be the primary purpose of companies. This is an organization of which CEOs are
members of major companies. People might know, recently this few months
ago, they changed the tune on that. They said, now, we’re run for stakeholders,
but Boeing at that point actually turned to being a shareholder value company. The other thing that happened in 1997, it
was the first year that dividends– that buybacks surpassed dividends in the form of distribution
of shareholders and you had the stock market boom going on and many companies trying to
keep up with companies that had high flying stocks by doing buybacks. Let’s say Cisco, which ended up having the
highest market capitalization in the world in 2000, March of 2000, didn’t do buybacks. Other companies tried to keep up like Microsoft
and Intel by doing lots of buybacks, so this was increasing. Now, at Boeing by 2001, the top executives
said we don’t want to be too close to the engineers here in Seattle, which was the original
birthplace of Boeing and they have been for since 1916 so they moved their headquarters
to Chicago specifically to be away from the engineers and said, okay, you can do the hinge. Now, you started having lots of business. Their business is producing major aircraft,
their large aircraft under that time, there still is the case, or two companies capable
of doing it. The Chinese are on the horizon, maybe the
Japanese in the future. They needed a new long haul plane, they needed
new mid-range plane, and partly it’s because of advanced materials, avionics and fuel efficient
engines. They built the Dreamliner, which was what
they call a clean sheet, it was a wholly new plane really. It wasn’t even a replacement, it was just
a new plane. They had a number of problems with that in
terms of the outsourcing of stuff, they were doing a lot of outsourcing of the capabilities,
but they were doing that from the early 2000s. Then they knew they had to have a replacement
for the 737 and gee, and the 737 series was a single aisle narrow body plane for mid-range
flights, which they call the workhorse. This is the one who would be biggest selling
plane, and it would be one where they would be used for a lot of longer domestic flights,
some shorter international flights. They had this architecture from the 1960s
for the 737. It had been reengined two or three times. The last one was 1993, which was called at
737NG, reengine just meant they kept the same architecture and put in a new engine. Already with the NG which meant New Generation,
they, which was a big selling plane and their main competitor is the product in terms of
these narrow body mid-range plane, they had a problem because of the wing being too close
to the ground, which Airbus did not have, because they’re series 320 originally in the
1980s, when you were using the loading equipment and you built the wing higher up from the
ground, so you could put more of an engine, a bigger engine underneath. The fact is that the bigger the engine, the
higher the fan diameter– the longer the fan diameter, the higher the bypass ratio, the
more fuel efficiency, generally, all other things equal. This had already become a problem with the
NG, it’s actually doesn’t have a purely round shape. It’s flat at the bottom to give a bit of extra
space between the wing and the tarmac. The fact is when they were thinking of what
to do in the– probably about 2003, 2004, 2005, they actually had a project called the
Yellowstone Project One to think about what they were going to do to replace the 737NG. What they should have done, there’s no doubt
in my mind, what they should have done is done what they call is clean sheet replacement. They would have been enough to take advantage
of all the modern avionics, all the modern materials, and have plenty of space for the
most fuel efficient engine. That was on the books. Apparently, apparently, it was still a possibility
even up until the spring of 2000 or summer 2011 when they announced that they would do
a re-engine plane, the 737 Max. They did that also in reaction to the fact
that in December of 2010, Airbus had put out the 320neo using their company CFM, which
is a joint venture between GE and Saffron, a French company. Leap engines which were much more fuel efficient. Actually, the fan diameter on the leap engines
that Airbus uses are 78 inches. Now, this was a problem for Boeing because
they’re already had reached the limits. There was then a debate at Boeing which I’ve
been able to find out a little information about, of how big those engines could be. There was never even an issue that they could
possibly be 78 inches so it was a question. On the NG, they had been 61 inches the fan
diameter, they may be up to 68 inches, in the end, they put some extra height on the
front landing gear and they got it up to– well, first supposed to 68 inches, actually
69 inches so they reached the limit. If they hadn’t done that, they would have
been subject to a critique, as they were, in fact quite vocal from Airbus is that you
weren’t going to get the fuel efficiency on the Max to compete with the Neo. That would have been a big problem so they
were trying to figure out how to get these fuel efficient engines on there, given an
architecture where you had to reposition them more forward, more upward. Now, here’s something where a lot of people
have opinions but the investigations really haven’t been done to really say what’s going
on and that is that the opinion, there seemed to be a widespread opinion that that repositioning
of the engines created a tendency of the nose to pitch up during takeoff when– it’s on
manual before you get up to your cruising speed. If it peaked up too much, the plane could
enter a stall and so often, you want to get back to a safe what they call angle of attack. This is something that pilots to be aware
of and will be looking at readings from two sensors that are on the exterior of the fuselage. If they agree, then they just see what the
angle attack is. If they disagree, they would get a lightness
on the NG and say disagree and then they would just shut the system off, they would just
figure out how to get the angle of attack. They would– MAX WIETHE: Fly manual. WILLIAM LAZONICK: Yeah, but what was happening
here was that this, they put on a system which later became known as MCAS, maneuvering characteristics
augmentation system, that was doing this for them and they didn’t even know about it until
after the Lion Air crash which happened in October of 2018. The timeline is the planes launched in 2011,
the end of 2012, they have 2500 orders. It just before the second crash of the Ethiopian
Airline’s plane, that was in March 10th of this year, 2019, they had just over 5000 orders,
387 delivered. The plane had been certified in March of 2017. The first delivery in 2018. Now, a year and a half later, you have this
crash. Immediately, it’s well, suspected that it
was a faulty sensor. Then Boeing was forced to reveal when American
Airline’s pilots went after them, what’s going on here that they had this MCAS system on
there. They didn’t call it that at first, but then
it became known as that and they hadn’t put it into the flight manuals, and there’s all
kinds of issues that have been written about whether they let the FAA, the Federal Aviation
Administration know about the system or know how more powerful the system had become. There’s a whole lot of issues of concealment
that are there and still being investigated in Congress and an issue right now because
as of today, what’s today, December 6 th , 2019, those planes have not flown since last March
13th around the world and nobody knows when they’re going to fly. The issue is, are they going to fly? I wouldn’t know whether I should bet on this
because I don’t bet but I’d say the odds are, in my view, that they won’t ever fly again. That would be true if they have this structural
defect and there’s been more evidence that there is this defect, that it’s not just a
software fix, and it’s going to– the deal with it is not a software fix and now, pilots
know about it. If it was, you would think that plane would
be up in the air again. The other thing is, you would think that Boeing
would have come and rebutted the notion that it had this structural design flaw, because
obviously that’s out there, everybody’s talking about it. You just see it on the chat on an article,
people think of it as a structural design flaw. If that’s not the case, come out and say no,
that’s not the case. Now, obviously, if they– here’s the crux
of it, if they had built a plane they should never should have built back when they had
the choice 2011, when they launched the Max and they could have gone to the clean sheet
replacement, by some estimates, it would have cost them $7 billion more, maybe $8 billion
more to do that, rather than the re-engine plane, it might have taken a year or two longer,
but this is one of the greatest engineering companies in the world. There was every reason to do it in terms of
material avionics, fuel efficiency in the planes and they actually still have it on
their books that they’re going to do it, that they should have done it then, they didn’t. Why didn’t they do it? Well, we don’t know for sure. We have some possibilities. We do know that Southwest Airlines, which
was the biggest purchaser of 737 planes wanted a plane that would fly just like its previous
plane, so it didn’t have to retrain the pilots. The pilots were in an airport, they’re going
from an NG to a Max, it would be not going to a different type of plane. That might be a part of it, but they could
have paid a million dollars for pilot to retrain them or give him a- – they could have figured
that out financially. It may be it’s more speculative that they
already are having problems with the Dreamliner with all the outsourcing they had done, which
was part of their business model and they didn’t want to start that whole process anew
at the same time with the mid-range plane. That’s possible. Then there’s also possibility that’s where
the financialization comes in, but it’s not the only reason. The fact is the period when they should have
been thinking, how do we mobilize all our resources to build the planes of the future,
between 2004-2011 and on top of paying very ample dividend, they paid $11 billion out
in buybacks and so when you come to 2011, most companies stopped doing buybacks and
a lot of them in 2009 in particular, the financial crisis or a little reticent in 2010. MAX WIETHE: When you actually should have
done that. You ever actually should have done it. WILLIAM LAZONICK: When I was buying stock
with the high prices, but that money would have come in handy, that money plus interest
that if they had had it, we don’t know if there is. I think there really should be an investigation
into why they didn’t build a clean sheet replacement at that point. Once they went the route of the reengined
plane, if it’s true, and this, we don’t really know but there are congressional investigations
that could find out that this plane had a design flaw that made it inherently unsafe,
and they didn’t want their customers to know about this so they tried to fix it with the
MCAS, and they didn’t tell anybody about it. Oh, that’s pretty serious. Now, where does financialization come in beyond
that? They didn’t do much in the way of buybacks. I didn’t do buybacks up through 2012, but
in 2013, right at the beginning 2013, they started doing them. By that time, it was clear that in terms of
sales that the Max was a success. It’s the fastest selling plane they’ve had
in history. I think the NG might have sold more than they’ve
sold so far, but any case the fastest selling plane and this looked pretty good. Airbus was doing very well with its planes
so it wasn’t just that it was huge demand for planes, which also particularly why Lion
Air is one of the biggest purchasers, it means that you’re also getting huge demand for pilots. You’re not going to have every pilot being
trained as a military pilot so we need planes that we need competent people, pilots, but
when we get on a plane, we can’t assume that solly is on their [indiscernible]. Any case, at that point, we don’t really know
what they do, or they didn’t know but we do know that they started propping up the stock
price. Between January of 2013, and the week before
the Ethiopian Air crash, they did 43 billion in buybacks, including about a little over
9 billion in 2017, 9 billion in 2018. Less than two months after the Lion Air crash,
they increased the dividend by 20%. They authorized a new $20 billion buyback
program but it hadn’t been for the Ethiopian Air crash in March, they probably would still
be doing buybacks and another plane didn’t crash. We’re not sure, but I would have said they
probably would have done 12 billion this year or something like that. March 1st , 2019, which is when the new dividend
went into effect, they hit their all-time peak in stock price. The Ethiopian Air crash 10 days later. Now, here’s think that this might have occurred
if they hadn’t been focused on their stock price. You might have had, I use the example of like
Volkswagen with the diesel emissions, not a particularly financialized company coming
out of Germany but if you’re at the top of the company, and you’re trying to meet regulations,
and you can fake the data, and you can sell your cars, there might be some executives
who are tempted to do that. Actually, I think there’s some in jail now
because of that. It’s not that it’s only going to happen in
a company where you have all these buybacks going on and you’re focused on your stock
price, but it certainly supercharges the incentive to do this. If the public is buying into the notion that
a high stock price means a company is doing fine, then it creates a certain aura of success
of the company. That it’s got its high stock price, it must
be okay. Even what’s– the frightening thing is that
even after the Lion Air crash when they knew that this may have been– they started discovering
why this may have occurred, there was still an attempt by Boeing to blame it on the pilots
to say that one particular plane was not air worthy and they doubled down in a sense on
trying to get their stock price up. Meanwhile, the executives are doing very well
in this. McNerney who had been the CEO from 2005-2015,
I think we had something like $257 million went into his pocket, his actual pay, a large
percentage of it stock based and other related to higher profits, which of course come from
having all the order for the plane. For Muhlenberg, the current CEO, then now
stepped down as chairman, but he was between 2015, summer 2015 when he became CEO and the
end of ’18, for which you have the data, it was about $2 million a month falling into
his pocket. Now that’s a lot of money, even if you are
successful in producing a safe plane because it’s really the engineers– the whole, but
if in fact, you’re not doing what you basically should do is produce a safe plane, then it’s
a big problem. Now, one last thing I’ll say about this is
that a lot of the– and we have this an article in American prospect group published last
May, which talks about this, a lot of the notion, the ideology behind shareholder value
is traced back to an article by Milton Friedman, well known as Conservative Economist of Chicago
School in 1970 in the New York Times Magazine, where he said the only social responsibility
of a company increases profits. This was actually came out in direct response
to Naderism and Ralph Nader and the push for more fuel efficient and safer cars and in
fact, the context was that there something called Campaign GM that wanted to put three
public interest people on the board of General Motors to push for more fuel efficient and
safer cars. Friedman publishes articles solicited by an
editor at the New York Times and called this and it was repeated in some editorializing
opinion of that article by the editor. Pure unadulterated socialism. Now, we know the future of the auto industry. They should have had people on there who were
pushing for producing safer cars because that’s what went out in the auto industry. The only social responsibility of a company
is, you could say, is to produce fuel efficient safe cars. It’s not a social responsibility. It’s an innovative strategy so he was basically
telling people, saying there’s pure unadulterated socialism, don’t be an innovative company. It comes full circle back to what the start
of the book is about what the value creating company is, what innovation is, where it comes
from. It doesn’t come from saying we’re going to
increase our profits. It comes from producing a high quality product
that people want, in this case, fuel efficient cars, safe cars, in the case of Boeing plane,
first and foremost, obviously a safe plane and then getting a large market share to spread
out the fixed costs and get economies of scale and make it more affordable. That’s where we get productivity growth, that’s
where we get a basis for paying people higher wages, paying higher taxes. That’s where we get the posit of some scenario
in the economy as a whole. The Milton Friedman article was really putting
the cart before the horse and we say you want the profits, no, if you want the profits,
produce the product that the market needs. MAX WIETHE: They actually want. Well, I think you make a very strong case
and I was hoping today, we’d be able to get into your last five points. I don’t think we have the time so we’ll leave
it to everybody. If you want to hear Bill does lay out, he
doesn’t just lay out the problem, he also does give five points as to what he thinks
will be the way to fix this problem of the lack of innovation in major corporations in
America but also across the globe. Bill, I just want to say thank you for coming
in today. It was really fascinating. WILLIAM LAZONICK: Yeah. My pleasure. Thanks.

