Eat the Rich: A Treatise on Economics Page 4

  The broker who goes to a post is called the “trading crowd” even if he’s the only person in it. Although usually he isn’t, because the cattle-herd instinct is as strong on Wall Street as it is, for example, in a cattle herd. The specialist’s job is to give a “quotation” on the stock—to tell the trading crowd the highest price that anybody is currently willing to pay for a share and the lowest price at which anybody is willing to dump it. The video screens above the trader’s head show the last price at which a stock was traded and whether that price was an “uptick,” a “downtick,” or no tick at all. The stock “ticker” running around the room is a compilation of the trading prices from all the specialists’ posts.

  What’s going on in the trading crowd is a double-jointed, Hydra-hatted auction—as though Sotheby’s had a dozen guys with gavels, each with the same Rembrandt, and not only could the bidders raise their prices but the auctioneers could lower theirs.

  It sounds complicated because you and I don’t buy a lot of Rembrandts at Sotheby’s. But shopping for a car this way would be a pleasure. You want a Lexus. You know exactly how much the last Lexus sold for—with the same option package you intend to get. All the Lexus dealers in the world are in one place. You can hear their lowest prices. You don’t have to read their fibbing newspaper ads or spend all day traveling to their dealerships in the outer ’burbs and getting soft-soaped. All the Lexus buyers are in one place, too. You can listen to each of them bargaining. Now you know—to the fraction of a dollar—how much you should pay for a Lexus.

  To an outsider, however, especially an outsider being assed and elbowed aside and trod upon by people walking at thirty-five mph, it is confusion. And the language doesn’t help. The hollering is done in a form precisely dictated by the stock exchange. The number of shares is expressed in units of a hundred. At means you’re selling. For means you’re buying. All bids are made “price for size.” All offers are made “size at price.” Price increments come in arithmetically boggling one-sixteenths of a dollar—6.25 cents. This is called a “teenie” on the floor.

  “Twenty-five and three teenies for twenty.”

  “Ten at twenty-five and five teenies.”

  The teenies inject an odd note of juvenility into the baritone roars. One expects “itsy-bitsies” and “itty-bitties” to pop out next.

  Meanwhile, the specialist is “maintaining a fair and orderly market,” which basically means keeping middle-aged men from hitting each other. And the specialist is also acting as a “market maker,” which is a role analogous to what Dad plays when the kids are running a lemonade stand on the front sidewalk. If there are too many sellers of a specialist’s stock and not enough buyers, the specialist is expected to “make a market” by buying some of the stock for his own account. If there are too many buyers and not enough sellers, he is expected to sell some of the stock he holds in inventory—the NYSE equivalent of going inside to squeeze more lemons. (Somehow, specialist brokers make out better on this than Dad does.)

  What about the floor trader who went to the specialist’s post several paragraphs ago? He’s gone. Half a dozen trades can be made in the time it takes to read about one.

  “Take it.”

  “Sold.”

  A large chunk of money has just changed hands without lawyers, contracts, notary publics, or even handshakes. The two traders put their heads together for a moment, jotting on order forms.

  “I am…” One names his brokerage and gives his NYSE badge number.

  “I am…” The other does the same.

  And we are…able to buy the beach house. Or we should start to look for a second job.

  I was interviewing one of the floor brokers, whom I’ll call David, or, rather, I was trying to interview him. Besides hollering in teenie language, brokers are consulting their beepers, using the banks of telephones on the trading floor, and shouting into cell phones. A good broker—and David is one—can do all four things at once. At any given moment, he’s supposed to be buying or selling several different stocks, each trade requiring him to be at a different specialist’s post. Also, the buy or sell demands come with complicating instructions—“Limit orders,” “Stop orders,” “Fill or kill”—with meanings like “Don’t buy for more than such-and-such,” “Sell if it gets to so-and-so,” “Buy this much or nothing.”

  “I have to ask my clerks,” says David, “‘Do I have time to pee?’”

