Bad Money (Stewart/Cramer/Medrawt Part II)

Rereading the post from last night, I already spotted a few things I wish I'd phrased differently, and multiple instances ("self-immolate himself") that are artifacts of the kind of sloppy writing you get when you're falling asleep.

Only the most bizarre pastiche of a dream survives into my waking hours with any clarity, but I can report that I actually did have a dream that somehow dealt with the stock market last night.

Also, last night I completely forgot, but this morning remembered, that at the very least I know of two people - espn.com writer Bill Simmons and his friend, "Cousin Sal" from Jimmy Kimmel's late night show - have in fact bet with each other on what the line is going to be for NFL games over the course of a particular season. It's clear, though, that they considered this a sort of ridiculous and esoteric activity. And again it's possible because the bet is an assessment of what an identifiable and rational actor - Vegas - is going to do in response to the activity of the betting market, whereas there is no rational and identifiable actor setting stock prices in response to the activity of the investing market.

***

To the limited extent that I have any sort of economic consciousness, it was born in my 11th grade US History AP class. Over the course of the year I developed what I thought was an understanding, albeit a primitive one, of how the economy developed and how our economy works. I found it all very frightening. There was - is - a central unreality to the economic system that I found conceptually disturbing. Our monetary system functions, I gathered, because of a collective agreement that it does and that we won't think very hard about it.

Now, I'm not a goldbug. (Even the gold standard has serious problems in the "reality" category, and certainly returning to it would be disastrous.) What I really find unsettling when I think too hard about it is the concept of money at all. Yes, I'm finding myself unsettled by over two thousand years of human social development and yes, I know that life as we know it would be impossible without a monetary system. You simply could not seamlessly swap a barter economy into modern society, and many currently viable modes of life - including ones I'm quite fond of - would become unsustainable. So, you know, I'm a fan of the monetary system, it just makes me sort of queasy.

But I'm smart enough to know that I'm not always going to be right (see what I did there?), and I'm especially distrustful of intuition (not just mine, everyone's) when it comes to all sorts of things, so I just assumed that I was wrong to feel the way I did. Intellectually I made my peace with the collective hallucination of "money" and moved on, presuming that what I had was a blind spot, a naive intuition, and that the confidence of intelligent and knowledgeable people in this arena was evidence that they were, on this topic, more sophisticated than I was. In a way, I was really presuming that I didn't truly understand the monetary system, I only thought I did, but there was something I was inherently unable to grasp because if I could have grasped it I would feel comfortable with it.

This is not a story of how I learned to stop trusting the dollar in my pocket. It still makes me queasy when I think about it and I still think that my queasyness about the dollar in my pocket is useless, because I'm much happier living in a world where I can spend that dollar on anything I want instead of a world in which buying a book turns into a Zelda game: I get paid in potatoes, the bookstore owner doesn't want potatoes, he wants cabbage, so I go to the cabbage salesman, but he doesn't want cabbage, he wants rice, so I go to the rice guy, but he doesn't want...you get it. (Instant thought: in a sophisticated barter economy designed to work in something like the modern economic system, banks would have to be the size of warehouses, because they'd need to be warehouses. Not just to hold people's savings - not sure if that concept could translate - but because you'd need a centralized place of exchange to make life manageable, somewhere you could go and say, "Hey, my client paid me in bolts of cloth, can you turn this into ham hocks? Thanks.")

At this same time I sort of learned abstractly how the stock market works, which was an interesting historical moment to do it because I was in 11th grade during the last, enormous, wild lurch of the dot-com bubble before it burst. I think I'm in the middle of a 5-10 year window of kids who were born recently enough that the internet is completely natural but early enough that it's not inevitable, which meant that I'd wander into my parents' bedroom while they watched MSNBC, listen for five minutes to all the internet stock hype, and then inform my parents that those people were crazy. Yes, ladies and gents, I was bearish on investing at seventeen. Because if you explained what was going on to a naive seventeen year old it made No Fucking Sense, especially since I was able to tell my parents interesting facts like: "Uhm, none of these companies is actually making money, and most of them are going to burn through their venture capital and shut their doors before they can start generating income." This turned out to be correct, of course, which meant that while I distrusted my intuitions about money, I became overconfident about my intuitions re: the stock market, namely that it was doubling down on everything I thought was scary about the monetary system. Still, with age comes humility (thankfully) and through college I softened my antagonism towards the stock market until I was almost as credulous towards it as I am towards the idea that the dollar in my pocket has intrinsic value.

