Wednesday: Tick-Tock Stock

In this post: A short film depicts a failed/successful love story found in electronic debris and the tick-tock behind yesterday’s stock market’s scramble.

Short film for this week by Victoria Mapplebeck examines personal technology detritus. Some of us have been through many generations of electronic devices used for communications, in which highly intimate details may be found. In Mapplebeck’s case, a failed love story followed by a lifelong relationship are bounded by text messages. What’s in your digital scrap heap? What would pixels you’ve left behind tell about you? Will you decode them as Mapplebeck has, or will they be decrypted by others in this life or after you’ve left it? Food for thought.

Tick-tock stock
Something doesn’t sit right about the brief tanking of Boeing’s stock yesterday, besides the absurdity of a president-elect rage-tweeting about the company just before the stock market opened. Let’s take a look at how events unfolded.

FRI 02-DEC-2016 12:00-14:00 CST — Aircraft manufacturer Boeing CEO Dennis Muilenburg gave a keynote speech to Illinois Manufacturers Association’s annual luncheon in Chicago. He advocated the incoming Trump administration to keep and reopen the Export-Import Bank (Ex-Im Bank) as it has aided U.S. manufacturers like Boeing to do more business overseas when other forms of financing are unavailable.

FRI 02-DEC-2016 17:58 EST — Bloomberg published a report on Muilenburg’s keynote, with an unspecified update at 19:29 EST.

SAT 03-DEC-2016

SUN 04-DEC-2016

MON 05-DEC-2016 15:24 EST — Washington Post reported, As Trump vows to stop flow of jobs overseas, U.S. plans to make fighter jets in India

TUE 06-DEC-2016 6:40 EST — According to a summary, Fox & Friends cited the Washington Post report that Boeing is building F-16 and F-18 jets in India instead of in the U.S.

TUE 06-DEC-2016 8:30 EST — Chicago Tribune published a story on Muilenburg’s remarks on Trump’s trade policies. The piece does not mention Ex-Im Bank or alternate financing to encourage trade but focuses more closely on Trump’s approach to China and free trade agreements.

TUE 06-DEC-2016 8:52 EST — Trump tweeted, “Boeing is building a brand new 747 Air Force One for future presidents, but costs are out of control, more than $4 billion. Cancel order!”, apparently misunderstanding the costs in the contract and the nature of the aircraft specifications, which must include the ability withstand certain military threats, unlike any aircraft Trump has purchased for himself or his businesses.

TUE 06-DEC-2016 — 10 seconds later, the market began to sell off of Boeing stock. (In comparison, average human response time required for braking while driving is +3 seconds)

TUE 06-DEC-2016 9:30 EST — New York Stock Exchange opened and the sell-off continued (Note that 9:30 EST = 14:30 London (LSE) = 15:30 Frankfurt (FWB) = 17:30 Moscow (RTS) and all these markets were also open at the same time.)

TUE 06-DEC-2016 ~15:30 EST — A CNBC report asked if algorithms traded on Trump’s tweet.

TUE 06-DEC-2016 12:50 EST — The Atlantic’s David Frum tweeted, asking if “we are to accept [Trump’s] unverified word that he sold all his stocks in June?” Frum linked to The Hill’s report, Boeing Responds to Trump: Air Force One deal is for $170 Million, not $4 Billon.

TUE 06-DEC-2016 18:45 EST — Senator Ron Wyden replied, “.@davidfrum @RealDonaldTrump: I look forward to seeing proof of these stock sales as required by law:“, referring to U.S. Office of Government Ethics’ OGE Form 278e.

The timeline spawns questions:

What’s in Trump’s current investment portfolio besides real estate? It’s alleged Trump sold his stocks in June this year, but there is no evidence to that effect. (Timing of such sales is also interesting based on the outcome of the Brexit referendum and Trump’s relationship with pro-Brexit Ukip front man Nigel Farage, but that’s another story.) Will Trump comply with U.S. law and inform the government of his investments? Or will he be as opaque and difficult as he has been so far about his tax returns?

Trump has been in trouble with the Federal Trade Commission and the Securities and Exchange Commission before, paying $750,000 in fines back in 1988 without admitting “any violation of the law” after he had purchased large quantities of casino company stock in 1986 without proper notice under the Hart-Scott-Rodino Act. The transactions then had been masked as “put-call option agreements.” Is it possible Trump or someone close to him has done the same with Boeing stock, avoiding high-frequency trading but operating within a tight time frame?