  David moves from post to post. I can barely keep up with where he’s going, let alone with what he’s doing. More than 3,000 corporations are listed on the NYSE. Their stock is worth more than $9 trillion. The New York Stock Exchange is the Super Bowl of money. Being allowed on the trading floor is like being allowed on the football field during the game and getting to follow the players around. Under the circumstances, Q&A is necessarily truncated.

  Finally, around noon, there was a pause. I had the chance to pose a question. There was so much I needed to know. There were thousands of puzzling aspects to the stock market. Possible queries flooded my mind.

  “What’s with the ugly jackets?” I asked.

  David’s was a polyester-cotton blend, with a lawn-and-leaf-bag shape in the prescribed, and horrible, color of his brokerage house. It was rumpled and creased and slightly sweat stained. The sides bulged with notepads, order books, and memoranda. Twenty pens and pencils were shoved into the breast pocket.

  “You wreck your clothes,” said David.

  The traders wear dress shirts, expensive neckties, and well-tailored trousers, but most of them leave their suit coats in the members’ lounge, and their wing tips, too. They put on the gaudy sack blazers and the least-fashionable kind of lumpy sneakers. As a result, the average trader is dressed like a combination bank president, produce manager, and ghetto kid who lets his mom pick out his shoes. Nike and Tommy Hilfiger doing a NYSE line of clothes is not really a bad idea.

  We in the general public have an idea that there’s something WASPy or, anyway, stuffy about the stock market. But the accents belie this.

  There are WASPs on the floor, saying “fuck” with the best of them. But the traders are predominately Jewish, Italian, and, most predominately of all, Irish. The NYSE is the Brooklyn of fifty years ago. (And one reason fuck may be used so often is that immigrants didn’t understand why the slang for making love was dirtier than the slang for going to the bathroom.)

  I asked a specialist broker, who’s Irish himself, why so many stock-exchange members are micks. We’re not known for our business acumen.

  “They were cheap labor,” he said.

  The Irish were hired as clerks and runners and boys who chalked up prices before video screens were invented. They figured out how the whole thing worked, and they stayed.

  “How come there are so few black and Hispanic traders?” I asked the specialist.

  “They’re next,” he said.

  And, indeed, many of the nonbroker employees on the floor are black, Puerto Rican, Dominican, and so forth. And more than a quarter of them are women. In twenty years the traders will be saying “mo’fo,”

  “caramba,” and “oh, fudge.”

  A lot of brokers never went to college. And the rest don’t care if they did. I asked David what kind of economic theories people who trade stocks believe in. Do they belong to the “classical school,” which says the forces of supply and demand are uncontravenable and self-correcting? Are they Keynesians, who think that government programs can create prosperity and full employment? Are they monetarists, who postulate that economic cycles are tied to Federal Reserve policy?

  “I don’t think they give two shits,” said David.

  They’re tough guys. David, for instance. He’s a wiry man in his fifties, a former college wrestler. He took up running at forty and ran in half a dozen marathons with times well under five hours. When he left for the Boston Marathon, the last things to go in his suitcase were four packs of Marlboros.

  “I look forward to this job every day,” says David. He takes
the subway to work from the Upper East Side and stands the whole way:

  “It never occurs to me to look for a seat.”

  “I had some marital trouble years ago,” he says. Lots of people would blame such difficulties on their work. “This job got me through some rough personal times,” says David.

  And then he is off into the trading crowd again, six strides ahead of me and holding more numbers in his head than I can count to.

  Upstairs from the trading floor is the New York Stock Exchange Luncheon Club, looking the way that something to do with the stock market should look. The ceilings are lofty, the windows are Palladian, and the help is obsequious. The leather armchairs are wide and deep. The china is monogrammed. The stalls in the men’s room are made of marble. And all day long the New York Stock Exchange Luncheon Club is empty. David hasn’t eaten there in seven years.