Credulous not towards the bubbles, whether they be internet or housing or tulip - but towards the market itself. That doesn't mean that I personally was a big fan of individual stock speculation; as a risk averse guy it just seemed insane to me to believe that an individual who had no connections to the financial industry and a straight job that took up eight hours a day could hope to "beat the market," a phrase that masks the reality of what the market is. You can outperform the market average in the short term, but in the long term almost nobody will because they're not in any possible way separated from the market. The market is us, talking about the market and trying to beat it.

So already I still had a disdain for people like Cramer who peddle stock picks as though offering up investment advice to people like, well, me - or future versions of me who've acquired some more liquid capital to play around with. But here we're wrapping back around to the Stewart/Cramer interview and one of the essential points Stewart makes that Cramer simply can't respond to:

The idea that there are "two markets". The first is "one that has been sold to us as long-term. Put your money in 401Ks, put your money in pensions, and just leave it there, don't worry about it, it's all doing fine." The second market, the "real" market according to Stewart's rhetoric, is "occurring in the back room, where giant piles of money are going in and out, and people are trading them, and it's transactional, and it's fast, but it's dangerous...and it hurts that long term market."

I think Stewart oversimplifies this; the long term market, where people sock away money for their retirement - because what else can they do to plan for their retirement? - is as he describes, and its safety is the sort of thing into which I talked myself; just entrust your cash to a mutual fund and you'll be fine in the long run. The "real" market is more than he describes, though; the "real" market includes all the people day trading in the front parlor as well as the back room, and what they do brings incredible structural instability to the market, but is well understood in its mechanisms if poorly understood in its outcomes (i.e., nobody significantly outperforms the market in the long run except Berkshire Hathaway, and they do it by behaving quite differently than everybody else). What happens in the back rooms is the stuff that no layman can really explain or understand, and is the stuff that led to the ridiculously overleveraged positions which laid the groundwork for this crash. Stuff like AIG buying shitty insurance policies isn't getting directly tracked by the up-and-down ticks of the S&P, but turned out to be hugely important to the global economy (which is one reason why, referring back to last night, confusing the DJIA's shorthand for the status of the economy itself is such a laughable mistake). There are, however, powerful points of intersection between the backroom "shenanigans," as Cramer continually calls them in this interview, and the second-to-second trading decisions made out on the floor, as when in yet another damning video segment Cramer describes how to damage Apple stock because it would benefit a hedge fund to do so.

The backroom deals have a destabilizing effect which is reinforced by the normal fluctuations of the market as both individual investors and major fund managers try to locate painfully brief inequities between the current and anticipated value of a position and get there first to sell it days or even just hours into the future. This is the kind of madness that Stewart gestures towards when Cramer defends CNBC by pointing out that they're filling 17 hours a day with live TV and Stewart replies, "Maybe you could cut down on that." Cramer also defends himself by pointing out that he never claimed to make 100% perfect picks, and that he tries "to make as many good calls as [he] can," which is when Stewart introduces the rhetoric of the real market and the unreal market. I actually thought Stewart was clearer in tying day trading to the more egregious decisions made by major financial institutions a week earlier, when discussing with Joe Nocera how "creating a false urgency every day of profit and loss in microseconds, and that amplification is actually what's hyperinflating bubbles and hyperinflating recessions."