What It Costs To Live In San Francisco | Making It


Everyone wants a piece of San Francisco right now. That’s why it’s so hard to live here I’m assistant professor of sociology at San Francisco State University. Between me and my partner we make anywhere between a $100,000 and $110,000 a year and that’s considered low income here. My family of four: my partner, our two children live in a one-bedroom apartment in a high-rise we pay $2,400. We are living in a university subsidized apartment, so that’s why we have it a little cheaper, but it’s still a one-bedroom apartment. For four people it’s a little tight, right? I’ve lived in many major cities, and I’ve lived in San Francisco before, but this time around it’s super hard to find affordable housing. So when I get up in the morning I get my kids ready to go. My partner and I will be tag-teaming on that. I’ll get breakfast started, and I’ll cook eggs and sausage, cut up an avocado. Child: “I want avocado.” You don’t like avocado, but you like eggs. Child: “I don’t want eggs!” On days that I go [see?] child care. After we’ve eaten breakfast, we’ll head over to her daycare. We pay around $1,300 a month for daycare for our two-year-old daughter. I think that the state should have more responsibility to working parents and working families to help them afford quality child care for their children. Our transportation costs monthly vary, but this is where we’re trying to save money San Francisco and the Bay Area has a definite car culture, but between me and my partner we share one car. We pay around $60 for gas a month because we drive a hybrid and we fill up for gas every two weeks or something like that. When I get onto campus, I’ll grab a coffee and a bite to eat. Come to the office, I will get my work done, respond to emails, get back to paper writing or grading or something like that in my office. After I’ve done some work in the office or after I’ve taught, I’ll go to lunch at a local sandwich shop. On some days my husband and my son will join me and we’ll have lunch together before I come back to work. Feeding a family of four, we really rely on meal planning and cooking at home. So, every week we try and go grocery shopping. We are Lucky enough to live in the city where we have friends and are raising our family in community. So, at times friends come over to share a meal with us and they’ll bring dishes to come and share and break bread together. The bay area is a lovely place to grow up in, right. It’s super diverse. I remember growing up here as an immigrant and a child of an immigrant and knowing that my mother was working a low-wage job. Being a working-class family and an immigrant family here in the Bay Area was never easy, right? It’s not just like it happened in 2017 where, you know, it’s hella hard to live here now. I think there is some sort of myth around that that it’s just happening at this moment Even if I am a professor and I have these great benefits Often it’s harder and harder to justify how to live in this city because it’s so expensive Homeownership in the Bay Area feels like chasing a dream. It’s what they call a seller’s market. There’s no negotiation. Someone will always outbid you in terms of buying a home here in San Francisco. When we do buy a home, it will be in the East Bay. Somewhere not in San Francisco and not in the peninsula. There’s a push and pull about living in San Francisco: the, you know, “I left my heart in San Francisco” kind of feeling, but also you’re brokenhearted in San Francisco because you can’t afford to live here.

The Economic Undercurrent of a Rallying Stock Market (w/ Raoul Pal and Keith McCullough)


RAOUL PAL: Hi, I’m Raoul Pal. Today, I’m going to sit down with Keith McCullough
of Hedgeye and really, I’ve got Keith here for one particular thing because I want to
ask him one pointed question. Keith, What the fuck’s going on? KEITH MCCULLOUGH: Let me tell you, it’s easy. RAOUL PAL: There is so much going on. I know that the market narrative is shifting,
I see you guys are shifting around with which quantum and things are moving. I think people are struggling to make sense
of it because they look at asset prices and equity markets, they see all-time highs, they’re
saying, well, everything’s perfect. It is becoming a complicated situation, which
is precisely why you’re in business to do what you do and why you’ve got a framework. Talk us through a bit of how you see things
and maybe we’ll just kick it around from there and see where we get to. KEITH MCCULLOUGH: Yeah, for the last year,
I think that it was a relatively easy environment to understand. You had basically both growth and inflation
slowing at the same time. Everyone agreed to agree at the all-time lows
and bond yields and I think it’s pretty clear that growth was slowing in China, EM, Europe. Then of course, the US joined that. As we went through that path, you’ve had this
Trump thing, like the tweets and the Trump and the deal and the non-deal and extended,
it’s so hard to keep track of it. You have so many people that have now entered
the game, so to speak, saying well, as long as we have a resolution to that, then it could
all be rainbows and puppy dogs. Our framework doesn’t really solve for rainbows
and puppy dogs, certainly doesn’t solve for a man in a tower tweeting or men from anywhere
for that matter, tweeting. What it does is it solves for these four quadrants. What we have, the only change we’ve made is
that we’re going to see a return of inflation, or the rate of change of inflation accelerating,
and really only for six months. If you think it’s confusing now, wait till
we get six months from now and we start to make the turn again back into what we call
Quad 4. Q2 of next year is where we have the US economy
finally slowing towards the slowest point. You can go Quad 3, Quad 3, Quad 4 for the
next nine months. Quad 3 is economic stagflation, which always
is a precursor for the end of the economic cycle which is Quad 4 which is when you have
both growth and inflation slowing in at the same time and we’re going to be right on the
screws ahead of the US election. It’s going to be pretty intense. RAOUL PAL: With markets looking forward, so
they started sniffing some of this out whether it’s from the tweets or other things, during
the what you would refer to as Quad 4, are we likely to see the markets looking towards
the end of the Quad 3 phase earlier, let’s say in Q1 as opposed to Q2? KEITH MCCULLOUGH: Well, the markets been very
good at sniffing out every single move and front running the Fed, I might add, on every
single move. Anytime the market saw a Quad 4 most intensely
in the fourth quarter of 2018, and again in Q3 of 2019, the market was very quick to cut
interest rates for the Fed. Don’t forget that the yield curve steepened
because the market basically said, if you don’t cut rates at the next meeting, we’re
going to have another little meeting with you. I think that that’s the interesting part,
is that all of that fully loaded cowbell from the Fed, fully priced in Fed cuts into the
most recent meeting, and the idea that we could see demand change and rate of change
terms. Like give me another 10 cents for the next
person that tells me the ISM has bottled. With 100% of those 10 cents coming from people
that never called it topping to begin with are 100% sure this is it. It’s a very dynamic point but we’re going
to get inflation accelerating anyway because the base effect of what happened last year,
which was highly deflationary is an easy comparison. That’s going to happen anyway. I think people are confusing that demand can
accelerate at the same time that inflation could go up. It’s quite the opposite actually, economic
stagflation is when your cost of living goes up, and your real consumption slows. RAOUL PAL: I think that’s the key point. This year on year effect from this point last
year is enormous now. It’s going to skew everything and you’re going
to have, as you said, some very hot looking prints and a number of things. Then as soon as you start getting into January,
because the markets all completely rebounded, you’re going to see it completely unwound
almost immediately. It’s going to be a fascinating period. Meanwhile, I look at the background of stuff,
the rate of change of stuff, and I’m looking at the rate of change of the increase in price
of copper is rolling over again. It looks like the increase of the rate of
change in or even more so, emerging market currencies are now starting to fall in absolute
terms again, quite sharply and we saw the Chilean peso today, stuff like that, just
like okay, it feels that the weaker things in the background are starting to already
transition. KEITH MCCULLOUGH: Yeah, the weakest thing
is China. When I look at copper, I see China. When I look at the Shanghai Composite Index
or Shenzhen and for that matter, I see copper. They’re all the same thing. They are not the US formal. They’re very different things but under the
same assumptions, people are expecting Chinese acceleration and demand. Meanwhile, the Chinese themselves, the locals
won’t buy it. It’s an amazing thing to watch now. At the same time, you can see I see big divergences
in the softs, or on egg, on long cattle for God’s sakes, Raoul, this is getting out there. I’m long cocoa, actually, to make it even
worse, because we’re actually seeing some of the supply shortages that we did see with
commodities being so oversold with the dollar at a 20-year trade weighted high. That’s actually just a simple pivot to reflate
from anyway. It’s not one that I think is going to be sustainable
and I don’t particularly care selfishly, I just want to make money trading the pivot,
but in no way shape or form do I think that this is the signal broadly and macro to your
point that we’re going to see a Chinese acceleration in demand. That’s the easily the ugliest thing that we’ve
seen in rate of change data this week, which is the October Chinese data. You’re either staring at Macro Tourist and
somebody’s unfortunately getting shot in Hong Kong and thinking markets are trading on that
or you actually paid attention to the rate of change data, which was a new high in inflation
in China, a new low in the producer price index at the same time and a 15-year low in
loans in year over year demand. It’s quite alarming to see an economy of that
size, and of that order of magnitude in terms of expectations, slowing against easing comparisons,
that is as damning as it gets for an economy and that’s what’s happening in China right
now. RAOUL PAL: I think one of the hardest comparisons
is actually what you’re picking up as well is obviously the pork prices. It’s coming through all the food chain. Hence why you’re seeing beef prices pick up
and a number of other things, along with tariffs is the Chinese have basically we don’t know
the size of the destruction of their herd, but its enormous. It looks like it’s spread elsewhere around
the world as well. That’s a huge input price to the average Chinese
person. Meanwhile, they can’t borrow money to smooth
out the effects of that, so that’s a real consumption crimp. KEITH MCCULLOUGH: Yeah. Big, big problem. People sit there and they said, well, how
could that matter? Well, it mattered big time. It’s affected the entire US protein complex. 70%, I’m saying this increasingly at the dairies
when we’re looking at these numbers, I’m like, they’re making up the numbers, they should
make up a better number than that number, because that’s a– first of all, that’s a
really bad made-up a number in the Chinese demand terms. Now, the inflation numbers, it’s easy to see
pork prices are up 70% year over year. Again, that’s happening. Chinese inflation is now running hot and that’s
just going to make Chinese growth slow even faster. Let’s just imagine that we go through the
most beautifully wonderful deal with all the adjectives fully loaded in tweets, and that
happens. Let’s just say it and by the way, it can happen
next month, because it’s always the month after that and demand continues to slow. Post your bounce, give me a bounce in ISM,
actually, give me a bigger bounce. Give me PMIs, ISMs, the bounce is higher than
where I think. You’re going to wake up in January with–
our nowcast for US GDP growth has a zero in front of it. 0.58%- – RAOUL PAL: For Q4 or Q1? KEITH MCCULLOUGH: For Q4, which will be reported
at the end of January. Post all of this happening, the Fed is now
going to have to reduce their dot plod and probably go right to the wood for you on your
Eurodollar position and finally get more incrementally dovish, because currently, they’re nowhere
near dovish enough relative to what that GDP headline number, I’m talking about the quarter
over quarters [indiscernible]. RAOUL PAL: It’s not unusual. I read tweets about this the other day, it’s
not unusual in the midtown cycle to see this part of reflation trade now, because whether
it’s the earlier comps that do it or whatever it may be, the start of the Fed cutting cycle
and the psychology of oh, we’re saved isn’t that amazing, it’s pretty common to see a
pullback in fixed income, a slight increase in the inflation style data before the whole
lot rolls over because everyone’s backward looking. Always looking at the unemployment numbers
and consumption numbers, which are the last things always to move. KEITH MCCULLOUGH: Right, and don’t forget
October of 2007, November of 2007, this is exactly the same setup. Now, when you mentioned those dates, or when
