Why my Stoxx call was wrong – do capitalists need to get paid?

I wrote back in May that it was time to buy European equities, which is either a great example of why not to follow investment advice you read on the internet, and/or that I am in idiot depending on your perspective!


In my defense, what I was writing about there was the contingency of the value of your paper claims on companies revenues on the whims of politicians – ie – without the state and its monopoly on coercive force on your side, you ain’t getting those returns! But of course there’s another rather more difficult issue: how does one make money doing business in the first place?

Under any kind of orthodox assumptions about capitalism it’s actually very odd that companies persist in having value over time. If one guy is capable of organising labour and capital in order to produce goods and services that have a higher value than the cost of that labour and capital, then another guy probably can, and will, and with his output the supply of the goods and services increases. Iterate a few times and competition has eroded all profit from the activity – and the only people getting paid are the people who ultimately own the land and or minerals, as everything else is just organisation. Yet when one looks at the market capitalisation of most stock markets, minerals don’t feature too heavily and ‘land’ doesn’t feature at all! Below the S&P 500:

Spooz Composition
Of course, good socialists understand that there is simply so much more to the activities called ‘business’ than simply organising labour and capital. For one, the state is there introducing all kinds of contingencies to that organisation – how much would Apple be worth without its patents, one might ask! For two, ‘the market’ is not a real thing, rather a theoretical construct most often observed in the scribblings of commentators like me and the fevered quasi-sexual fantasies of teenage ayn rand readers, the invisible hand ain’t there to stop apple fanboys queuing up like desperate lemmings when cheaper, better android devices are available around the corner for less money. We live in a world of power relationships, of people and institutions, and ‘market forces’ simple describe some of the drift of those institutions and relationships over time and under certain conditions.

In other words, there are profits in them there hills people! And how do we get access to them? How do we ensure that its us that gets access to those golf-holiday-paying-for dividends? We must invest – ie – give someone some cash and have them use it to marshall capital and labour to secure returns. But hang on… why do they need our money? Surely if they have the secret profit recipe – they should just use it themselves and not give us a cut? They only need our money if the recipe includes some big lump that they either can’t, or won’t pay for themselves. ‘Ah!’ I hear you say from behind my computer screen ‘but you’ve got a graphic of the S&P up there, yet you’re talking about Primary investing! That’s secondary trading‘ – and this is a fine thought. Financialisation does indeed remove the linear link between your savings and my investment. When I buy stocks I am not ‘putting money into companies’ – I am increasing the cash balance of my brokerage account. Often permanently. But I digress. The point is that, in aggregate, finance has processes whereby cash balances are given to firms, and then the profits of those firms are assigned, through a complex system of contracts, to the people who put up the balances.

The problem with the modern world however seems to be that firms simply don’t need those balances all that much! By and large, big companies are accumulating oodles of cash. In fact, in recent times, US companies have more often been lenders to the rest of the economy than borrowers, as shown by this chart where a ‘+’ means lending to everyone else.US Corp Balances

That means that far from needing investors to step up and provide them with cash, companies are lending it back. No wonder stocks have rallied so much! How can anything stay at all cheap when no one needs capital to buy anything, and investors money isn’t in the demand? They’ve had to take any return they can get especially as the government has decided to hold real interest rates (nominal rates – inflation) negative. In other words, technology has lead for mighty hunt for yield as demand for investors cash is unmatched by supply. In other words – buy stocks! They’re not making them any more!

However, by buying into this kind of thing, you are implicitly trusting that the claims made about firms abilities to simply innovate their way to higher productivity are actually true. VW built a reputation on efficiency – and turned out to be quite efficient with the truth. UBER trades at a massive valuation because it’s thought to have revolutionised transport and generated enormous efficiencies, can’t actually make money. It’s entirely possible that the nature of technological change has itself changed, such that it’s not that companies are making profits from technological change, but that technological change has eroded sources of profits – and companies are fighting over the scraps. The whole business of investing only works if there are future streams profits to buy, but in a world where every innovation just seems to allow us to do more with the same stuff, why pay for any more stuff? Why pay the capitalists at all?

FF vs Spooz


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