  The traders gobble take-out food, standing up, and not just because they have too much work. They’re in the groove. They’re wholly absorbed in what they’re doing. They’re lost in total concentration on the market or on one segment of that market. In the middle of the afternoon, I mentioned to David that the Dow Jones average was down a hundred points. He’d had no idea. He hadn’t bothered to look.

  The traders spend their day in that eerie, perfect state the rest of us achieve only sometimes when we’re playing sports, having sex, gambling, or driving fast. Think of traders as doing all those things at once, minus perhaps the sex.

  The great surprise of the stock market is that it’s a happy place—not only happy in a bull season, when everybody’s making money, but also happy, in its way, when everything is falling apart. All free markets are mysterious in their behavior, but the New York Stock Exchange contains a mystery I never expected—transcendent bliss.

  The New York Stock Exchange does $23 billion in business on an average day. Five times a week it buys and sells an amount of stuff equal to the annual gross domestic product of Tanzania. The NYSE is the world’s largest clearinghouse for corporate shares, but there are plenty of other big stock markets. The American Stock Exchange, a block away, trades 6 billion shares a year. The stock of newer, smaller, or less-illustrious corporations—more than 5,500 of them—is bought and sold in the Over-the-Counter market. Here the hollering and wearing of ugly clothes take place across a network of computer terminals and phone lines—the National Association of Securities Dealers Automated Quotation system, or NASDAQ.

  There are regional stock exchanges in Boston, Philadelphia, Chicago, and San Francisco. Most capitalist countries (and some communist nations such as China) have stock exchanges. More than $19.4 trillion worth of stocks was traded worldwide in 1997.

  And stocks are only one way to bliss out with money. The bond market is also huge. Americans have more than $2 trillion invested in corporate and foreign bonds, another trillion-plus in state and municipal bonds, plus the Treasury bonds and T-bills we (and the Japanese) have bought to cover our $5.5 trillion national debt. Then there are commodities, derivatives, money-market instruments, and just plain money itself. More than $1 trillion of international currency changes hands every day. All of these things are traded with the same frenzy of incomprehensible glee as stocks.

  The trading floor was starting to spin again. A feeling of desperation began to rise, and so did the take-out food that was gobbled standing up. For us civilians, savvying financial markets is like taking calculus when the last course we had in the field was high-school practical math. Not only that, but—because we didn’t pay any attention to stocks, bonds, interest rates, or the business section of the newspaper until it all got famous about a year ago—we have, in effect, hooked the first dozen calculus lectures. What are we going to do?

  And this is not just a matter of idle journalistic curiosity as far as I’m concerned. I mean, I may want to know why some places are as rich as Wall Street and other places are as poor as a visit to Wall Street makes me feel, but I’m also planning to retire. It seems everybody is planning to nowadays. Although I can remember a time when we all intended to die before we were thirty. We’re saving our butts off, putting $3,000 a year into our savings accounts. By 2028, we’ll be able to…live comfortably for thirty-six months. Of course we get dividends from those savings accounts. We consult the compound-interest tables in Money Management for Fools. At 3 percent, the $3,000 we put in the bank today will be worth $7,281.79 in thirty years. But Democrats are going to get back into Congress sooner or later. Inflation will return. We tell our kid to find the consumer-price-index Web site. It turns out today’s dollar is worth only about a quarter of what a dollar was worth thirty years ago. That means our $3,000 that will become our $7,281.79 may equal $1820.45 when the golden years begin. Of course, there’s always Social Security. I understand Meow Mix is one of the more palatable cat-food brands.

  We need to invest. But investing presupposes a certain basic knowledge about investment and not just knowledge about whether corporate bonds will go up or down but knowledge more basic than that. Like: What the hell is a corporate bond?

