Thursday, October 6, 2011

Steve Jobs, and Tobin Taxes

I'm not going to write about Steve Jobs this morning - the papers and media are full of great memories - but I wanted to mention again how much I found his 2005 Stanford commencement talk inspirational.

The full text can be found at the link below, but here's an excerpt from his talk:

Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma — which is living with the results of other people's thinking. Don't let the noise of others' opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.

Back to the markets:

This past Tuesday afternoon, at about 3:30, I was in the midst of a conference call with an investment committee of an important client.

I have two screens on my desk, so while one screen had my PowerPoint presentation, the other had stock markets updates flashing.

When we started our call, the screen was mostly red: stocks were largely down for the day.

Then, about 15 minutes into our call, a funny thing happened: the stock market turned around, and suddenly my screen turned from mostly red to mostly green, as stocks suddenly moved sharply higher.

What the heck was going on?

The official explanation was that there was a story written by the Financial Times that suggested that European governments were close to some sort of rescue package for Greece.

(This report, by the way, turned out to be false.)

What really seems to be going on is a market increasingly divorced from fundamentals. Instead, the direction of the market is being set by high frequency, computer-driven trading and leveraged hedge funds. These investors care little about fundamentals or economics; instead, they are looking to hop on stocks if they are going higher, or short them if they are going lower, with a time horizon of five minutes or less.

Here's what Reuters wrote yesterday:

In less than one hour on Tuesday, the U.S. stock market surged by 4 percent -- for no apparent reason.

The last hour of trading was the most volatile final hour in two months -- and it occurred at a speed that frightens many, from experienced hedge-fund managers to mom-and-pop investors.

The late-day "melt-up" that pushed the S&P 500 index .SPX out of bear-market territory might be construed as good news. But it brings back echoes of the "flash crash" that saw markets dive by several hundred points in a matter of minutes, and it's a big reason many are staying away from the market.

"Everyone is scared in both ways -- the shorts are scared, the longs are scared, everyone is scared. The high-net-worth investor is very, very scared," said Stephen Solaka, managing partner at Belmont Capital Group in Los Angeles, which manages money for independent wealth advisers and family offices.

Tuesday's move was the latest example of an erratic, high-octane stock market increasingly driven by levered exchange traded funds and complicated hedging and options strategies that unwind with dizzying speed.

It's a far cry from when the U.S. stock market was viewed as a place for capital-raising by businesses seeking to expand and a place for investors looking to put their savings to work.

There has been a lot of talk recently about instituting a small transaction tax on every stock or bond trade. Originally called the "Tobin tax" after the economist who first mentioned the concept back in the early 1970's, the idea would be to try to encourage longer-term thinking in the investment community by taxing trading.

Wall Street, of course, hates the idea, and mentions all sorts of reasons why such a tax will either not work or will penalize pension funds.

But the real reason the Street hates such a tax is that it would make high frequency trading considerably less profitable, and reduce trading volumes in general.

If a transaction tax were to be enacted in all of the world's major markets - so that traders couldn't avoid the tax by simply moving their activities to another market - I think it might go a long way to making stocks more palatable to individual investors. Yes, the markets would continue to move up and down, as they always have, but at least the direction would be determined by reality, and not cyberspace.

I think a Tobin tax is worth a serious look.