I mentioned those dates, I first of all, remind myself that that’s when I got fired, but people
naturally say, oh, my God, like I literally just came out of a couple institutional hedge
fund meetings, where there’s a– you said that this is like the consumption setup relative
to commodity costs inflation in the fourth quarter of ’07. I said, absolutely. It’s called Quad 3. It’s where your cost of living rises on a
short term basis. Don’t forget where oil went in the first part
of 2008. That perpetuates your real consumption slowdown,
and that really plays to the heart of the biggest consensus. You literally, even if you’re watching it
on mute, you’re going to hear people at CNBC say that the consumer’s in great shape. This is what we know. 100% of the time anyway, at the end of every
economic cycle. That’s not the point. It’s when they slow for the first time and
moreover, when jobless claims rise for the first time, which we haven’t seen happen in
a decade, that is actually the high probability bet that we have right now, is that year over
year earnings go negative. People start to file jobless claims because
they’re getting fired and the consumption patterns slows at a faster rate. That, I can’t calibrate until I see more data
points but we’re along the rate of change, the sine curve, we’re at precisely the same
point at the end of the fourth quarter of 2007, which is not a good reference point. RAOUL PAL: No, I was just writing an article
today about car industry. The currency is screaming that this is a bigger
deal going on here. We’ve got, obviously the slowdown in sales
that’s going on around the world, but we got pick up in inventories. There’s a whole bunch of things. The collapse in price of used cars and you
look at that thing, and this is exactly the thing that starts before jobs get lost. We’re starting to see layoffs in fact and
coming in some of these places, jobs start getting lost and people start losing faith
because if your car starts losing its value very quickly as well and you’re living in
the margin anyway, that’s an expensive thing to think about because you need to replace
your car. You start worrying, oh my God, I’ve lost all
that money in my car. It’s these things at the margin that change
consumer behavior and they take time, because consumers are listening to the President saying,
isn’t it great? Stocks are at alltime highs, which is not
a million miles away from 2000 and 2007, but the reality is underneath, everything’s going
to shit. KEITH MCCULLOUGH: Well, if corporate earnings
go to shit, your job prospects and how you think about buying these big ticket items
is going to go to equally go to shit. There’s actually a very good sentiment survey
within– there are plenty of consumer sentiment surveys you can look at but if you look at
the University of Michigan Consumer Sentiment Survey on your propensity to buy a big ticket
item, ex-auto at the 2008 lows. As you know, and I know, if you get zero percent
financing, people might actually go do that, but you can’t get zero percent financing for
a washing machine. You can’t do that for– it’s within the durable
goods complex that people are saying, hey you know what, I’m actually not that confident
and there are certain things that I can’t quite put my finger on, but I’m pretty sure
it has to do with the company that I’m working at. Starting to cut a little bit on the margin
and starting to talk about the world changing a little bit. Don’t forget that only a year ago, we hit
the triple peak, GDP growth, inflation and corporate profit growth. Rainbows and puppy dogs as far as the eye
could see. When you have corporate profits, you spend
on capital mid-cap CapEx, you buy back stock, and you hire more people. That was the peak. A year later now, people understand that something’s
changed but they’re probably a little lost here for words when you have somebody tweeting
at you from the presidential office, like look at me, look at your all-time high spend
away. It’s like those tweets take me like, wow,
those won’t age well. RAOUL PAL: No. It’s irresponsible as well, potentially, if
we’re writing the underlying trend of the global economy, the US economy is slowing
still over time, then to be telling people to spend money and take out more credit or
do whatever they’re doing is irresponsible. KEITH MCCULLOUGH: I think that that’d be a
kind way of putting it. It’s negligent and you’re misrepresenting
simple and basic economic facts which Larry Kudlow, or anybody who’s got anywhere with
all on a sine curve could tell you that we’re slowing. By the time– that’s the utility of the nowcast
on GDP. We have not seen it zero, you can look as
far back as you can go. To find a zero on headline GDP is hard to
find. Moreover, we went from one to two to three,
we had one headline that was north of four. This is a dramatically different version of
the truth than what’s been represented with some of these, like I said, they’re negligent
tweets if we got for better right on the number, then those are negligent tweets. RAOUL PAL: Yeah. I think, you and I talked about this in the
past, this is almost precisely the reason we even got into business is to stop people
being fooled at times like this. Because it’s important, it’s people’s money. It’s people’s life savings. It’s their pensions, all of that stuff. It’s not right that the President is making
the noise that he does. You don’t have to be negative, sure, but don’t
cheerlead. Don’t try and push people into doing things
they shouldn’t do. Sure, we could be wrong, but the probability
is not that high. KEITH MCCULLOUGH: Now, this is not– you don’t
do that with the man on the street. It’s not cool. It’s not right. It’s not a political comment. It’s just if you’re against fake news, then
don’t perpetuate the ultimate of fake news, which is not acknowledging what’s happened
to the US economic data, which even the Fed itself, they’re the last to figure it out,
as obviously figured it out. It’s not going to hit, like I said, these
tweets will not age well. In fact, it might– and in the institutional
community, I think it’s an also– I don’t think it’s negligent. I think the word fiduciary comes to mind. Because everyone who does math, again, rate
of change math, everybody knows that growth, inflation and profits have slowed. Yeah, they might be better than expected because
S&P profits are down 1% to 2% year over year instead of down 10%. That’s everybody knows. For you to buy stocks with people’s 401k,
again with other people’s money, because you believe that he believes that there’s a chance,
that I think that there’s a lack of fiduciary responsibility. RAOUL PAL: And I think the same thing is you
look at every economists forecast always, they never will forecast a down cycle. Well, a small child can look at GDP growth
for the last hundred years and go, well, it goes up now. It’s a sine wave. It’s obvious. Therefore, what you should be doing is thinking,
well, let’s say, we’ve just had a recession. Within 10 years, we’re going to have another
recession with a 90% probability. They won’t, they’ll just go, no, no, we’ll
extrapolate future growth forever. It’s like, really? And you get the PhD. KEITH MCCULLOUGH: Yeah. It’s pathetic. RAOUL PAL: It’s ridiculous. KEITH MCCULLOUGH: First of all, the Fed’s
projections on their dots are wrong almost 70% of the time, which is pretty much horrendous. Even if you look at just the narrative of
Wall Street better than expected, said by who? Tell me one house on Wall Street that told
you a year ago today, and at least that a year ago today was in November, you had some
time to watch the market go down for a couple months, or six weeks and the Russell’s case
since the end of August, you show me just one person that said that GDP was going to
slow from its cycle peak, inflation was going to slow markedly, bond yields go to the lows,
earnings would go negative year over year, and that was better than expected. Better than what you expected a year ago. Not even close, but constantly moving target,
constantly floating target. Again, that’s why we built the firms that
we built because that just certainly is not the truth and the forward outlook is actually
quite alarming to be depending on them for the next version of the truth. RAOUL PAL: Probably this is neither of us
say that we’re always right, far from it. Even the whole industry, we were just talking
off-camera beforehand, the whole industry is screwed up in this way that nobody can
stick their necks out anymore. People just can’t take risk because everyone’s
trapped in a one-month time horizon, or in some cases, even less. If you think about it, economically, there
comes out one piece of data a month, yes, you can find some high frequency stuff maybe,
extrapolate it from market stuff, but really? The best you can probably get is a weekly
data, but yeah, everybody so that’s four data points in a month. You shouldn’t really be trading a P&L around
four data points a month. KEITH MCCULLOUGH: Or perpetuating like this
performance chase. RAOUL PAL: No. That’s they’ve got themselves in a huge mess. You can see industry returns going down and
down and down. KEITH MCCULLOUGH: Yeah. Well, I mean today. You can talk all you want about the year to
date. Again, let’s just not talk about what happened
for the three months of the fourth quarter of last year where you could have lost 25%
to 30% of your capital in any US based stock index, it wasn’t a bond proxy. Let’s just ignore that for a second, park
it there and say the year started with everyone’s going to get paid. Now, we have this year to date number that’s
up a lot. A month ago, it was 41% of managers were beating
the bogey. Now, it’s 29 and falling. They’re literally forced and compensated to
chase the market for whatever remains of the year to try to get to an unreasonably high
target. The S&P 500 is 27% more expensive today than
where it was when it started the year. 27% higher, and that’s only because the market’s
gone up and the earnings numbers have gotten down. The only time we’ve seen a divergence like
that was back in 2000 to 2001. That’s a very alarming picture because again,
of course, 2001, we saw earnings not just go negative for the first time, but then went
double digits negative. By that time, you didn’t have to have a US
recession. You had a corporate profit recession to lose
well over half of your money. RAOUL PAL: Yeah, the recession was pretty
mild back then, but the market recession based on the corporate profitability was obliterated. KEITH MCCULLOUGH: Yes. When you think about that relative to the
corporate credit bubble that we’re in, obviously– RAOUL PAL: That’s a bigger issue, though. KEITH MCCULLOUGH: Yeah. There’s so many charts that I show institutional
investors that I’ve walked through with you, and you show me yours. It’s like, ever is a long time. There has never been the spread that we currently
see between Triple C credit and the Bs. You take what is considered the higher quality
credit and the stuff you’re not allowed to own, they’ve not only diverged to their widest
point, but now, they’re heading in the opposite direction for the first time ever. You usually, or all of the other times, that’s
why we have the ever now. We have Cs take off, lower quality credit
spreads widen, and then Bs follow. The Bs will follow. Where will the Bs meet the Cs? They will end up in the same place and it
could be violently, it could be suddenly. To me, that really is the point about corporate
profits. If corporate profits remain negative on a
year over year basis, labor continues higher as it always does at the end of the cycle
and companies continue to push out, guiding down because of a proposed Chinese bean deal. Yeah, that could be your eye opener, is not
that getting the T-minus three to six months from now, this thing should look a lot different
than where it looks today without the year to date dynamics of people chasing the spreads. RAOUL PAL: Yes, there’s a couple of things
observations on that. CCCs, there’s obviously this shenanigans going
on in the funding markets right now. There’s basically a lack of domestic liquidity
in the funding market, because the massive new issuance is coming the out of the Treasury,
but that illiquidity, the Fed started printing more money again to do it to try and alleviate
some of that strain. At the far end of the strain curve is the
CCCs and they’re going, no, no, no, there’s a problem here. They’re not getting the funding they need
so they’re blowing out. The BBBs, because they’re supported still
by the pension funds sector, are not feeling it. Meanwhile, there’s the corporate profit slowdown. What’s in that bunch of BBBs? Ford, GM, AT&T, General Electric, and Dell. Those five are enormous part of that market. Any one of those and Ford one got downgraded,
one of the agencies downgraded to junk but one of those who actually falls becomes the
fallen angel and falls into the CCC category. The whole thing’s over. Because the markets will seize up because
they can’t– the junk bond market doesn’t have enough buyers already and it’s widening. If one, God forbid, if one of these come through
and get downgraded, the whole thing’s going to seize up. KEITH MCCULLOUGH: What is the discussion in
the boardroom to avoid that? For all of them, it’s to fire people. RAOUL PAL: Or usually, General Electric, the
other one is equally as bad, restructure the pensions. KEITH MCCULLOUGH: Yes. Somebody has to take a markdown. RAOUL PAL: Someone’s going to get screwed. It’s always the little guy, it won’t be the