The caution that any halfway reputable public figure - including Cramer - issues about trying to compete with the big brokerage firms in day-to-day profit and loss decisions is completely and utterly belied by the fact that CNBC nonetheless devotes so much of its 17 hours a day not merely to the idea of picking stocks but to slavishly following the ups and downs of the stock market (or its shorthand indicators), period. This is what Cramer can't or won't get, what CNBC can't or won't get, what the various pundits who have criticized Stewart for being unfair or mean-spirited in his one-week attack on CNBC don't get; he's not criticizing them for recommending bad stock picks, he's criticizing them (a) for focusing so much on the idea of stock picks, and (b) for doing so at the expense of trying to do in depth reporting and commentary on how the market really functions. Cramer is chastened, but he doesn't even offer a defense of the short term market - maybe because Stewart in this instance presented it purely in terms of the unsavory conduct of Bear Stearns et al., which Cramer is going to find indefensible, and not putting it the way he put it to Joe Nocera. Defenses of the short term market are possible - people make them in blog arguments about this topic all the time - but the pundits who are actually out there defending CNBC haven't done so that I can see because it's apparently beyond their ken that such a thing should need defending. Of course they have to fill 17 hours of live TV a day, and of course it has to be about hourly market fluctuations (and puff pieces on successful financiers) because that's totally normal and reasonable and what else could there be, anyway? Why can't Cramer provide an answer when Stewart asks him to whom CNBC is supposed to be beholden, or what its purpose in offering "reporting" is? That Cramer, eating crow, seems open to suggestions about what kind of content he should be offering on his show is flabbergasting (if it's not purely disingenuous) because it seems like he's saying he's never previously given sustained thought to the question of what a financial news network should be doing with its time.

Meanwhile the thing that I'd convinced myself wasn't true turns out to be true, and here I do think Stewart articulates the point both clearly and powerfully: "It feels like we capitalized your adventure [with our pensions and 401ks]." The long term market isn't safe (my dad's 401k is worth about 55% of what it was a year ago), because of the short term market, because of the inside baseball bullshit the brokerage houses do, which is simply the logical extension of what everyone who trades does by buying and selling multiple times a day, which is why, I think, the people at CNBC never imagined that the business practices of Lehman or Bear needed to be subjected to scrutiny in the first place. For one, those guys know what they're doing, for two, what they're doing is in the same spirit as what we talk about doing every day - maximizing income by playing the market for short term profit, and even though we caution individuals about thinking they can come out ahead that way, it's just so fucking fun, and lucrative, and because it's taken for granted everybody will tell you that the market is just perception but no one behaves as though they grok, in their deepest bellies, that the market is Just Perception, and that having a frighteningly volatile Just Perception game in the same financial and cognitive space as the Safe Long Term Investment game is going to wind up being a really bad fucking idea.

Which is why when people like Stewart, or me, turn to the people who are supposed to keep us informed about the financial markets, and we say "Why didn't you protect us?" they have no answer, just defiance (everyone on CNBC except Jim Cramer, apparently) and potentially genuine contrition (Jim Cramer). But being sorry is worthless unless you understand what you did wrong, and I don't think anybody in the middle of this clusterfuck is ever going to understand that, truly and deeply, because humans are too handicapped by the narratives in which we find ourselves.

And by the way, if every bank failed tomorrow, it looks like the FDIC actually doesn't have the money to pay us all the money FDIC ostensibly insures, because FDIC hasn't collected its insurance premiums (thanks, US Senate!) in a decade, because banks don't fail.

As my longest arguments generally do, this is falling apart and I'm not going to be able to put it together unless I rewrite it, which I'm not going to do, but I'm glad we wound our way back to one of my predictably pessimistic and misanthropic hobbyhorses, and I'm sorry if you waded your way through my undrunken ranting.

Mad Money (Stewart/Cramer/Medrawt Part I)

This is going to be long.

I'm sure the people who read this blog are aware of Jon Stewart's attack on CNBC, and how it came to a climax on Thursday when Jim Cramer (unlike Rick Santelli, who originally provoked Stewart's comic ire and then reneged on his acceptance of an invite to appear) had the gonadal fortitude to actually show up and take his lumps. I'd been warned by various of the blog outlets I frequent that the video was pretty awkward and uncomfortable (when I watch The Daily Show I do so online a day or two after the airing), since Cramer basically goes out and gets embarrassed, so I was worried that I'd have difficulty watching given my inherent discomfort with watching other peoples' embarrassment. Not so - I found it gripping and not uncomfortable (from the viewer's perspective, at least), though definitely at times awkward. The whole interview was too long to run on-air, but Comedy Central provides the unedited (fucks and bullshits and all!) thing here (first part of three).

