Business & Economics: July 2004 Archives

Money used to be backed by gold and may now be backed by other securities, but I'd like to suggest that the real reason money (or gold itself, or other securities) has value is because it's backed by sex. Maybe it's just the amateur population geneticist in me, but biologically just about everything comes down to sex, even abstract social constructs like money.

Money(/gold/whatever) has value because it can be converted to sex. Money serves a complementary biological purpose for both genders: men want to have sex as much as possible, and women want to have their children protected and provided for -- and money can help them accomplish both. Not directly, of course, unless you're inordinately attracted to portraits of Alexander Hamilton and Adam Weishaupt or can build a shelter out of tiny pieces of paper, but indirectly because people are willing to perform sex-related services (such as getting married) in exchange for wealth and its accoutrements.

Prostitution is often considered "the oldest profession", and it's also the most direct tie between money and sex. Even before there was money, wealthy nobles would send their daughters off to marry the sons of other nobles, trading sex for protection and prosperity. Are many modern marriages much different than long-term prosititution in exchange for food and shelter?

Money is to humans what plumage is to peacocks, and ultimately it's most important purpose is to attract a high-quality mate. As long as it's successful in this it needs no other intrinsic value.

Update:
Part 2 goes into more detail and refutes some criticisms.

As many have pointed out before -- including myself -- America's "poor" are far better off than any other group in history, and apparently better off even than the middle-class of the 1970s.

I wonder if stockholders, investors, and clients are more concerned with making money or with treating everyone nicely and fairly? Those two goals probably aren't mutually exclusive, but what if they are correlated? What if promoting more women ends up cutting profits by 10%? What if firing high-level executives who don't work well with women cuts profits by 10%?

The City has been urged to tackle its culture of sexism following a plethora of sex discrimination cases brought by female bankers and lawyers.

Julie Mellor, chair of the Equal Opportunities Commission, called for companies to shake off their "macho" image by carrying out "root and branch" reform in the way they recruited and paid female staff. ...

The settlement includes a $12 million (£6.8 million) payment to Allison Schieffelin, a bond trader who helped launch the joint action six years ago.

The women claimed they were gropped by male colleagues and were sent strippers or breast-shaped birthday cakes in the office.

Morgan Stanley admitted that few women were promoted to its top jobs, but denied discrimination.

It's obvious that the men involved here are pigs. But, as a former customer of Morgan Stanley, I couldn't have cared less how many women were involved in management. I cared about how much money the company made me. If some executive couldn't or wouldn't stop offending women, I'd want to company to make the most profitable choice and fire whoever was contributing least. If the women were less valuable than the man harassing them, then get rid of them; if the man was less valuable, get rid of him. (And, obviously, if any of the harassment was actually criminal (such as assault, battery, rape, or attempted rape) then seek criminal prosecution.)

Companies aren't designed or intended to make people feel good about themselves, they're designed to make money for their investors. It's the only fair thing for them to do. If you invest money in a company that makes telephones and then the management of that company decides to waste your investment by buying balloons for orphans you'd be pretty upset. On the other hand, if buying balloons for orphans -- or firing sexist managers -- is the profitable way to go in the long run, then so be it. Do it. But leave all the touchy-feely (ha) warm-and-fuzzies at home.

The problem, of course, is that there are laws designed to make it expensive to make some decisions, even if they're the most profitable. So now some women are suing (and winning) and costing the companies even more money. What should they have done? How about quitting and finding another job where they're appreciated more? If they're really that valuable, some other company should be glad to take them away from the competition and treat them the way they want to be treated. The only reason to sue is if you know you can't cut it and aren't worth having around.

Update:
And of course some industries -- like rap music -- would disappear entirely without sexism. Should bankers be held to a higher standard than musicians?

I just learned about something really devious called a negative amortization mortgage (or any other type of loan). As Dr. Don explains:

Negative amortization means that your loan balance is increasing instead of decreasing. With a negative amortization loan, when your monthly payment on an ARM (adjustable-rate mortgage) isn't enough to cover the interest expense and principal payment, the shortage is added to your loan balance.

Say, for example, than in a normal mortgage your monthly payment is $2000. Of that, $400 may go towards paying off the principal and $1600 may go towards paying interest on the loan. With a negative amortization mortgage your monthly payment on the same size loan could be $1200 instead of $2000, but each month the entire $1200 would go towards paying interest -- and an additional $800 could be added to your principal. Thus, at the end of each month you owe more on your house than you did at the beginning of the month.

James Picerno at The Capital Spectator does a good job explaining why the market has been a little indecisive recently, but I think he leaves out one important factor: political uncertainty. I talk to business owners, large and small, and the ones I've spoken to are all scared stiff that John Kerry might somehow win in November.