CEO. It’ll be everybody else, those who get fired
will lose the benefits. KEITH MCCULLOUGH: Well, it’s interesting like
GM. If you look at GM, the last time they had
their strike was in ’07. Again, the dynamics are the same. After you hit the peak in profitability, the
people say, I want a piece. Now, they’re going to get their piece. If you get more and more of this into the
election, the dynamics are real and labor’s coming off basically a 15-year low relative
to corporate profits, this is a period that no money manager, certainly the ones that
are illiquid and levered which would include all of private equity, have had to deal with. Again, every other cycle, labor has been high
and rising. That’s what always perpetuates a recession
because the Fed can’t cut people’s wages, and they certainly can’t fire people. That’s what labor is going to do, but it was
always high and rising. 1980s, 1990s, that’s why people like or at
least they can, or at least a macro person should like the 1980s and 1990s, irrespective
of your political party affiliation, because we had very good relatively low cost of living,
we had really economic growth and labor was high and rising. Now, it’s been blasted to 15-year lows, again,
put off paying the people, corporate profits were big, fat and happy and labor’s rising
from the ashes. This is probably the most important secular
turn in labor that certainly anybody our age or older has seen. You’ve never seen it before. What could possibly go wrong? Anyone who’s levered long assets that have
people facing businesses are going to have to face the reality of having to pay their
people more and/or just getting lower quality higher and seeing reduced corporate profit
margins and reduced corporate profit margins, negative year over year corporate profits
is the catalyst to what you just year marked as a ring of fire, if you will, of companies
that really aren’t “secular growers”, I can go off on that, but these are cyclical companies
that have bloated cost structures to begin with. RAOUL PAL: Yeah, exactly right. Also interesting in the margin is you see
delinquencies in cars. They come to new highs. You’ve got– yeah, on 60 days, 60 days or
more, delinquencies are at new all-time highs. It’s like, okay, that’s something, that’s
an interesting data point, the consumer’s not quite as happy as people think they are. You look at the credit card borrowings, and
then you look at the rates credit cards are charging, which is the highest all-time rates,
considering interest rates, and that’s the data that goes back to 1990 or something and
credit card rates are high not at 17% than they were back then when interest rates are
8%. It’s like, okay, there’s something going on
here for people– the only reason they can do that is demand is high enough that people
need the credit. It’s the only source of credit they can get
because they can’t get any other credit. There’s something telling you, there’s bits
creaking at the seams here, so how do you think it plays out– and again, neither of
us are interested in the politics of it but the election side of it, it sounds like you
don’t think that the administration can keep the economy floated into the election. I’ve got different view that I don’t think
they want to, I think they’d rather have a recession. I don’t think it’s as a shoo and that they
really necessarily need to keep it in the way that it is. Because I thought today, Trump was very clearly
again, blaming the Federal Reserve, it’s nothing to do with me, look how they screwed you. How do you think from a nonpolitical standpoint,
how you’re seeing it play out? KEITH MCCULLOUGH: My political lens is always
explicitly affected by my quad outlook. We are right on the screws. I’m not a believer that any politician central
planner or otherwise can part the heavens and give us a new path underneath the seas
of economic gravity. The economy is going to continue to slow and
if it continues to slow into what we call Quad 4 which is the most damning of market
conditions by Q2 of 2020, that’s the worst place for Trump to be for a period of time. Because that’s when Elizabeth Warren’s chances
or Bloomberg or whoever’s are going to start to rise and again, it’s more about the probabilities
change. There are very few money managers on Wall
Street who actually, even if they hate the guy like the Bourbonic Plague, they still
believe in some way, shape or form, that Trump has a good chance to be reelected. RAOUL PAL: Almost everybody. KEITH MCCULLOUGH: Yeah, if you don’t– like
I have raging Democrats telling me that I live in the state of Connecticut, I have plenty
of exposure to them in non-money market, like nonmarket people won’t have that view but
if you’re running a portfolio today, you can’t tell me that you expect the tax rates and
the truncation of tax reform, which is the biggest thing for corporate profits that the
modern era has ever seen. Like you can’t possibly say that that’s in
the market. I think that that is a big shift, too. You get your zero percent handle on GDP in
late January, the economy continues to deteriorate. We take a look at Quad 4, the last two times
the market’s taken a peek at Quad 4, not good for Trump, not good for the stock market,
which is one and the same thing. It’s almost like I think that– and I think
now Ferguson said this, if the market starts to go down for real for once, God forbid,
actually, it’s done it multiple times, but again, if it goes down for real, her chances
go up. It’s the Soros reflectivity view, which is,
again, the faster you go down, the higher her chances, and you could wake up one day
where people are right scared of that, and Trump gets reelected just for that reason. Then you get the mother of all rallies from
a much lower point again. Again, that’s way out there but I’m using
my quads to instruct what the political and reflexive human response would be to just
negative economic conditions. RAOUL PAL: Now, my view is somewhat different. I think economically, we have the same view,
but my view is on the Trump side, if you can anger the American, the middle American, because
they can’t be screwed over and if you can blame it on the Federal Reserve and the Chinese
and the Europeans, then if you are going to a recession, first, you say I will save you
with some MMC John Spinning package and secondly, it gets them mobilized because they hate everybody
else. That’s a typical thing and Elizabeth Warren
will use the same tactics, will say well, it’s all his fault and blah blah blah. It’s going to be a very interesting election
and I never trade markets on elections but it’s just interesting. Talking about elections, what do you see in
the UK? KEITH MCCULLOUGH: Well, we see Quad 4 in the
UK. That’s where we started and again, seeing
the UK through the lens of the quads and what are the prevailing conditions of growth and
inflation has been absolutely the way to trade the UK from a gilt perspective, long gilts
Quad 4. RAOUL PAL: Yeah, you just ignore all of the
noise and just look at the economics. KEITH MCCULLOUGH: Yes, exactly. Short the pound, Quad 4. Now, the pound is actually trying to have
a breakout here relative to the dollar, which is interesting. However, it’s based on a catalyst which is
this expectation which I have zero edge on. Plenty of things I had zero edge on but one
of the big ones I’m certain of is the political outcome in the UK and when this Brexit catalyst
actually can be finalized, it’s just not what I do, but the market is saying there’s a chance,
like there’s– as long as there’s a catalyst, it’s closer. That catalyst is also aligned in terms of
the quad timing that I have for the US economy to slow at a faster pace, then that would
be bearish for the dollar and bullish for the pound anyway. That’s an interesting one, because I’ve not
been long the pound for a long time. I’m long Canadian dollars against the US dollar
for the first time in a while, but I’ve been willing to go there in the UK but broadly,
UK data is Quad 4. RAOUL PAL: Talking about fiduciary responsibility. You’ve got a situation in the UK where the
economics is relatively clear it’s Quad 4, but you’ve got this huge overhang of something
else, which of which you have no edge, is the right answer to the [indiscernible], just
keep out of it? KEITH MCCULLOUGH: I just stay away. Yeah. RAOUL PAL: It makes no sense otherwise. KEITH MCCULLOUGH: Yes. I think that this is a point that you made
earlier that’s critical to understand. Wall Street isn’t like the person that’s watching
this. They aren’t like you and I. We, until somebody removes it from us, maybe
the CCP governs us and we can no longer have any legal right to make our own decisions
on our own free will, we can decide to buy whatever we want, whenever we damn well please. Wall Street is siloed into these are the people
that trade the pound, these are the people that do the UK, these are the people that
do the US consumer. These are the people to do US healthcare. They have to have a view. All of the time, think about how hard that
must be. In fact, it’s rendered itself useless. There’s an oversupply of money managers, and
you’ve basically made everybody a silo expert of nothing. What I intend to do is I’ll wait and watch. I wouldn’t been able to tell you a year ago
that I’m going to be long cattle and cocoa today. Are you kidding me? We’ve seen negative supply dynamics, I see
the volatility of the volatility of volatility, the signal changing within the commodity space. I see two dynamic situations that wow, this
is perfect. The crowd’s definitely not there and that’s
when I go. As opposed to feeling like I have to have
a view that the crowd is having fumble on, or tweeting about, or God forbid, reading
CNBC view of every day. RAOUL PAL: Spinning a bit more around the
world and then we’ll come back, we’re going to come to the dollar later. There’s two markets that we’ve all looked
at and thought at some point, they’re going to enter trouble; Canada and Australia. Where are we with those? Is everything in the same sink right now? Is everything in that Quad 3, moved into Quad
3? KEITH MCCULLOUGH: No. Well, in Canada, in particular, we have back
to back Quad 2s coming. If there is a country that looks like inflation
accelerating, it’s Canada, and they are the recipient of it, like within the Toronto Stock
Exchange Composite Index, the heavyweights are Quad 2 exposures, which include energy
companies and the banks. Canada for the first time, if only for six
months, and the Canadian currency for that matter, that’s why I’m long it, because it’s
hard to find. First of all, Canada only has twos because
they’re comparing against borderline recessionary Quad 4s that they’re coming out of. That’s why you have that, but you also have
the dynamics that they are hooked to headline US inflation’s acceleration and the broader
breakout in commodities. Canada to me, it looks like we’ve been long
it since the beginning of October. It’s a relatively new position, but it’s the
same position that I have across the board. I bought TIPS instead of being as long as
I was of duration. I flipped the Dalio move and flipped into
some of that. It’s a cheater. He knows it, that’s why he created it. If you want to outperform people that are
permanently long duration, let’s have a different thing to be long while they’re still long
duration and inflation accelerates. TIPS. It’s like the old adage, just you don’t have
to outrun the bear, you just have to outrun your friend. Again, I’m just trying to isolate that view
of inflation accelerating particularly North American inflation accelerating, so it’s long
energy, which is I think the most concerned position that we have in equities, long Canadian
energy, long Canadian equities, broadly long the Canadian currency, and like I said, long
the proteins, long lumber, which is another way to double up on our– RAOUL PAL: You’ve
got the full on reflation trade on? KEITH MCCULLOUGH: Yeah. Yeah. Well, there’s no mincing words about that. I’m short the consumption curves and software,
which are, it’s a very– I have a higher beta setup than I’ve had for a year. Because I’m long things that are classically
what I call phase transition coming out of bearish trend, Quad 4, do not buy energy,
do not buy commodities, short both to buying what I was short, which can be somewhat unnerving,
but exciting. On the same token, consumer staples, which
was a long, we’re shorting though. RAOUL PAL: There’s a psychology that’s difficult
here. Your prevalent view is that we’re in the downside
of the cycle, but what we’ve got is not faced within a down cycle. You have to trade against your view, which
I don’t ever do. It’ll either the out or outsize it so I could
just sit with the longer term view, just different way, different time horizon. I find it particularly difficult to trade
against my own view, that personal view. If I know there’s some confusion, I just bail
it, but you’re doing it. How do you do that? How do you find your plan still with that? KEITH MCCULLOUGH: Well, my model, the way
that my model is set up is not A or B, there are four different economic outcomes. It’s an explicit bet on what we call Quad
3. RAOUL PAL: No, I understand that. KEITH MCCULLOUGH: Yeah. That is a six -month view. That’s not against my view. That’s my view for six months. The hardest part will be to get back to the–
RAOUL PAL: You are in the down cycle of which, that goes on longer than that. It’s based on your view and it’s all about
time horizon. KEITH MCCULLOUGH: Yeah. If I only go back and look at how could I