What does come off as maybe painfully awkward to people are the moments when Cramer finds himself strung up by the video clips Stewart airs. (The clips were clearly never imagined by Cramer to become publicly available; I don't know their provenance, so I'm not sure whether or not they're the same clips mentioned in this very long and only slightly deranged article about Cramer. I had heard on prior occasions about some ostensibly private clips of Cramer speaking at a function or being interviewed in which, according to some people, he essentially gave out enough rope for the SEC to hang him if they cared to, but I can't speak to the legal issues or the details of any of these video clips.) He knows they make him look bad, he offers defenses which are upended by the next section of the video, and clearly vitally wishes that there had not been a camera running that day. I do wonder whether the deployment of these clips, which Stewart effectively used to make a number of his points, actually hampered the ability to which Cramer was able to be an open and honest interlocutor:

I don't know how much actual apologizing for error Cramer does on Mad Money, but he's obviously willing to go on The Daily Show, take his lumps, and say: "Look, I was wrong," even "Look, I failed," since that's exactly what he does in this interview, however much or little it personally rankled him to do so. What he's (understandably) not willing to do is say "Look, I was bad." Stewart uses the video to undermine the more mealy-mouthed responses Cramer provides, but they also put Cramer in a position where he can't really talk honestly about what's on screen because the optics are so horrible - he has to evade the reality of what he's on camera as having said, which also means that Cramer isn't as psychologically/rhetorically free to dissect and impeach the practices he describes in the video. If Stewart had made use of video clips involving other people articulating basically the same points (although maybe Cramer is right in one of the clips when he says that no one else would be willing to go on the record with some of the details he's providing about how fund managers can manipulate financial analysts and thereby the market), then Cramer might have felt freer to provide a "safe" explanation of what he observed and even what he did as a fund manager in the 80s and 90s, an explanation that criticized and exposed those practices without precisely setting his own self on fire. I have no inherent sympathy for Cramer, but it's a lot to expect a man to willingly self-immolate himself on national television. Also, the clips of Cramer (and only of Cramer) work against Stewart's (accurate) observation that he initially had no interest in focusing specifically on Cramer, but rather was throwing pie at CNBC as a whole. Of course, while Cramer is willing to boo Santarelli's infamous "loser" rant, there's probably a limit to how much he's willing or able to throw a coworker under the bus; my understanding is that he left the world of fund management in excellent financial circumstances and Mad Money is really a lucrative "retirement," but he probably would really really like to get his contract renewed, and there's limits to how much a personality can go after another personality on the same network.

(Although maybe not: check out this montage of Shep Smith openly shitting on Glenn Beck.)

ANYWAY

The upshot is that Cramer is willing to offer apologies for incorrectness and inadequacy both on his part and CNBC's overall, and he's willing to express a lot of anger (though it's a very sad-eyed anger) at the people who created the circumstances for this financial collapse. What he can't really do, because he lacks the awareness, capacity, inclination, or courage, is engage more substantively with Stewart's critiques of both the market and the network that purports to cover it better than anyone else. He can't or won't answer what is in many ways Stewart's most basic question: what is CNBC's audience? To whom are they responsible? Stewart raises this question on I believe two separate occasions, and both times Cramer doesn't answer. The kernel that so angered Stewart and whomever else on The Daily Show staff in Santarelli's rant against financial assistance for the average homeowner was that CNBC promotes itself as a network than can help the average viewer like me or you navigate these tricky waters of the financial markets, and dispensed a lot of bullshit advice while telling us to trust them because they were the experts, when in fact if the network's coverage served anyone in the end, it was the people who fucked us. This is par for the course with my running (if not previously voiced on this blog) fury at major media outlets for having approximately 0.5% awareness of how they are intimately and inescapably wrapped up in every story they tell by the fact of choosing to tell it, and wide-eyed speculation about what will or won't be an "important" story is insulting coming from the people who make that decision by voicing their speculations in the first place.

This is doubly ironic in the world of the financial media, because what CNBC is doing by reporting in this un-self-reflective manner on the health of the stock market and its constituent companies is (a) exactly what the political media does while also (b) acting as a force multiplier on the vicissitudes of the market. Everyone will tell you that "playing the stock market" is a form of gambling, but it's really a very special form of gambling, really meta-gambling. Allow me a tendentious and over-explained analogy:

Let's say that I want to bet on a basketball game that was played tonight, the Chicago Bulls at the Philadelphia 76ers. The most unsophisticated way to do this is to simply pick the winner - I would've picked the 76ers (and been correct in doing so). That's not how real sports gambling works, though; the people with whom you will place your bets are going to offer you a "line" - I don't know the ins and outs of how this works, but in the US at least lines are more or less standardized by Vegas. The line for tonight's game was probably something like "76ers by three" or "76ers by five", and this is called the "spread". The actual bet is that the 76ers will win the game by at least the amount specified. I would've bet on the 76ers to cover the spread in either case, and I would've won if the spread was three points but lost if the spread was five points, since the 76ers as it happens won by exactly three points.