History seems to indicate that a split government -- with control of Congress and the White House divided between the parties -- is good for the economy, but there aren't a lot of data points to go on and there are many other external factors that muddle the issue. From the people I've talked to, the fears aren't over economic policy and taxes as much as over terrorism. Business leaders think a Kerry victory would increase the risk of terrorism to our country, and 9/11 demonstrated that terror is worse for the economy than are taxes.

I agree, sort of. I don't think John Kerry will have any choice but to continue in Afghanistan and Iraq, because those are done deals. What I'm concerned about is that he won't prosecute the rest of the War on Terror but will instead just cool his heels while North Korea and Iran fester and plot against us. If President Bush wins re-election I expect those two nations to be overturned by 2008, but if he doesn't they won't be and we'll be in much more danger.

Personally, I'm bullish. I still think Bush will win in a landslide, and the other economic data all look strong to me. Sure, there may be another terrorist attack no matter who wins election, but I don't think it will affect the market as much as 9/11 did. Of course, if it's a bigger attack than 9/11 it might, but then we'll have more important things to worry about than our portfolios.

Higher earnings over the past several quarters have helped bring down the market's valuation. The S&P's trailing price-earnings ratio, for instance, is about 20 today, vs. more than 60 back in early 2002. If Wall Street's consensus earnings outlook for the S&P for the year ahead proves accurate, the p/e will fall to about 17, assuming the index remains unchanged.

Ed Yardeni of Prudential Equity Group recently opined that "the balance sheets of corporate American are in the best shape ever." As a result, he says the market deserves to trade at a higher p/e. But the market's ignoring the improved state of corporate balance sheets, he notes. The good news: that mispricing creates opportunity, he believes, advising that "there's room for the p/e to rise once investors become aware of this great improvement."

A low p/e ratio is one of the key indicators of a good investment because it means that the price of the company is low relative to its earnings. So I'm buying.

The economic word for today is arbitrage.

In economics, arbitrage is the practice of taking advantage of a state of imbalance between two (or possibly more) markets: a combination of matching deals are struck that exploit the imbalance, the profit being the difference between the market prices. A person who engages in arbitrage is called an arbitrageur.

Arbitrage is possible when one of three conditions is not met:

1. The same asset must trade at the same price on all markets ("the law of one price").
2. Two assets with identical cash flows must trade at the same price.
3. An asset with a known price in the future, must today trade at its future price discounted at the risk free rate.

Basically, arbitrage is taking advantage of the common economic advice to "buy low and sell high". You find two markets trading in the same thing (stock, commodity, currency, whatever) and buy from the market with the low price and sell to the market with a high price. The trick is often in identifying the item to trade and the markets in which to do the trading so that the trades are profitable.

Due to human psychology, some markets are in permanent disequilibrium. Consider, for example, the endless spending on weight-loss.

Also of interest: bookmaking.

This may not really be a surprise to anyone, but Bill Clinton doesn't understand that even though the government isn't forcing him to give (as much of) his money to poor people, he could still decide to do it for himself.

Clinton accused the GOP and Bush of caring only about the wealthiest Americans to the exclusion of everyone else. ...

"They are paying for my tax cut by kicking 300,000 poor kids out of their after-school program," he added.

Clinton also accused the administration of cutting U.S. aid to a school lunch program in the developing world so that wealthy Americans like himself could buy more luxury items.

Mr. Clinton can buy more luxury items if he wants to, or he can donate some of his wealth to less fortunate people, either by contributing to after-school programs here in America or to school lunch programs in the developing world.

"Last year they cut that program to $50-million dollars from $300-million dollars to protect my tax cut," Clinton said. "Hundreds of thousands of kids aren't getting food in school so I can, you know, buy another watch. I am telling you, that's what the deal is," he added.

No, Mr. Clinton, it's so you can have the choice between buying another watch or helping people you want to help. Leftists are big on choice right? So why is it that in this case you don't seem to understand it or appreciate it?

Clinton said that as a wealthy man, he would be happy to pay more in taxes to fund programs he feels are vital to the nation.

"I like saying this now - 'cause I literally -- I didn't have any money ever. I had the lowest net worth of any modern president when I went in office and then they bankrupted me when I left, and I didn't care, 'cause I wasn't in it for the money anyway," he said.

"Let me tell you something -- people like me -- it's a privilege to live in this country and if you are lucky to have something, you ought to give something back, so that all the kids can get educated."

Then do it. Nothing is stopping you, Mr. Clinton, from giving some or all of your money to charity. But don't get the government involved in taking money from other people just because you feel guilty about being "too rich". Many of us -- who would be deeply affected by your propsed tax policies -- don't have that same problem.