have traded ’08 better? Crushed it in ’08 by just staying with the
view that we’re in the down cycle. How could I have done better? Well, I would have bought commodities in the
early parts of Bernanke going dovish, and stayed long– RAOUL PAL: That whole correction
that we had, the reflation correction we had in the middle of 2008. It was brutal. KEITH MCCULLOUGH: It helped my consumer shorts,
which is where I made all my money in ’08. I just kept shorting every bounce in every
story stock, every loved, broadly held story stock, consumption oriented shorts. That’s where my, I guess, my formal training
came as a hedge fund analyst and then a PM in the consumer space. If I could do it all over again, I would have
been long crude futures on top of that, that the alpha is manifest when you have the cost
curve piece on for that six-month period of time. It is an explicit view of stagflation. Every time– like, again, for me, and God
willing, I get to live through a couple more cycles. I might be 90 years old at this point if they
keep [indiscernible], but it is classic late cycle, where labor and you get that final
push of inflation. You can make money on the long side of that
while you maintain your bearish view on the consumption curve or the proper, as you said,
the down cycle. RAOUL PAL: From my perspective, I’m not so
short as long term correction. I’ve looked at the history of, of these moves
in the down cycle and there’s two which makes it somewhat complicated. There’s one and I look at it through the lens
of Eurodollars you and I’ve talked about. That’s been a big thing for me at the moment
because for me, I find it’s the best way of trading the down cycle as well as– the up
cycle tends to be equities and commodities better. The down cycle tends to be rates, which is
why you’re not short rates right now particularly, but you are long commodities because you’re
in the reflation. Anyway, so I look at this and both 2001 and
2007, both had 70 basis point pullbacks in Eurodollars, which were the gut check reflation
trade. They didn’t last that long, they lasted three
months, which is where we are now. Then in 2008, and 2001, late 2001 going into
2002, before the 9/11 were these huge pullback in rates, which was the Fed have done enough,
the cycle’s over, oh no, it’s not phase. I don’t know which one of those we’re in. I feel like it’s too early for the bigger
one, which will be the sixmonth, nine-month trade but I hear what you’re saying and also
can see that okay, maybe it’s a hybrid. I don’t know. It’s very interesting for me but I’m staying
in the short end and just hiding out there waiting because I was in a long time ago,
and something we talked about before is if you’re not doing monthly mark to market or
even annual, then it doesn’t really matter, you’d look at what price do I buy it, at what
price do I sell it? KEITH MCCULLOUGH: 100%. RAOUL PAL: The entire world’s gone mad because
they don’t even think about it. When I was running a hedge fund, literally,
it didn’t matter what price I bought anything or I sold it at. It was how much money I made that month. If I was going to lose money that month, had
to change, get rid of the position even though I’ve made for x in it. It’s crazy. KEITH MCCULLOUGH: Yeah, well, great example
and you absolutely nailed that was obviously the Eurodollar trade, by the way, everybody
a year later agrees with you because the net long position there is like one and a half
million contracts. Net interest [indiscernible] just epic. RAOUL PAL: But all the other problems are
short. That’s a part of it. KEITH MCCULLOUGH: On that piece, that’s actually
the point I was going to make, which is on the short end of the curve, which is I like
to think of, okay, we got into short term treasuries on October the 17th of 2018. That’s good. We like that cost basis, but when do I go
big again? When do I grow set position up again? That clock because I’m making a T-minus six
months call on inflation accelerating, I’m not willing to run the clock up six months,
because the GDP number is T-minus four months. That’s the January number. I think that that’s the beginning of the Fed,
because again, the short end of the curve is what the Fed does, the long under the curve
is what the market thinks the cycle’s doing. If the Fed actually sees that and goes to
where Fed Fund Futures are, their dot plot is as wide as it’s ever been going back 12
years since the inception of the dots, and again, a highly inaccurate dots of process
or whatever you want to call that forecasting process to do that, but they will have to
acknowledge at some point that their dot’s going up this way in terms of economic expectations
have to come down. That’s where I think I cannot, you cannot
be big enough on the short end of the curve into that. RAOUL PAL: No, when that happens, it becomes
the crisis trade. KEITH MCCULLOUGH: Because you can take the
2-Year Yield down 100 basis points from where it is today, which is a monster move relative
to the long end of the curve. RAOUL PAL: Yeah, and the leverage you can
take in something like that is enormous, too. KEITH MCCULLOUGH: Yes. I’ve spent a lot of time with clients, and
we can talk about it later but clients are all asking, okay, what is it? Should I use swaptions? Should I do use this? Should I use that? Eurodollars, they do see it as having been
a little bit more crowded than they would like, that’s the discussion within this discussion
but it’s pretty simple. If we’re right on the economic projections
the Fed is going to have to at some point in early 2020, look like they are actually
completely politicized relative to the Trumpia. RAOUL PAL: I just think that the yield curve
is telling us something. Now, the yield curve goes negative into recession,
we’ve seen. The swaps curve got to zero, which is the
same as it did every single, actually went negative which was actually rare for the swaps
curve 2s, 10s, and it seemed to steepen. The prerequisite for a recession is steepening
curve. Everyone thinks it’s the negative curve. It’s not, it’s the steepening curve. KEITH MCCULLOUGH: Post the inversion? RAOUL PAL: Post the inversion. Yes. Which it’s now doing, which plays into, as
we’re both saying, somewhere within Q1, Q2, it’s going to start getting ugly again. KEITH MCCULLOUGH: Yeah. Well, that steepening is just based on the
Fed catching up to our view. They’re the last one to figure it out. Once they do, they steepen the curve by cutting
the short end out and I think that if they don’t do that, then they perpetuate having
to do more when they finally do do that. They are the catalysts for their own panic
if they don’t acknowledge it soon enough. That’s why I do think that that GDP number
if we’re right on the headline, in conjunction with profits slowing and jobless claims rising,
there is no case to be made for jobless claims rising for the first time in a decade for
the Fed to not go incrementally dovish, and probably aggressively so if I’m right on that. Again, that would just be washing through
Q4’s earnings season into the Q1 of 2020 outlook, where the street is way outsized on earnings
expectations. They’re actually looking for earnings to be
up 5%, 6%, 7% in the first quarter of 2020, which I think is mathematically impossible. RAOUL PAL: Yeah. They’re just looking at, they just want a
hockey stick up every time. They just don’t want to believe the fact that
things can trend lower. Where are you most excited about in the world? Is there anything you see different that’s
not in the same cycle? Because that’s the key thing. Because most of the world, give or take is
in the same cycle, some leads, some lags. Is there any way you would say a great thing
about this is just entirely different. It’s a breath of fresh air. KEITH MCCULLOUGH: Well, on the short side,
yeah. I’m feeling it’s not– I shouldn’t say feeling,
if I ever say that again to you, Raoul, just take me off Real Vision. RAOUL PAL: Basically, there’s nothing in it. KEITH MCCULLOUGH: There’s no feelings, there
are cycles. I think this software bubble that built within
the cycle is potentially like this thing that can almost make you giggle, or things trade
at 15 to 20 times revenues with these TAMS as far as the eye could see. They’re seeing rate of change slowdowns in
revenue growth, and massive, bloated cost structures. That’s like, in short selling space, that
is easily bee– by the way, the software stocks are down depending on what day you’re looking
at them, they’re down 8% to 10% already since July. I like it when the movie already starts and
the index doesn’t agree with that setup. Actually, consumer discretionary, broadly,
is the other one that’s down since the July highs. You have this concept of secular growers which
has never happened before. It’s only something Wall Street could make
up, a secular grower is something that’s never seen a cyclical slowdown. Great. To me, that like from a short seller’s perspective,
because let’s be clear, you’ll find them at Real Vision, but the art of short selling
has been shot for dead. That, to me, is the most exciting thing. Having an independent research team with 40
different analysts. We’re finding some really interesting shorts
and very low short interests, which reflects the broad interest that people have in story
stocks, or in these TAMS, these total addressable market stories. It’s all about stories, and again, as they
become cyclical, I think that that’s probably the most exciting thing in terms of opening
the envelope to the downside because we’re already seeing that actually in this earning
season in particular. RAOUL PAL: Just a side story to that, it does
worry me, because obviously a bunch of hedge funds are more than skilled at short selling,
but there’s the short sellers, people like Marc Cohodes and stuff that we all know and
love, are very skilled at this but it’s a very, very skilled business, particularly
if you’re fraud hunting, as opposed to trading a directional view based economic views or
whatever it is. We saw that the amount of tourists, short
selling tourists, I think more than Macro Tourist, they all flooded into Tesla. Then people have lost fortunes in stuff like
this. There’s a whole bunch of these stocks that
they were like, they’re definitely going to zero, they’re definitely going to zero. It’s all a fraud, because they became market
vigilantes. A lot of them came out of the gold crowd,
the same vigilante stuff. It really concerns me that people have been
pushed into stuff like that, because they don’t really understand that short selling
as you know is not easy. KEITH MCCULLOUGH: If you don’t have, and I
know that this is going to ruffle feathers, and maybe the first time I’ve ever done so,
but if you don’t have a macro process to overlay when the cycle is in your favor as a short
seller, I think you need to really rethink that. If you think about– RAOUL PAL: Well, unless
you’re an expert short seller who writes a whole thesis on the thing and everything else,
because it’s so difficult. KEITH MCCULLOUGH: Even that, when the cycles
not on your side, and I don’t need to name names, but they lost their hedge fund. Since the financial crisis in ’09, I think
50% of hedge funds that launched on the Goldman system are gone, because people start with
shorting valuation. Valuation is not a catalyst. The cycle slowing is the catalyst and expensive
stocks within a slowing cycle is the ultimate short seller’s dream. It made many short sellers famous, those that
have ignored the economic cycle. 2017 is a great example. I was born a short seller. The first thing I learned how to do is short
a stock because my first job on the buy side was in 2001. I come to my boss, John Dawson, I said, well,
they’re going to miss again. They’re going to what? They’re going to miss again. I just listened to what they said at the conference. I put it in the spreadsheet. Their margins are going to be down. The revenues are going to slow. He’s like, short it. Like, okay, this is cool. Short it. I thought it was just like buying something. I thought that’s what you did. Because it’s when I was born into the business
that mattered. Anyone who’s done something well over time
can tell you that. There is a significant amount of luck in terms
of when you were put in that seat to do a certain thing. RAOUL PAL: You have a boss. KEITH MCCULLOUGH: Yes. Okay. Then the rate of change went bullish in 2002
of all the shorts, I come back to John and I say, well, they’re going to beat it for
the first time since I’ve worked for you. They’re going to what? Cover that short, we’re going to buy that
stock and lo and behold, growth was accelerating from obviously late ’02 all the way until
2007. I think most people that got blown up in the
story socks high multiple. Again, there’s some epic things that have
gone on, we weren’t fully loaded Tesla’s Elon storytelling, but people were shorting them
into the 2017 tax reform acceleration and top line growth that perpetuated these multiples. Software growth, software CapEx, for example
accelerated all the way into the end of last year, into the end of– and into actually
the first quarter of this year, of 2019. There was no backdrop to short sell software
stocks in rate of change terms until this year. RAOUL PAL: How did you guys get on with Tesla,
because you guys were Tesla shorts in that period as well? KEITH MCCULLOUGH: Yeah. Well, we came into it literally, Jay Van Sciver
came into it rate as it was topping. He was looking– and I’ve taught all my analysts,