When exactly did Trump hear about Muilenburg’s comments; are we to believe he didn’t see the Bloomberg report and relied on the Chicago tribune piece as some suggest? Or instead was he riled up by Fox & Friends’ second-hand report, or by the original Washington Post article on Monday afternoon? It seems odd that two to three entire days went by after Muilenburg’s keynote without reaction until Tuesday morning.

Was Trump’s real problem with Boeing the creation of jobs in the U.S., continuing the craptastic narrative behind the Carrier Corporation jobs story last week? Was the rage-tweet Tuesday morning about a perceived attack on Trump’s China policy? Or was it really about Trump’s position on Ex-Im Bank, masked by the three-plus day delay in response and two other news pegs (Fox & Friends and Chicago Tribune)?

 If Trump’s real problem with Boeing is Muilenburg’s protective stance on Ex-Im Bank which Trump wants to eliminate, why is Trump so adamant that the U.S. can’t provide alternative financing to encourage purchasing of U.S. goods and services? Why would he refer to Ex-Im Bank as “featherbedding”?

If Trump has a problem with Muilenburg’s position on trade policy, why is Boeing’s former CEO Jim McInerney meeting with Trump during the first week of the administration as part of the “kitchen cabinet”? Especially since McInerney derided Trump’s trade policies earlier this year?

The timing and tone of Trump’s tweet just don’t make sense given the complexity of Boeing’s situation. How are we supposed to believe his rage-tweet was only about the (misunderstood) cost of the next Air Force One aircraft — the guy who’s going to cost us more than a billion dollars during his term for Secret Service at Trump Towers in NYC?

Especially since Boeing is a client renting office space from a Trump building in Turkey.

Especially since Boeing’s contract to build fighter jets in India maintains a relationship with a potential partner against the spread of radical Islamic fundamentalism.

Especially since Boeing’s relationship with Chinese companies aided by Ex-Im Bank financing creates jobs here in the U.S. (though at a possible loss to Russian competitor United Aircraft Corporation).

Longread: Iceland’s Birgitta Jónsdóttir on reforming democracy
This piece was written nearly two years ago by Jónsdóttir who had been elected an MP in 2013 and co-founded the country’s Pirate Party in 2012. Her concerns then about of the rise of totalitarianism, fascism, and populism, appear prescient now. Worth the time to read what Iceland was doing to address these threats as we may need to do the same here in a hurry. Bonus: she’s a reminder of what WikiLeaks once was for comparison against the organization we see today.

À demain, mes copains!

The Problem of the Liberal Elites Part 1

As I pointed out in this post, conservative elites have completely lost their minds. But liberal elites have problems as well. The problem is more complex with liberals, and it will take several posts of reasonable length to get into it. To make things concrete, I’m going to begin with the liberal approach to trade, which gives me an opportunity to tie together several ideas I’ve raised based on books I’ve discussed here and at Firedoglake:

1. Karl Polanyi’s argument in The Great Transformation that societies can only handle a certain amount of change before they revolt and demand protection. Social changes will come, but the pace of change dictates how much misery will be inflicted on the losers.

2. The absence of a clear definition of market in standard economics.

3. The failure of economic theory to incorporate the impact of raw economic power, including fraud and corruption.

The text for this post is a 1993 article in Foreign Policy by Paul Krugman titled The Uncomfortable Truth about NAFTA: It’s the Foreign Policy Stupid.

Krugman begins by insulting the anti-NAFTA people.

It is as hopeless to try to argue with many of NAFTA’s opponents as it would have been to try to convince William Jennings Bryan’s followers that free silver was not the answer to farmers’ problems.

Indeed, the parallel is quite close. The populism of the 1890s represented a desperate attempt to defend agricultural America against deep economic forces that were changing it into an industrial nation. The choice of a monetary standard had very little to do with the real problems of the farm sector; a burst of inflation might have given some highly indebted farmers a brief respite, but it would have done nothing to reverse or even materially slow the industrializing trend.

Well, as I remember my high school history and related reading, that’s just wrong. My sophomore history teacher, a woman whose name I sadly have forgotten, encouraged us to read the muckrakers, and I chose Frank Norris’ The Octopus and The Pit. They tell an entirely different story, one that revolves around fraudulent financial schemes of a railroad company and traders in the pits of the Chicago Mercantile Exchange. Things haven’t changed much.

