The Markets Aren't Divorced From Reality, But They Are Separated

 |  Includes: DIA, SPY
by: Vikram Rangala

Before we look to the markets to reflect the economic reality 99% of us live in, we should recognize that the big stocks and big traders who move the market are multinational corporations, not citizens of the United States or any other country. They don't pay much tax in the U.S., their manufacturing is done overseas, and the bulk of their employees are outside the U.S. And much of their stock is owned and traded by foreign citizens, banks, and funds or by other multinationals.

The Coming Plutonomy

In 2005 and 2006, Citigroup sent secret memos to a few of its wealthiest investors, advising them on how to profit in the coming "plutonomy," in which wealthy corporations would control Congress and the presidency and maintain a display of democracy while ruling in secret and arranging tax and other policy to benefit the wealthy. The memos were leaked. You can read them here.

If you read them, you see that Citi is not saying the plutonomy is a good thing. They're just treating it as a fact, and here's how to profit from it. That's what investors do. We profit from whatever is available as long as it's not too evil for your conscience, your PR, or whatever legal authority can get to you.

Markets Are Amoral and Apolitical

Good traders don't trade their politics. They accept that only the collective knows where it's going to go next and only the collective knows why. Or maybe it doesn't. Like many Americans, I lean toward liberal and Democrat. I'm not a fan of some Obama policies, like drone wars and a Trans-Pacific Trade Alliance that threatens U.S. sovereignty. But I didn't for a second support the Iraq War, and my healthcare plan would have been one sentence: "The minimum age for Medicare shall be reduced from 65 to -9 months." Done.

But will I pass up a great crude oil trade because my last two vehicles were a 50mpg Honda and an electric scooter? No. Boycott cigarette makers? Yes. But nearly everything we touch has cruelty and exploitation in its history and we're all accomplices to the crime. Our tomatoes are picked by slaves, our metals are mined by indentured miners, our chocolate is harvested by children. We need to change the system that makes such crimes profitable.

Markets can't care about what's good for America or humanity. But until we do, the markets will simply allow us to buy and sell whatever is currently available in the system. Good traders know that the only commodity we ever really trade is risk. So far we have not found a way to quantify the risk of corporate hegemony, though it's all around us. Just look at global warming. Even if you are one of the few who still deny it, you can't deny the multitrillion-dollar opportunity it represents.

Many people, including former IMF Chief Economist Simon Johnson, are wondering why the markets seem so unconcerned by the damage the Congressional Republicans are doing to the strength of the U.S. dollar and the reputation of the U.S. as a superpower whose word should be trusted and sometimes obeyed. When Jay-Z flashed bundles of euros in a music video a few years ago, he was just showing what a lot of people were saying privately. Earlier, when Saddam Hussein suggested that he might demand payment in euros, not dollars, he didn't just piss off the U.S. government. He angered Exxon Mobil (NYSE:XOM) and China Oil. After that, his fate was sealed.

The world has dictators worse than Saddam, who was for over a decade a key U.S. ally. Those dictators don't sit on 10% of the world's known oil reserves. Through all of that horrible, stupid oil war -- Operation Iraqi Liberation (OIL) -- smart, trend-following technical traders were blending with the markets profitably and treating the news as noise. Not because we don't care. It's because the market isn't the place for caring. It's a place to buy and sell risk.

One Market, Two Economic Agendas

Why do so many corporate CEOs seem unconcerned by the potential weakening of the U.S. government -- a weakening as dramatic as the emergence of the U.S. in 1945 as the world's greatest superpower and, through Bretton Woods, the dollar as the world's ultimate reserve currency? Because U.S. power doesn't really concern them. In fact, a weaker U.S. government makes it easier to buy Congress members, accelerate the movement of taxes from the middle class to the wealthy, and have the U.S. military keep resources cheap and available.

The markets are not divorced from reality, or what Karl Rove calls "fact-based reality." They have a separate but equal reality, where having a tax home in the Caymans and laying off workers are good things because they boost quarterly returns to shareholders. When Milton Friedman famously said that corporations exist to serve the interests of their shareholders, there was more to that paragraph. He also said that's why corporations shouldn't run things. Compassion is not always in the corporate interest.

Should it be? Yes. Can it be? As a New Capitalist, I say definitely yes. If and when we make compassion more profitable than cruelty. Until then, we slouch inexorably toward the plutonomy Citigroup's top investors are preparing for. While these two economies -- the multinational corporate economy and the economy that affects American workers, businesses, and citizens -- are not completely divorced, the two economies are separated and they're seeing other people.

And they're wondering if their differences are irreconcilable.