Sunday, March 20, 2011

Follow The Moving Money

Warren Buffet is the 2nd richest person in America, and one of the most successful corporate investors. When he has something to say about the economy, people listen. One of his most recent comments was: “Money will always flow toward opportunity, and there is an abundance of that in America. [Our] best days lie ahead.” Then he went on to lay down a few more billion dollars on his latest corporate acquisition.

Buffet also famously said, “I never buy anything whose business purpose and plan I cannot understand.” Good advice. The man avoids speculation and focuses on solid real businesses that create tangible products and/or provide really needed services that people need, not just paper profits. As a result, he managed to quite nicely survive the 2000 “” collapse as well as the more recent real estate/mortgage implosion.

But while Mr. Buffet may represent the substantive version of “money flows to opportunity,” too many other investors (speculators) have a more unseemly version of that concept. In spite of all the talk about the current Great Recession, the flip side is that right now there are too many people and corporations with too many dollars on their hands. They are people that profited from the Great Recession, who sold off early and left “the suckers” holding the worthless mortgages; the unethical CEOs who took the bailout money from the Bush administration, recapitalized their losses, quickly paid back the taxpayers/government with barely a “thank you,” and then went about their business-as-usual practices unscathed. Add in the already rich that are invested in the “basic need” products (e.g. agriculture, energy, oil) who never ventured into the financial swamp and suffered little from the downturn. Combine all that money with the record profits big corporate America is enjoying (versus middle-class wage earners) due to lean staffing, the world’s highest productivity per worker, and the typically more than 50% of corporate earnings coming from overseas operations. Despite what the economic news reports say to Mr./Ms. Average American, this investor class right now is awash in excess dollars.

But dollars sitting dormant in a bank account do not grow. They need to be put somewhere, converted from stagnant to working dollars. The first option is to buy another money generator, available to be bought at a depressed price, and a good cash cow that can generate more good profits. In that strategy, we are seeing a growing market for corporate mergers and acquisitions.

But when you run out of “real” products (aka other businesses) to acquire, you have to create new products. Creating real, tangible products that people need takes too long, is hard work, and requires actual skills – in engineering, research, manufacturing, management and marketing. Too slow. It is much quicker to simply make dollars from “the sale of sales”: easy effort, low overhead, almost a one-person operation, easy in, get out at the right moment. All you need is some excess cash (hopefully someone else’s!) to play with, sufficient to make enough noise to convince others that “the next big thing” is coming around the corner. Like a magnet on steel, the dollars will begin to flow.

That is essentially what happened with the internet bubble of the 1990s. Amazon and EBay came into being, and a new industry of “online retail” was born. Anyone with a good story and a 20-year-old programmer was in business looking for financing. Venture capitalists who could not spell “i-n-t-e-r-n-e-t” pumped in billions of dollars; companies with no assets went public on the New York Stock Exchange. Stock prices soared; paper millionaires abounded; sales and revenues were non-existent. Then one day it all imploded. Investments disappeared for the late buyers who got into the game “before it was too late.” Because it was already too late. The smart ones got in at the front, contained their greed, and walked away with the real cash.

Same thing happened a few years later, when some folks said, “Let’s go back to our old money-making friends – real estate & mortgage sales; they are always good for a fresh run.” We were all horrified at Bernie Madoff’s gigantic Ponzi scheme: new investments covering old investments hiding no assets. The Great Recession was the biggest Ponzi scheme of all – but today only Madoff sits in jail.

Today we are seeing the latest legalized Ponzi scheme – except the rich boys are smart enough to call it “Capitalism’s supply and demand.” Each week – or is it each day? – I drive by a 3-gas-station intersection and observe the current price/gallon. For months it has gone up as steadily as the coming spring temperatures. 2-3 years ago when we heard of a $3.50 price the news media were all over the story; the vacation industry predicted its collapse as people canceled vacations and cruises; new commuting and driving habits were promised; the case for alternative energy versus Middle East oil had finally been made! Then the crude oil price collapsed, and we all went back to driving the same as before.

Now we are watching a rerun of that movie. Like before, there is no real shortage of oil in barrels; demand is inching up, but quantity is still adequate. Libya’s instability in the latest blamed culprit for prices – but prices had begun to rise long before the first protestor hit the streets of Tripoli. And the price at the pump rises the same day that crude oil rises, even though that gas will not be in the ground at my local station for months. No, this is not about supply and demand or capitalism. It is about cash – too much of it with nowhere else to go. Oil traders and moneymen put out the word that “oil is the next great place where we are going to play with money.” With this announcement (and fueled by all the economic talking heads predicting $4/gallon this summer), speculators all jumped in like trained seals and bid up the price from $50 → $100 → $??? just because they can. They are all betting with each other on what will be the ultimate price limit for this episode of the monopoly game – and who will be the ones left holding the empty barrel. It has nothing to do with actual oil.

The moneymen play with other people’s money. The working stiff leaves his/her car at home and tries to ride multiple bus connections to work. Politicians want to drill more off-sea oil, which will only create more oil to invest in, not oil needed for cars and furnaces. Congress inexplicably votes to continue to give the most profitable corporations – oil companies – tax subsidies while concurrently screaming about the need to cut costs and balance the federal budget, and to cut funding for the new financial regulatory mechanisms designed to prevent a recurrence of this past decade’s financial fraud.

Go try to figure this thing out. And why we continue to allow it. I can’t.