if you can’t show me the rate of change slowdown in their business within three to six months,
this is not going to have a hedge on name on it. You can argue till you’re blue in the face
but the batting averages are very low. If you tell me you found a fraud, like our
analysts, Kevin Kaiser did with multiple MLPs and by the way, those frauds weren’t revealed
until oil blew up. RAOUL PAL: Yeah, same reason, micro, macro
changes. KEITH MCCULLOUGH: That’s when it was easier
to get loud on deflation Quad 4 type theme. I have an analyst who’s super buried up on
a bunch of frauds in the MLP space. Go. I think that timing part, I’d humbly submit
that that’s a part when I say the art of short selling has been shot for dead. It’s because you haven’t had the macro meets
micro. The rate of change now, your timing’s good. Now, your batting averages are going to go
up. If you show me a software company, we found
one that basically filed an S1 with two years lookback in terms of revenues when the revenues
have only gone this way up. Post tax reform, through tax reform. It’s a 20-year old IT services company. It’s like hello, McFly, you slowed every single
time we had a cycle but you’re not showing the lookback. These are the kinds of things that Wall Street
underwrote. This is why you know short selling now in
a lot of these high multiple stocks is a much more appropriate time, high multiple stock
prevailing condition is slowing as opposed to accelerating. RAOUL PAL: Right. You just been out seeing clients that’s why
you were in a suit and tie. KEITH MCCULLOUGH: It’s the only time I wear
it. RAOUL PAL: What are you hearing? What are people doing? What are they thinking? Where are the pain points? Where are they– I don’t think it’s been a
straightforward year for many. KEITH MCCULLOUGH: No, but if you’re having
a good year, the happiness factor is back. I do have clients that are macro aware. They’ve been on the right side of the cycle. Generally speaking, I’d say that the clients
that if they’re paying us, they’re aware of the view that we’ve had, certainly the Quad
4 views, their batting averages on the short side have gone up tremendously if they are
of that ilk. If they’re long only they’ve been leaning
on proxy, which they’re quite happy about, but I’d say that, like, in particular, this
last couple weeks of meeting, there’s the markets punch to new highs throughout earnings
season. There’s an uneasiness to it. It’s like– RAOUL PAL: That’s my opening question,
uneasiness or uneasiness. KEITH MCCULLOUGH: Uneasiness. RAOUL PAL: Yeah, hence my opening question
to you when we started this is nobody really knows quite what’s going on. KEITH MCCULLOUGH: Happiness becomes uneasiness
when you start to underperform the bench. That’s what’s happening. Peak happiness was coming out of the October
lows in the S&P 500 or August and October, our clients would be doing fine because the
things that they’re long were going up and their shorts are going down. Now, everything’s going up. In fact, the things that have gone down a
lot are going up more., so you’ll have that uneasiness. There’s an absolute consensus to not be able
to fade Trump’s tweets. Therefore the value or the resurgence of these
PMIs and ISMs a bottom trade. They’ll wait to see the data point until they
believe that the cycle is properly continuing to slow. There’s an uneasiness about that. There’s always an uneasiness about your compensation. A lot of people– RAOUL PAL: It’s always a
difficult time of year because you’ve got six weeks to make a decision. Do I do anything else or do I not do anything
else? KEITH MCCULLOUGH: Yes. There are plenty of money managers long only
and long short that have set their yearend in September, October, November, those months
for that reason because they didn’t want to be beholden to chasing the ace into yearend
markups. It’s an interesting one, but again, don’t
forget that the S&P 500 stock going up in November of ’07, it didn’t wait till the end
of December. There’s an uneasiness associated with that
as well. The more macro where you are, the more ’07
questions I’m starting to get, which doesn’t have to mean we’re going to have an ’08 but
that’ll certainly– if it doesn’t make you feel uneasy to some degree, I think it absolutely
should. RAOUL PAL: The hedge funds themselves, what
is the appetite for risk now? Are they gun shy? Because they’ve had, yeah, it’s been a flip
flop year. It’s been one of those years where they came
in short of equities, equities rallied, okay. Anybody who got the bond trade got it sorted
out, then it flips again later in the year. It’s been a complex year for many people. How are they feeling in this? KEITH MCCULLOUGH: The better the research
teams and most specifically on the short side, the better they are doing right now. Don’t forget, just like the high yield index
or where high yield spreads are is not where the rest of the market is. You have multiple blow ups going on. Think of some epic story stocks imploding
and for the valuation oriented short seller that got the timing right, I think that the
batting average is going up their– or building a confidence that wow, I have the benchmark
index SPYs at the all-time high and I can make money on my shorts at the same time with
the president trying to trump up the bench. Like it’s almost like licking the chops times
for this– somebody who’s had a successful career short selling across cycles, not somebody
who’s just getting lucky. RAOUL PAL: Final question, the dollar. You’re, I think, majorly negative the dollar
right now, do you think the dollar cycle is turned for good, or is this part of the reflation
in Quad 3 theme? Where do you stand on the whole dollar view? It is crucial to a lot of things. KEITH MCCULLOUGH: Yep. If you take the trade weight of dollars at
a 20-year high, again, back in 2001, same point, what could possibly go wrong? Sustainably strong dollar is also one of the
many negatives to corporate earnings growth for the fourth quarter and the first quarter,
so it’s the same sixmonth outlook. No longer buying dollars– RAOUL PAL: Okay. It’s off the same– it’s not a separate construct
for the dollar. KEITH MCCULLOUGH: No. Quad 4 is where the dollar goes up, so the
next time I’ll buy the dollar is when I think the market’s setting up the price in another
Quad 4, so I have a six-month window, might be four. RAOUL PAL: When do they start– when did the
clock starts here? KEITH MCCULLOUGH: October. That’s when dollar– RAOUL PAL: End of December,
January, February, March. KEITH MCCULLOUGH: Yeah, our call was it’s
pretty straightforward, it’s hashtag peak dollar. I don’t mince words. The dollars peak, but again, the dollar–
RAOUL PAL: The peak dollar sounds to me secular, but you’re saying cyclical? KEITH MCCULLOUGH: Yeah, it’s just my six-month
pivot. Again, I want to cancel– RAOUL PAL: That’s
what I wanted to ask you about it. My thinking, I’m a much longer term person
so I was thinking okay, if you’re saying that you think the entire dollar construct has
now changed for the world, okay, that’s very different than the view I have which is like
okay, and this has been trading accordingly to your view, it may had broken down or broken
up but it’s– KEITH MCCULLOUGH: It made it– it’s been like literally right on the screws
played out in our playbook and this doesn’t happen all the time obviously. When it does, you like to know just like a
good golfer makes a birdie putt, you expect to make the putt, you hit three good shots
on a par four, well done. That’s what the process say. When Quad 4 is you’re in the thralls of Quad
4, the dollar should rally to new highs, which it did, Quad 4 ended in Q3. Now, we’re not in Quad 4, the dollar should
start to make lower highs for six months. That’s pretty much it. I don’t think that it’s like some big bang
call. I still do think that there’s some asymmetry
to the Fed waking up to that GDP number in February, and then cutting their dots. I think that that’ll probably be wherever
the dollar corrects to, that’d be the beginning of the end of the negative dollar view. Then I go back to being long the dollar in
start of second quarter. RAOUL PAL: Final, final question, when you’re
looking at the rate of change to assess where you are in in your framework within the quads,
you’re looking at the rate of change, are you looking at the rate of change of asset
prices, rate of change the economic data or a bunch of both? KEITH MCCULLOUGH: Both, and that’s what I
call my AB test. A is various in the research team constantly
measuring and mapping the rate of change data across 50 different countries. RAOUL PAL: Economic data. KEITH MCCULLOUGH: Economic data, and then
there’s me, that is measuring and mapping the rate of change of price, volume and volatility,
the relationship of all three, especially the volatility of volatility is what I really
care on, and something like that. Like we just saw what I call phase transition
in oil volatility for example. Oil volatility or the vol of vol has now gone
from bullish volatility, very negative for the price to now bearish volatility, which
is very short term bullish for the price. We’re starting to see that too. It’s classic. I think, Bridgewater, Dalio to a degree, assets
flow towards falling volatility, assets low the rising volatility, and that’s why I spend
so much time on that. It’s the most humbling of experiences as it
was for Mandelbrot when you had Big Blue, the machine measuring and mapping cotton prices
in all historical prices, because you have to wait for a moment where that signal becomes
real, because there’s lots of Brownian motion. If you’re looking at it like I do, and measuring
and mapping the volatility of volatility daily, Brownian motion 101, there is nothing to do
until there’s something to do, because volatility will cluster and then become a new trend. That’s what I’m essentially on the lookout. RAOUL PAL: Because it’s interesting. We’ve just interviewed John Bollinger. I haven’t seen the interview yet, but Bollinger
Bands, the technical analysis. It’s basically based around the same concept. KEITH MCCULLOUGH: Really? RAOUL PAL: Yeah. It looks like it basically looks at the volatility
of an asset and if the volatility is increasing, the band’s increasing, if it’s decreasing
and usually when it decreases after a while and you get a breakout, you’ve got to change
your volatility regime. KEITH MCCULLOUGH: Well, that’s right. Bollinger Band would be a Gaussian standard
deviation and when the volatility changes, the standard deviation of vol comps change. RAOUL PAL: Essentially, yes. KEITH MCCULLOUGH: Actually, that’s a good
example of what I call our risk range process. I published daily risk ranges and people are
like, wow, I can’t survive without it and I’m like, no shit. I couldn’t do– I couldn’t trade without it. Again, when I see the volatility of volatility
rising, what happens is my probable range widens. RAOUL PAL: Of course. KEITH MCCULLOUGH: Similarly, when the range
is starting to tighten, what that means is that the volatility is starting to go away,
or potentially undergo phase transition, plenty of head fakes. Again, when I take the AB test, this is critical. The signal is always raw, front running the
quad, the market signal’s going to get it before the quad does. If my quad outlook reflects what the market
sees, and it’s a change of face- – RAOUL PAL: The problem is that the market also does a
lot of false signals, just keeps reading for something different, and it gets it wrong,
and it reverts. KEITH MCCULLOUGH: 100%. RAOUL PAL: That’s endlessly testing the narrative,
the markets or indices, so yes, it’s the test between the two is dead right. You can’t do it without the other. KEITH MCCULLOUGH: Which is why my hair is
grayer and I’m getting fatter because I have to do this. That’s what I signed up for, like Hedgeye,
I don’t get to have days off from Brownian motion. I have to deal with that damn thing every
day. Moreover, I have to try to explain it, which
is unexplainable some days, but it certainly makes– it’s made the experience of what I
do, and trying to teach what I do, if only I’m teaching myself actually, I’m sure people
have realized that, wow, this guy’s not as dumb as he used to be. It’s a rate of change. If you have to teach yourself through your
mistakes publicly, every day, you will get less dumb. God forbid, you get a little bit better at
it and better and better at it, but you’re quite right. The amount of head fakes, they’re just manifest. RAOUL PAL: Yeah, that’s a lot of filtering. Keith, super interesting. I think it’s been– you’ve had a great year
so well done. Hands down to you. KEITH MCCULLOUGH: Thank you. RAOUL PAL: Let’s see what next year brings
because it’s going to be another really interesting macro and the great thing for us, for both
of us is it’s a macro world and macro world is the most interesting of all, because that’s
what I find the big returns lie. This whole period of time, we have low volatility,
choosy, well, the grinding high prices and that’s never the easiest to make money. Well, you can’t easily make money if it’s
never exciting. Let’s see how it pans out. Thank you ever so much for coming and do this. KEITH MCCULLOUGH: Yes and congrats to you,
you had a great year as well. I appreciate you having me on. RAOUL PAL: Yeah, and it’s all good.

Should You Transfer Your Final Salary Pension?


Welcome to the Morningstar series, “Ask the
Expert.” I’m Holly Black. With me in the studio is Steve Webb. He is Director of Policy at
Royal London. Hello.
