Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan
Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and "The
Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)
Jacques Barzun, who died last week at the
age of 104, is known to most Americans, where he is still known at all, for one
statement: "Whoever wants to know the heart and mind of America had better
learn baseball..." Rarely is his explanation discussed. He saw a
combination that was uniquely American: teamwork and technique. Boosters and
critics of GDP growth as an end in itself should immediately recognize this
truth. Barzun's observation helps explain why Americans were uniquely drawn to
stock market technology bubbles. ("Were" - such a distinction between
Americans and the rest of the world may have passed.)
Today's bubble-builders root for Apple's ascension to
a $1 trillion market capitalization. Comparisons have been drawn to Cisco and
Microsoft. But who remembers the post-Sputnik technology boom and bust in 1958?
Or the bowling binge in 1962? That was whipped up by the introduction of the
automatic-ball-return machine. Americans would be more efficient bowlers,
spend, accelerate, and multiply, or some such New Economics interpretation.
Bowl-Mor Corporation fell from $51 to $3-7/8; Fairlanes Inc., from $12-3/8 to
$4-3/4; Major League Bowling, from $14-1/4 to 5/8; Sports Arenas Inc., from
$14-1/2 to $1-1/8.
As to the application of technology, the October 31,
2012, King Report gathered bulletins from the embers: "Power could
be restored in Manhattan and Brooklyn within four days, but other boroughs and
Westchester County could be without electricity for a week." "[C]ell
phone coverage is down as users in Manhattan battle signal failures. Many
people are virtually cut off [sic - they are either cut off are they aren't -
FJS] and have no way of contacting friends or family or calling for help if
there are further emergencies." "A call to FEMA's news desk"
found "even they didn't have any non-Internet information readily
available beyond suggestions that people call 911 in an emergency."
Investors should watch this development closely:
Consumers have dropped non-cell phones, declaring there is no need for Ma
Bell's relic. However, this decision is often a means to cut costs. Lifting the
veil on falling corporate revenues, many are reductions of spending on, if not
formerly "necessities," objects and services that were not
consciously considered an "expense." Cell phone or TIVO charges were
not matters to ponder.
FEMA's response to those in need: "Well, those
people who have a laptop with a little battery life in it can try that way.
Otherwise, you're right."
Most markets, including the New York Stock Exchange,
were closed Monday and Tuesday, October 29 and 30. The New York Stock
Exchange's "main data center for U.S. markets is in Mahwah, New
Jersey." It has no remote back up center. After 9/11, we heard:
"just-in-case will replace just-in-time." This was specifically
directed at the exchanges in New York. October 31 is the last day of the month
and the last day of the year for most mutual funds. (Bonuses and retention are
swayed by November 1 through October 31 performance). A breakdown at Rahway
could have produced untold gains to the swift and the clever, but the exchanges
are public now, and precautionary expenses are not accretive to NYSE
The presidential election is less than a week away.
The clear winners are political opinion makers. Now, no matter what they
predicted and no matter who wins, consultants can blame poor forecasts on
Americans subjected to a cone of silence rather than the incessant roar of
Nevertheless, technology gadgets are dominant. Yet, in finance, knowledge is
regressing. Is it also possible "just-in-time instead of
just-in-case" has left us vulnerable, trusting our lives to an i-thing?
Electronic communications betray shaky foundations and gee-whiz faith in
spreadsheets and models is built on ether.
Recent conversations reveal the loss of financial acumen.
Balance sheets are not taught at business school. There will be exceptions, but
it is normal to graduate from a celebrity business school without understanding
the relationship between the income statement and balance sheet. This makes for
frustrating discussions about corporate valuations within investment firms.
Related is the ignorance of CEOs and CFOs who go about acquiring and spinning
off businesses. It has been brought to these elders' attention that they are
making such decisions without an appreciation of (for instance) the value of
retained earnings vs. those from acquisitions. It makes no impression on top
management that earnings that are neither retained nor paid out in dividends
are a house of cards.
Top business schools still drown students in efficient market theory and the
capital asset pricing model. The theory is bogus; to those who still believed,
it was shot full of holes in 2008; yet, finance professors who rose and landed
astoundingly high-paying corporate directorships are not going to think
From someone who attended a reception at his business
school, after cornering two finance professors:
"Are you still teaching CAPM?"
"With a negative risk-free interest rate? How
does that work?"
"You move it down....."
"How can you teach it when there's obviously no
such thing as a risk-free rate?"
"Because that's what we teach."
"Yes, yes. That's what we teach."
It is also evident there is a new taboo when meeting
with top-tier investment firm strategists and analysts. That is the touchy
topic of monetary policy. Just try and ask a simple question to often-quoted
Wall Street oracles: "Do you think Bernanke's policy is working?"
Silence. A cough or two. Then, one of the top-tier
analysts dares speak: "Yes." This is the classic
Emperor-who-wears-no-clothes. The financial celebrities cannot bear to either
think or talk about it.
My daughter (age 9) was reading a fictional biography of Anne Boleyn to me.
Henry VIII was anxious to produce a male heir. Anne Boleyn was eight-and-a-half
months pregnant when she had a miscarriage. Life went on at court as if nothing
This called for an explanation: "Wait a second. Henry's court - the whole
kingdom - was anticipating Anne was about to produce a male heir. Now, she's
obviously no longer pregnant. And nobody says a thing? Nobody mentions it? That
doesn't make sense."
Daughter: "Of course it does. It's the same as when Bernanke and Obama say
things that everyone knows aren't true but nobody says it. People
don't change that much, Daddy. It will be about the same 500 years from