Norris’ stories fit better with this analysis published by a site operated by the Economic History Association, The Economics of American Farm Unrest, 1865-1900, written by James I. Stewart of Reed College. He explains that farmers “perceived” that their political and economic status was deteriorating. According to Stewart, farmers had three main complaints: a) farm prices were falling, decreasing their incomes, which they thought was the result of overproduction; b) monopolistic railroads and grain elevators were gouging them; and c) financial conditions, including usury by lenders, an inadequate supply of money and deflation which forced them to repay loans with more expensive dollars. They were not able to get government help for these problems because the legislatures were dominated by financial interests including banks and railroads, the oligarchs and monopolists of the day.

Stewart says that these claims do not match the statistical testing done by economic historians. For what it’s worth, I think his explanations are weak, but I’m no expert, and perhaps those silly farmers didn’t understand their lived situation as clearly as economic historians reading aggregated data decades later. Perhaps, for example, there were no usurious loans in that mix that resulted in mortgage loans averaging 2-3% above the norm in New England. After reciting the contents of several studies, Stewart explains that the real issue facing farmers was a massive increase in uncertainty and risk. As he puts it, farmers might experience one or more of the problems he discusses, or they knew someone who was affected by them, and this increased their concerns.

What were the sources of risk? First, agriculture had become more commercial after the Civil War (Mayhew, 1972). Formerly self-sufficient farmers were now dependent on creditors, merchants, and railroads for their livelihoods. These relationships created opportunities for economic gain but also obligations, hardships, and risks that many farmers did not welcome. Second, world grain markets were becoming ever more integrated, creating competition in markets abroad once dominated by U.S. producers and greater price uncertainty (North, 1974). Third, agriculture was now occurring in the semi-arid region of the United States. In Kansas, Nebraska, and the Dakotas, farmers encountered unfamiliar and adverse growing conditions. Recurring but unpredictable droughts caused economic hardship for many Plains farmers. Their plights were made worse because of the greater price elasticity (responsiveness) of world agricultural supply (North, 1974). Drought-stricken farmers with diminished harvests could no longer count on higher domestic prices for their crops.

Stewart uses the passive voice throughout this passage. But except for growing conditions each of the causes he lists is the direct result of the intentional act of specific human beings either in government or business. In particular, the section on railroads makes it clear that managers took every advantage of their monopoly status, as did the owners of grain silos. There is no doubt that the same is true of bankers and merchants in many places. The deepening involvement of the US in international grain dealings was another opportunity to hurt farmers. In bad years, some of the losses from low harvests were made up from higher prices, until the “integration” world markets. In combination, these efforts of government and business effectively dumped all the risk of bad harvests on tens of thousands of farmers, while increasing the profits of a few shippers, grain merchants and speculators.

In other words, the effect of the policies chosen by the rich and powerful was to make the lives of an important segment of the population worse. Or in Stewart’s bloodless words:

Uncertainty or risk can be thought of as an economic force that reduces welfare

In Krugman’s world, the forces facing these farmers would have been unstoppable. In the real world, as Stewart reports, the farmers organized themselves and forced legislative changes at the State and Federal level that protected them and enabled them to stay in business, the socially important business of growing food for their fellow citizens. They were able to transform the conditions of the markets they faced, using the power of government. They were able to slow the pace of change to a level that didn’t ruin their lives despite the best effort of the powerful. It’s a neat demonstration of Polanyi’s idea about people demanding protection from violent social change.

There were massive changes in the markets facing farmers as they moved from subsistence farming to commercial farming at the local and state and then federal levels, and then into the world market. There were changes in the markets from lenders, railroad companies and other vendors. There was constant change in the terms of the markets during this period, to the point that it would be unreasonable to compare the grain market in 1865 with the grain market in 1895. And Stewart says nothing about mechanization during that period. Economic historians treat the price of wheat as the outcome of market activity without apparently looking at the changes in the nature of the markets. But, as Stewart points out, the regulation of these markets changed steadily over this period, and the outcomes to farmers were improved by those changes.

Third, the central part of Stewart’s story is international trade in grain. The impetus for that change came from the powerful and wealthy shipowners, railroads, merchants and grain speculators, and not from the farmers. The roles of the people who operate railroad and overseas shipping lines, the merchants who import and export grain, and the grain speculators in Chicago is not even touched by Stewart’s account. He does not even discuss the fraud and corruption that dominated the lives of those farmers and all of society. He and other economists neatly hide the power structures that created the problems of farmers and the forces the farmers beat down to protect themselves.

That pattern is repeated over and over in the story of trade.

Index to prior posts in this series.