  There are two main kinds of investments: debt and equity. Debt is just lending money. A General Motors corporate bond is a “debt instrument.” You lend GM money, and GM promises to pay you back, plus interest. Your savings account is also a debt instrument. You lend the bank money, and the bank promises to let you withdraw it, never mind that the interest is less than you’d get from keeping a sock full of buffalo nickels under your bed. And your checking account is a debt instrument, too. You lend the bank money and they…charge you for it? Plus ATM fees? This is probably why so many pistol-waving people rob banks and why so few pistol-waving people rob General Motors.

  Various companies, such as Standard & Poor’s, provide bond ratings from AAA to D to help you estimate how safe your debt instrument is. A D-rated bond is like money lent to a younger brother. An AAA-rated bond is like money lent to a younger brother by the Gambino family. U.S. government bonds are considered “riskless”—unless Vince Foster is still alive and Iraq has the bomb.

  Bonds rated BB and lower are called “junk bonds.” Junk bonds are just loans that are risky and therefore pay higher interest rates. The credit-card debt that you’ve run up is essentially a junk bond held by Visa. There’s no collateral except the Benetton sweater that the dog chewed. And Visa knows what your Standard & Poor’s rating would be if you had one. Visa knows more about you than your parents and psychotherapist. There’s a good reason you get soaked on your credit-card balances.

  Debt means that you’re renting your money to someone. Equity means you’re buying something from him. If you buy a share of a corporation’s common stock rather than buying its corporate bond, you own part of the corporation. You don’t get a mere loan payment, you get the profits. Specifically, you get the profits that are left after the corporation settles its tax bill, pays off its bond debts and other prior obligations, gives enormous bonuses to its top executives, uses part of its earnings to buy other corporations and Indonesian real estate, and retains another part of its earnings in case it needs to buy more Indonesian real estate later. You get those profits, or, rather—since there are, say, a couple million shares of common stock outstanding—you get 1/2,000,000 of those profits.

  This is your stock dividend. Oh, and because you’re one of the owners of the corporation, you get to vote. This means that once in a while you receive something in the mail called a proxy statement. The proxy statement allows you to give your vote to the people who are paying themselves enormous bonuses. Either that or you can travel to the corporation’s annual meeting (held in Indonesia this year) and stand up in the back and ask shrill questions like some Ralph Nader nutfudge.

  You rarely buy common stock for the dividend and almost never (unless you’re buying 1,000,001 shares) for the voting rights. You buy stock because you have one of those opinions mentioned earlier. You think other people will think this stock is worth more later than you think it’s worth now. Economists call this—i
n a rare example of comprehensible economist terminology—the Greater Fool Theory.

  Speaking of folly, you can also invest in the commodities market. This is where you buy thousands of pork bellies and still don’t know what you’re going to have for dinner because, in the first place, you’re broke from fooling around in the commodities market and, in the second place, you’re not completely insane. You didn’t actually have those pork bellies delivered to your house. What you did was buy a “futures contract” from a person who promises to provide you with pork bellies in a couple of months if you pay him for pork bellies today. You did this because you think pork-belly prices will rise and you’ll be able to resell the delivery contract and make out like a…perhaps “make out like a pig” is not the appropriate simile in this case. Of course, if prices fall, you’ve still got the pork bellies, and won’t your spouse be surprised?

  The reason you go broke in the commodities market—or die from the cholesterol in sausage—is because you’re betting you know more than the actual producers and consumers of the commodity. Take the less-risible example of feed-cattle futures. Ranchers have a pretty good idea of how their cattle raising is going: They can count the calves. If it looks like a good year, the ranchers will sell cattle futures early so they don’t suffer from weak prices when all that beef comes on the market at the same time. Burger King has a pretty good idea how the hamburger business is going. And they know how many cattle it takes to make all their burgers (about two). If it looks like a bad year for Whoppers, Burger King will put off buying cattle futures to take advantage of the coming beef glut.

  This leaves you to buy high and sell low*. The producers and consumers of a commodity know a lot about that commodity’s market, and you know your investment portfolio is filled with rotting meat.