The Stock Market: The Enemy of Our Economy

How Is the stock market model actually responsible for the global crisis?

Usually, we look at reality “as it is” and consider the actual organization of things as part of the ineluctable demonstration of what things should be. But if you apply the lateral thinking (Edward De Bono docet), everything can be assumed to be a completely different color. Try to think about the stock market and the financial products considered “speculative”.

Theoretically, shares are part of a company sold to the market in order to increase the capital of the company and have fresh resources to invest in the company’s development. In a normal market, where we pay attention to real values and real potentials of existing companies, the investor will buy shares in companies where he imagines to have increasing value or more revenues in the future. Investment, as a concept, is long term, as companies usually take time to make the capital invested profitable and create some return on the value. Theoretically the investor, when he gets back the price paid plus a gain, can go to the stock exchange market and sell his stocks to other investors and invest the revenues in other companies with high growth potential. We don’t want to repeat basic concepts, but merely focus our readers on the real meanings of what we are doing and for what such institutions are built.

In this theoretical market, as it was in the origins, there is a close connection between the value of the company, the expectations of future growth or revenues, and the price you can pay in the stock market. For instance, a company with high potential with a long period between the starting of production and the day you can get some revenues could have a lower value compared with a company with revenues available in a shorter time. But we are always talking about values, expectations, revenues, and time.

Some financial tools and products, like future options, have been created in order to help the negotiations in some specific market (for instance wheat futures in agriculture). But in the last 10 years, the situation has deeply changed and the stock exchange has become a place where speculative products (derivates, futures, options), and even stocks and financing itself, have become something separated from the economical substance present in those elements. Finance, formerly a tool to cover the time gap between when the entrepreneur invests money and the time products are sold, has become an independent market and environment, where there are no connections to the real economy.

Today, you can have a capital of 1 dollar and create financial products, credits, operations and revenues for an equivalent of 10 dollars or more. But what happens when we try to find the real value of the financial products? You can see this, for instance, in the sub-prime loans and toxic titles spread around the world. Our economy, the real economy, is on its knees because finance has “forgotten” to be a service to help the economy, and has become its own speculative product and market.

Until now, I have simply presented what everybody knows and lives everyday. What can we do to change this situation? First of all, this is a question of culture. By writing critical articles, commenting with friends and colleagues, and refusing to buying such kinds of products, we can create a culture capable of breaking down this tendency. The protests, political movements and much more going to happen are just the inorganic answer to the problem. What next? The revolution has to be done in the stock market first: banishing products with high speculative ratio put on the market without enough fundamentals under them, and also taxing all the negotiations when you do operations on a short period. In an idealistic world, stocks could be bought with a very low commission, but sold with a decreasing commission over time. So I can buy $100 stocks from Apple, for instance, and I pay $131. In that case, 1$ goes to the stock exchange organization, 100$ go to the seller, and $30 are put in a special fund connected with the stock itself. Every year, for 10 years, the fund pays me back the equivalent of 10% of that commission based on how many stocks I bought originally. So if I keep the title for one year or less, I lose $30, but if I keep it for 10 years, I recover all the $30 and it was like I originally paid 100$. Of course, we are talking about number of stocks, not money. In that case, if Apple stocks increase, the restoration fund does also, at the same level, so I will have back the 10% of an increased value. This is just an example of what can make the stock exchange market more favorable to long term investments. Blocking speculative products, making negotiations much more expensive, and creating incentives to keep stocks for a longer time will make the market slower, smaller, and less attractive for speculators and much more connected to the real economy and the real value of companies.

Necessary speculative products can still exist, but they need to be connected to real wealth and material substance. How could it be possible to have a change of 6% of the value of a company who realizes glasses when there are no changes on the glasses’ market or in the company’s revenues? Of course, in such a case which is prevalent today, there are no links to the real economy.

We might even have to consider a terrible scenario if this does not change. Nowadays, numerous operations are automatically conducted by financial robots who sell and buy titles following complex algorithms. I interviewed one specialist in robots for machine-time operations with whom I discussed a lot about the possibility of creating a software capable of learn from other robots and instigating them to make significant mistakes and therein destroy the stock market. This is not the plot of a movie; it is real. This scenario is possible. We don’t have to imagine an hacker closed in a garage, but a new financial terrorist could be a well-shaved young programmer capable of creating the software able to learn and then act in order to create the biggest financial crisis we can imagine. So the sooner we reconnect finance to the economy, the sooner we can transform the stock exchange into a place where long term investments realized, the sooner we will have a slower economy, but with less injustice and more attention to the future, not merely the next quarter. We don’t live by quarters. We need all seasons to complete a life cycle. The next frontier will be the annual horizon as the shortest period we can talk about.