Now, there's a bit of an art to setting the line; what Vegas wants to do is pick a line such that the amount of money bet on the 76ers to cover the spread is as close as possible to the amount of money bet on the Bulls to either win or lose by no more than x points; they take into account both what they actually think is going to happen and what they think the people who are going to bet on the game think is going to happen - if Chicago fans are known to bet vociferously on their team even when it's not very good, that'll affect the line. In practice, for at least some events up until a certain point in time (or maybe even as the event is ongoing) the line is actually mobile (again, I don't know the ins and outs of this because I don't actually gamble on sports); if heavy money is coming in betting on the 76ers to cover the spread, the sports books will continue to shift the line to make that a more and more unfavorable bet so that they can get equal money on both sides of the ledger. We're getting somewhere sort of like betting on the stock market, but not quite yet, because:

In this instance, the Vegas books actually act as an arbiter of where the line is. They respond to the activity of the people placing bets, but there is a sense in which they provide a semi-externalized authority that determines what is and is not a reasonable opinion to have about the outcome of a particular game. The stock market is only the bettors, collectively setting and resetting the prices of every stock continually throughout the trading day. Setting aside quibbles about ethics and SEC regulations, if I had enough friends and we each had $30 million of money with which to play on a given day, we could radically change the prices of stocks by coordinating our efforts, just for shits and giggles. So when you step into the stock market you're stepping into a constantly fluctuating environment the fluctuations of which are entirely determined by, well, you. My bet to buy Bear Stearns (or whatever) is not in any direct way a bet on Bear Stearns, it's a bet on whether other people are going to bet on Bear Stearns. To return to the tendentious and overextended sports analogy, betting on stocks isn't betting on a line, it's betting on what the line is going to be, placing a bet a week beforehand that at the time of tipoff, the Vegas sports books would be offering 76ers +3. It's gambling on how other people are going to gamble, except since we're all in the same pool, they're gambling on how I'm going to gamble on their gambling. It's meta-gambling.

WHICH IS WHY when CNBC opens its collective yap to talk about "what the market is going to do" they're either stupid or disingenuous if they don't think their discussion of what the market is going to do has a direct and not insignificant effect on what the market is actually going to, because the whole thing is based on what the collective perception of the collective perception is, and if you've got a major media outlet discussing what the collective perception is, that's going to be heavily factored into the actual collective perception (of the collective perception).

Or as Jon Stewart put it a few days ago, mocking pundits' use of the Dow Jones Industrial Average - the Big Mac Index of stock market assessments - as evidence of Obama's job performance:

"I know what you're thinking - isn't the Dow Jones Industrial Average just a short-twitch numerical representation of a bunch of guesses about other people's assumptions about the financial well-being of an arbitrarily chosen group of thirty out of tens of thousands of possible companies?" ("No! You're wrong! It is a real time, cause and effect, precision barometer of how the president is doing.")

This post isn't done, so more will follow after I've slept the sleep of the bitter.

Blogging Bonanza?

The tension between what I envision this blog being - short, pithy, tossed-off mini-rambles interspersed amongst longer, carefully composed if a bit rambly reflective thought pieces - and what it is - long, pithy, tossed-off rambling reflective thought pieces - continues to frustrate, but isn't the only reason I've gone a month without blogging.

I have in my mind a weekend in which I pump out four or five considerable posts. But I have a lot of things in mind that tend to not happen, so we'll see. Given the amount of thought I put into these posts, and the type of process by which they migrate from my brain to the computer screen, I'd probably be better off podcasting, since all I'm really doing is transcribing what I'd be saying if I were vocalizing my thoughts at the moment I had them.

Up next: Jon Stewart, Jim Cramer, why the stock market isn't gambling, it's meta-gambling, and my weird emotions about how all of that plays into my personal intuitions about the world of finance. (Pronounced, please, in the snooty and possibly British manner.)