149th Edition
Making progress, part two
Economy and Financial Markets:
Ah, where to start? My career following and working within the financial markets began in 1983. This was pre-Internet and before the widespread use of personal computers. I worked on what was then called the “Buy Side.” It’s counterpart, made up of Wall Street research analysts and traders, was called the “Sell Side.” The flow of information pertaining to equities and fixed income (stocks and bonds) was straight forward. It was generated by companies, who then passed it to the Sell Side, who then analyzed it and sent it to the analysts and portfolio managers on the Buy Side, who were ultimately responsible for making buy and sell decisions. The system worked very effectively. Markets were efficiently priced most of the time, although individual securities routinely became under or overvalued for a number of reasons. During the next two decades, generally speaking, free-market capitalism was alive and well. From 1982 – 1999, the average annualized total return for large cap stocks was 18.5%. The return for bonds was 12.1%. Both figures are well above long-term averages.
In more recent years, primarily in response to the financial crisis, and left-leaning political ideology, the federal government has become significantly more involved in managing and regulating the economy and financial markets. Most noteworthy was the passage of Regulation FD (Full Disclosure) in 2000. This obliterated the traditional information flow process, mentioned above – From companies to Sell Side analysts to the Buy Side analysts and portfolio managers. Essentially, after Regulation FD, companies were required to release all information to all recipients at the same time. In short, the Internet made this possible. What resulted was the reverse of what regulators hoped for. Markets became less efficient and market volatility increased. Why? Because investors were making decisions without input from trained professionals, relying more on whims and emotions. As the involvement of bureaucrats expanded, so did pressure and influence from lobbyists and politicians. Free-Market Capitalism had become Crony Capitalism. Today, companies are forced to employ a cadre of regulatory and compliance officers. None of which create any revenue. Hence, profitability declines and so do stock and bond returns. The annualized return on stocks from 2000 – 2025 was 7.5%, and for bonds it was 7%. Nothing to panic about, but well below the previous two decades.
I have always been, and probably always will be, a proponent of free-market capitalism. It doesn’t exist anymore. Hence, I would expect lower than average returns to continue. Not exactly what I would call progress.
Technology:
Obviously, there are an infinite number of ways to think about the impact of technology. A few thoughts. The first car I drove was a 1974 Ford Pinto. Pedal to the floor it went 82 miles per hour, at which speed it shook so much the windows rolled down by themselves. Per pit stop, it took more quarts of oil than gallons of gas. Has there ever been a worse car made? Maybe the AMC Pacer?
I would not want to go back to the days without personal computers. I like email, word processing and spreadsheets. Their impact on office productivity has been monumental. Without question, from a technological standpoint, we have made tremendous progress, in just about every industry and facet of everyday life. The impact of the Internet has been overwhelmingly positive. Offshoots like social media, perhaps not as much. I would not want the Internet to go away. I could probably live without social media. Could you?
Technology has had a profound impact on many areas of health care. Future discoveries will undoubtedly save thousands of lives. At the same time, technology is also helping militaries around the world build more powerful weapon systems. If only we could concentrate more on the former and less on the latter.
Sometimes technology offers a solution in search of a problem. Self-driving cars fall into this category. Televisions are way too complicated to operate. Even automobiles have too much technology. When systems fail, you can get locked out of your car or worse yet inside your car while holding the key fob in your hand. Still, there is no reversing our dependence on technology. That just isn’t going to happen. The latest concerns and fears of too much technology center around Artificial Intelligence. It isn’t going away. In some areas it will offer amazing benefits. In others it will be very disruptive.
So, this ends the discussion of progress in four areas – how neighborhoods function, the quality of K – 12 education, the economy and financial markets, and the expanding role of technology. Hands down, we have made the most progress in technology. Mixed results on the other three.
What do you think?
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Michael Kayes
*These views are my personal opinions and are not the viewpoints of any company or organization.