Hi, Holly. So, we’re talking pensions today and you are
telling us about the difference between defined benefit and a defined contribution pension
scheme. So, defined benefit sometimes called final
salary is often you hear it called is the older style of pension. So, you used to work
for a big company, and they pay you a pension that was like a hard promise. You’ve earned
this amount of money; you’ve served this number of years; you’ll get this percentage of your
final salary when you retire. Fantastic. Great. So, that is the kind of thing that you want.
That’s tended to go these days. Companies have shut them, because they’ve become a lot
more expensive than they expected and these days you’re more likely to have a pot of money
pension called a defined contribution, because the only thing that’s defined is what’s going
in. That’s what we know. What we don’t know is how well it will do when it’s invested.
We don’t know what sort of pension it will buy you when you retire. It’s flexible. It
has its advantages but it’s not the same as the old style.
And some new rules that came in a few years ago mean that if you do have one of those
older style pensions, you don’t have to stick with it. You can move it into sort of a SIP
and choose how you invest it yourself. Why might someone do that?
What can happen is, if you’ve got an old-style final salary pension of, let’s say, £10,000
a year. Instead of taking that £10,000 a year when you retire until you die, the pension
scheme might say, we will give you instead £300,000. That might be an example. And you
can take that money and put it into a pot of money pension at different sort of arrangement.
And the big plus of that is flexibility. So, for example, from the age of 55 you can start
drawing on that. Now, there’s tax to be paid and of course, it might not last you until
you are 85 or 90. But it is much more flexible. People like that because if they were to die,
perhaps if they don’t have a spouse, but they have children or something like that, then
the pot is left for the children. Whereas a company pension, not much might go to the
children. So, it generally allows people more choice, more flexibility, maybe retire a bit
earlier and spend some of the pot, keep them go until their state pension starts. That’s
why a lot of people see this very large amount of money, see the flexibility and find it
quite attractive. But the regulator has said – they are actually
concerned that too many people were doing that, and it might not be the right decision.
Because there are a lot of reasons to stick with that older style pension scheme, aren’t
there? There are. And the regulators say that when
you take financial advice, the advisor has to start from the assumption you should stay
put, from the assumption that you shouldn’t move unless there’s a good reason to move.
And some of the attractions of staying put are first of all this income is pretty much
guaranteed. It lasts as long as you do. It goes up in line with inflation in most cases.
And if you’re retired for 20 or 30 years, that really matters. And you don’t have to
worry about the stock market going up or down. That’s the pension scheme’s problem; not yours.
So, that element of certainty, predictability, guaranteed income, because you don’t know
how long you’re going to live, you don’t know how the markets are going to do. All that
risk is taken care of for you and that’s a very attractive and valuable thing.
This is probably one of the most important decisions people will make in their life if
they do have this choice. So, what is the right thing to do?
Well, even if your pension is worth only about £30,000 and that’s a pot of £30,000 not
an annual pension. So, most of these old final salaries you are going to draw be above that
level. By law, you have to take financial advice. But a couple of things. First of all,
listen to it, because it’s tempting to think, I see this amount of money might be bigger
than value of my house. I want my hands on it. I don’t care what you, the advisor, say.
I just want my cash. That’s you know – if you’re in a hurry, take a big deep breath.
And the other thing also is to ask some pretty searching questions about where the money
is going to go to. Because many advisors are impartial. They’ve got your best interest
at heart. But some of them have got incentives that actually they want to manage your money.
They want another slice every year. And you just need to ask a lot of questions about
the charges you’ll face if you do a transfer. So, be sure there’s a good reason to transfer
and start from the assumption that you don’t. And then listen carefully to the advisor,
be quite – you know, ask some tricky questions. Well, thank you so much for your time.
Thank you. And thanks for joining us.

CAREERS IN POLITICAL SCIENCE – Politics,BA,MA,Ph.D,Recruitment,Salary package,Govt Jobs


Hello All..This is Manju from Freshersworld.com Welcome to our video channel on jobs and careers . Today I will be talking about the career opportunities in Political Science Political science is an integral subject of
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analysis and interpretation of political systems. Since, it covers all aspects of political
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a wide area of subjects and successfully studying it can provide individuals with knowledge
of various fields and roles linked with the political system. Students who want to get connect to operations and systems of the government can opt for
this course as their career field. Besides having sound knowledge and a degree from a
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in order to have a boosting career graph in this field. Once a political science degree
is secured, a student can then look to future job avenues in public administration department,
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Almost every leading college and university offers a degree course in this subject. But
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• Teaching The initial remuneration for a political science
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log on to finest career portal of India, www.freshersworld.com thank you for watching we will be back with more such videos do not forget to hit the subscribe button

Foreign investors book profit in S. Korean stock market this year


now foreign investors book profits from
the South Korean stock market this year but retail investors didn’t fare quite
as well according to Korea Exchange eight out of the top ten stocks that
were net bought by foreign investors in 2019 bought than profits
Samsung Electronics was the most sought-after stock and traded forty four
percent higher on the last trading day of the year compared to the first
trading session of 2019 foreign investors net bought over 860 million
u.s. dollars of local shares this year with their holdings accounting for over
38 percent of the market cap of the main bourse of nearly three percentage points
from the previous year

Economic Update: U.S. Economy and the Market


Welcome, friends, to another edition of Economic
Update, a weekly program devoted to the economic dimensions of our lives – jobs, incomes,
debts – all of that. I’m your host, Richard Wolff, and today I
want to begin by dividing our program into two major discussions. The first part will be the condition of the
US economy at the end of this summer, 2019. And the second topic will be the market, this
institution that gets such a remarkable play in our culture, in our society, but that deserves
the kind of critique I hope to offer in the second part of today’s program. So let’s begin with the US economy. Every day we hear from the Trump administration,
from Republican leaders and, unfortunately, from quite a few others, that our economy
is, quote unquote, “great,” or, quote, “in great shape.” It isn’t. But let’s explore why it’s even possible to
say such a thing. The answer – and it’s a very simple answer
– is that the unemployment rate is low. That’s correct. It’s about three to four percent these days,
and that is historically a low number. And, without going into the problems with
that number, which I’ve talked about on other programs, let’s assume that it’s a reasonably
good statistic about the economy. No one who has ever studied the economy, and
certainly no one with a claim to be an economist, would ever judge the economy by one statistic. It would be as if you went to the doctor,
he gave you a thermometer to check your temperature, it was 98.6, and therefore you’re done. Isn’t that wonderful? You’re normal. That would be a doctor you should never visit
again. Why? Because you have to look at multiple indices. You have to look at different things to come
to some composite judgment about the health of an economy or the health of an individual. So let me give you some more statistics to
think about. The same government that says the economy
is great – last year was the first year, 2018, that we had a brand new, big-fat tax
cut for corporations and the rich. Huge! And it was premised on the notion that it
would get the economic growth rate of the United States back to three percent – something
it hadn’t seen for a long time, which would be a great achievement. That achievement was not achieved. We are at two percent, and we’re staying around
two percent, and three percent is not in the cards. We gave an enormous tax cut to get something
which did not materialize. That’s not a good sign. That’s a bad sign. Number two: Mr. Trump – in order to look
as though he were defending America, making America first, and all of that – has imposed
tariffs, virtually on the whole world – especially China, but Europe and Canada and Mexico too. That has disrupted the world economy and brought
a recession nearer. Poor Mr. Trump, trying to get votes by being
Mr. Tough Guy, protecting, then produces a recession, which will lose him the election
if it happens in the next 12 months. So he’s trying to lower interest rates. He’s trying to keep telling us the economy
is great, which, if it were, wouldn’t need to lower interest rates. The poor man is caught up in his own chaos. There’s really no other way to say it. But this is not good for the economy. Conditions in Europe and Asia are deteriorating,
and that will come to the United States in a world economy sooner or later. But we’re not done. There’s a statistic, very nice one. How has the stock market done since Mr. Trump
came to office? The answer is, as of mid-August, 2019, that
the stock market is up 29 percent. That’s very impressive, in two ways. Number one: It’s way more of an increase than
wages have seen. In other words, the gap between the rich,
who own the shares, and the rest of us has grown wider. The inequality has become worse over the last
period since he was elected. But here’s a number you might also enjoy. Using the same 645 days of Trump, and asking
how well did Mr. Obama’s administration do in its first 645 days: Whereas under Mr. Trump
the stock market is up 29 percent, in the first 645 days of Obama it was up 46 percent. Mr. Obama was even better for corporate America
than Mr. Trump. In the 1960s, the ratio between CEO pay and
average-worker pay was in the neighborhood of 30 to 1. By the 1990s, it had become the ratio of a
100 to 1. Since the year 2000 it has gone up to (ready?)
250 to 1. The gap between the people at the top of our
corporations. Now, nobody in their right mind thinks they’re
that much better today as leaders of corporations than they were in the ’60s and ’70s. I might remind you that in the ’60s and ’70s,
when CEO pay was only 30 times the average worker’s, we had a more rapid rate of growth
than we’ve had ever since. So more CEOs hasn’t helped the economy, but
it sure has helped the CEOs. And here’s another measure of how well we’re
doing. The Federal Reserve did a study – every
year it does this study – on the condition of American households. So the results for 2018 are in, and here’s
a statistic that jumped out at me: One in four Americans during the year 2018 did without
needed medical care because they could not afford it. Twenty-five percent – that includes millions
who have medical insurance, but it still didn’t cover something they needed, and therefore
they did without it. That’s not an economy that’s doing great,
no matter how you slice it. But I don’t want to leave you with the notion
that there’s all bad news here. I just want to correct the absurd notion that
we have a great economy that is the envy of the world. It isn’t. Every one of the things I just went through
with you isn’t the envy of the world; it’s something the rest of the world is happy it
has avoided. But here’s a bit of good news: The American
Medical Association, a very conservative organization representing this country’s doctors, recently
pulled out of a coalition. The coalition is called the Partnership for
America’s Health Care Future. This is a coalition that is a lobbying group. It represents drug companies, medical-insurance
companies, doctors, and hospitals. Or it did represent the doctors. But the doctors pulled out. You know, that coalition was very strong. By acting together, the insurance companies,
the drug companies, the doctors, and the hospitals were able to drive up the price of medical
care in this country so it is far more expensive than in every other country in the world – any
other developed country – even though the medical results we get, the outcomes, are
mediocre. Many countries do better than us who spend
a fraction of what we do, which, if there were real competition in the world, would
have disappeared long ago. Why not? Because that coalition – drug companies,
medical insurers, doctors, and hospitals – is powerful enough to get the laws changed and
the regulations controlled to make them monopolists in selling medical care. That’s really what we’ve got. But the American Medical Association pulled
out. Why? Because at this year’s annual meeting of the
American Medical Association, to everyone’s surprise, the demand for a Medicare-for-all
solution – sometimes called single-payer insurance system, a little bit like Canada’s
– was voted down, but only by a 53 to 47 percent majority. For the first time, half the doctors in America
want what the right-wing calls “socialized medicine.” And the AMA, recognizing which way the wind
is blowing, pulled out of the coalition because they’re going to support, or at least be neutral
in, this struggle to get Medicare for all – a proper medical insurance for every American
citizen, the way the French or the Swedish or the British or the Italians have had for
decades. It’s an interesting comment. It’s a crack among the capitalists as some
of them see which way the wind is blowing, and it is blowing against them and in favor
of something much friendlier to the average American citizen. We’ve come to the end of the first part of
this program. Please remember to subscribe to our YouTube
channel. It’s an important support for everything that
we do. Make use of our websites, democracyatwork.info
or rdwolff(with two F’s).com. You can communicate with us directly through
those websites, and/or you can follow us on Facebook, Twitter and Instagram. And finally, a special thanks to the Patreon
community. To support us at patreon.com, Democracy At
work, this is an important encouragement, as well as support, and we thank you for it. Stay with us. We’ll be right back. Welcome back, friends, to the second half,
for the second part, of Economic Update. I want to spend this part talking about an
institution that gets an extraordinary amount of praise, adulation – a kind of fawning,
almost fetishistic notion of it being some kind of superb institution. I’m referring to “the market.” I want to talk to you about the market – not
because there aren’t some things about it that are useful and helpful, but because there
are lots of other things that are terrible. And those have to be part of the equation
if you’re going to come to any kind of reasonable judgment about this particular human institution,
the way you would look at a balanced assessment of any other human institution. So let’s begin. Some people seem to use the word “capitalism”
and the word “market,” or “free market,” as synonymous. This is a mistake. It’s not a question of interpretation; that’s
just wrong, and let me explain. Capitalism is a system of producing things,
goods and services. So we distinguish it, for example, from feudalism,
and slavery, which are alternative ways of organizing production. You know, in slavery there’s a master and
a slave, and they have a relationship that produces goods and services. In feudalism, there’s a lord and a serf, and
they have a different relationship. For example, in slavery a person can be the
property of another person. The slave is the property of the master. In feudalism, it’s not like that. The serf is not the property of the lord. The lord can’t buy and sell serfs the way
a master can buy and sell slaves. And capitalism is different from both of them
because we organized that into the employer/employee, and the employer can’t buy and sell employees,
and the employee, unlike a serf, doesn’t go with the land or is stuck to that particular
employer. He’s free, or she’s free, to go, etc. So these are different ways of organizing
production. Market is something else. A market is a system of distribution – that
is, what do we do with the product after it’s produced? How do we distribute the shirts from the maker
of shirts to everybody who wears one? How do we distribute the product of the farmer
to everybody who needs to eat a meal, etc., etc.? And the market does that by what we call a
“quid pro quo” exchange. I take shirts, if that’s what I produce, and
I go to a market, and I bargain. I’ll give you two shirts, you give me a bushel
of potatoes, or two bushels, or – that’s the way it’s done. Okay, so a market is a system of distribution. To show you the ignorance of equating that
with capitalism, let me remind you – you probably know, but let me remind you – that
markets have coexisted with slavery, feudalism, and capitalism. They’re not peculiar to capitalism. For example, in slavery, there’s a market
in – you guessed it – slaves. You buy and sell slaves. That’s what masters did, so of course there
was a market where slaves were distributed from whoever brought them from Africa against
their will, to whoever bought them when they arrived here, from whoever had brought them
over, etc, etc. Okay. Here’s another way that markets are not the
same as capitalism. In every socialist country that we’ve had
so far – Russia, China, Eastern Europe, Cuba, Vietnam, whichever one you want to pick
– there were, throughout their history, markets. Lots of stuff was distributed by means of
market exchanges. If you study any of those economies, the notion
that actually existing socialism was not market is just ignorance. It comes out of a Cold War, kind of crazy
exaggeration that needed to make complete opposites of whoever it is we didn’t like
at the given moment. It was not a reasoned thing. Lastly, the people who talk about markets
like to often use the word “free.” What they seem to mean, when they’ve thought
about it or explain themselves, is it’s a market that isn’t regulated by some political
authority. A market with no rules, no regulations, where
buyers and sellers confront one another and bargain, and reach a mutually agreeable rate
of exchange, each for whatever it is they have, and each for whatever it is they want. I get that idea. But here I’m going to be an economic historian
– something I have taught all my adult life as a professor in the United States, and something
I share with other professors of economic history. The free market that I just described has
never existed. It is a figment of the imagination of people. It is also a wildly utopian image. We don’t have that. Every market that I have ever studied – whether
it’s ancient Greece right up to the present – is full of regulations. The notion that we can have a market without
regulations is refuted by the fact that every time a market has been created as the way
to distribute goods, it has immediately had so many bad effects that regulations had to
be brought in to counter them. For example – and it’s really important
to understand this – in a free market, wages can be very low. A capitalist pays as little as he can get
away with. And if they’re desperate people who need to
survive, they will work for next to nothing. This creates a vast population of very poor
people often in capitalism. And guess what. We bring in a regulation, it’s called a minimum
wage, so you can’t do that. Here’s another example: Some companies get
into a position where they’re the only company producing something, and they can jack up
the prices because you’ve got nowhere else to go. Think of your local utility. You don’t have six utility companies to choose
from. You don’t have six etc., etc. So those companies jack up the prices. You know what we have as a result? The Antitrust Division of the Justice Department
to break up the monopolies. Because if you let the market go, the competition
among many becomes a few, and then they do what they always do, and in come the regulations. There’s a good reason why we have regulations:
because markets have undesirable effects. So let’s talk a little bit about them. First, let’s remember what a market is. A market says that there are goods that people
want. Let’s suppose ice-cream cones, for lack of
a better example. Ice-cream cones. Let’s suppose there are 20 ice-cream cones
that are available for sale. And let’s suppose that there are 50 people
who want an ice-cream cone. So the supply of ice-cream cones 20, and the
demand for ice-cream cones 50. What happens? Very easy to understand. Let’s suppose the sellers of ice-cream cones
are ready to sell them at 20 cents a pop. Well, the richest people out of the 50 immediately
realize there’s only 20 cones and there’s 50 of us. But I’ve got a lot of money, so I’m going
to offer 25 cents. Oh no, says another rich person. I’m not going to stand by while he gets it
for 25; I can afford 30. And another rich one says, well I can afford
50. You see what happens? The price gets bid up. As we teach in economics, the demand being
greater than the supply, the price goes up. The idea being those with the most money can
keep raising the price because they can afford to pay. But as the price goes up, the poorer people
have to drop out of the race because they can’t afford $2.18 for a cone. Guess what happens. When the dust settles, the 20 cones go to
the people willing to spend the most money, to bid up the price, because they don’t care,
because they’re rich – they’ll pay $5 a cone. In other words, what markets do is distribute
whatever is scarce to the people with the money. The most money wins. Well, if the market is a game in which those
with the most money win, then it’s a game that favors the people with the most money. This is not rocket science, friends. The market is a system that favors the rich,
which is why the rich love markets. What would be an alternative to the market? Well, here’s one: We would distribute whatever
is scarce according to some other rule. Not the rule who’s got the most money to bid
up the price. Here’s an alternative rule: Who’s got the
greatest need? If I substituted milk for the ice cream in
my example, and I said to you, of the 50 people who want milk, there’s a dozen rich people
who want it for their cats, and then the rest of the people want it for their babies. Well, suppose the rich people bid up the price
so those with the babies can’t afford it. Their babies go without so that the pets of
the rich have the milk. Are you okay with that? Because that’s the market solution. But if you had a different idea – that human
being’s children are of more importance than rich people’s cats – you would have to distribute
the scarce milk in some other way, by some other rule. But, folks, you already do that. Let me give you another example: It’s Thanksgiving. You’re all sitting around the table, gobbling
up that turkey. And you know who produced the turkey? Your mother. She roasted it, and then perhaps your father
carved it up. And now you’ve got pieces of turkey. How are they distributed? Do Mother and Father sit at the head of the
table and say to the assembled family, “Okay, what am I bid? Who’s going to offer me for this drumstick?
for this breast meat? for this wing?” You don’t do that, do you? You don’t distribute the fruits of the labor
of your mother and father by a market mechanism, because you would think it’s immoral, unethical,
outrageous. Instead, your mother and father distribute
because they love you. They distribute to everybody. They don’t, they don’t discriminate. They let everybody choose. What do you prefer – the leg, or the wing,
or what? You understand? It’s a different rule that you use in your
home. And if you did have a member of your family
who brought, say, whipped sweet potatoes to Thanksgiving and said, “Okay, I’ve got these. Who’s going to offer me how much for this
little scoop of . . .?”. There would be a lecture given to that person. “We are a family,” that person would be told. “We love each other. We produce food for one another because it’s
part of how we hang together as a family. It’s how we show we care for each other. Bringing the market into this household is
against the love we want there to be.” To which I always like to add the thought,
gee, if bringing the market into the household destroys love there, I’ve got news for you. It may have the same effect outside the household
too. Hmm. Think about it. Well, then there’s another way that the market
helps rich people. They use their money to get scarce things
that help them be rich into the future, that help their children be rich. If you ever look at rich people, you find
out very quickly they spend a lot of money on tutors, on special programs for their children,
on special schools for their children, on all the best medical care, and on nice trips
for them to learn about interesting – you get the picture? They’re taking care that their children will
be rich in turn by spending money which poor people don’t have. Here’s another thing rich people do: They
hire very expensive tax lawyers and accountants. You know what for? To get out of paying taxes, which those people
specialize in. But they’re very expensive, so you have to
have a lot of money to pay the person who’s going to get you out of having to pay taxes
on your lot of money. In other words, wealth, in a market, can reproduce
itself. It’s an institution that not only favors the
rich, but favors the rich staying the rich. Which is why they do it so carefully. Well, then there’s another defense. Well, it’s said, yes, okay, the market, but
that when the price goes up and rich people bid up the price, it’s a signal, we are told,
to producers: Hey, make more of that because the price is high. It’s a very sweet idea. Here’s why it doesn’t work: Because rich people
long ago figured out that if they’re the only ones producing something, if the price goes
up, they don’t want other people to come in because that’ll drive the price down. So they erect what we call, in economics,
“barriers to entry.” You can’t come in. A new car company can’t break in because everybody’s
used to the same five names for what a car is. And a new car – let’s call it a “Fafufnik”
– isn’t going to have an easy time being sold because nobody ever heard of a Fafufnik. It hasn’t got 100 years of learning names
like Ford and Chevrolet and Toyota and all the rest. So you create a barrier. You know how you do that? By plastering every corner of the universe
with pictures of your car, with that name over and over. Car is this. Car is this. Other people can’t come in, and that allows
them to jack up the price, because you’re not going to go to somebody else. In other words, corporations play the market. They know exactly how markets work, and they
intervene to make them work in their favor. Only in the minds of libertarians is there
the notion that someday, somehow, somewhere we’re going to have a “free market” whose
effects are not going to be shaped by rich people wanting to use it for their ends, or
by the government stepping in because the mass of people are getting so angry about
what’s going on that they demand some accommodation. Someday, if you have time, go back and read
a little Plato and Aristotle. Both of those great fathers of modern Western
Civilization talked about markets, and both of them didn’t like them. They were critical of markets. Why? They had the same argument: Markets destroy
community. That was their argument. Markets disrupt and destroy society. They set people against each other. Because in a market, you’re always in this
situation: I want to get more and give less, I want to get the best price I can for whatever
it is I have to sell, I want to pay the least possible for whatever it is I want to buy. We’re always adversaries. We’re not working together; we’re trying to
figure out how to get one over on the next person. This is not a way to build community. This is not a way to build solidarity. It’s not a way to distribute goods and services,
which is why your mother and father don’t do it that way at Thanksgiving. Even here in the United States, we got rid
of markets in World War II. You know why? Because we were fighting a war with the Germans
and the Japanese. And we needed all our resources in America
to fight that war. And we said okay, we’re going to use resources
for military – produce bombs, and bullets, and planes, and tanks – and that means those
resources are not available to produce consumer goods. Now, we could let the market deal with the
reduced supply of consumer goods, because we’re doing all this military work. But then only the richest people could afford
what remains of the consumer goods, and that would make the mass of people very angry. And we can’t have that and have a solidary
society to fight a war. So we’re not going to let the market distribute
the consumer goods that are available after military production. We had a ration system. The government issued little cards and distributed
them here in America for years. And you had to have a ration card to buy milk,
or sugar, or gasoline for your car, and many other things. We didn’t let the market distribute because
it is socially divisive. And you know how the United States government
distributed ration cards? To each according to their need. If you had a lot of kids, you got more ration
for milk. If you didn’t, you got less. They used a different, non-market rule to
distribute. Markets have bad effects. They always have. They’re dangerous for society, and their negative
dimensions deserve the kind of analysis that conservatives want to keep from us, for reasons
that should make you deeply suspicious. I hope this critique of markets has been interesting. Thank you for being part of this program,
and I look forward to speaking with you again next week