February 28th, 2006

Baby and me

Google Exec States Obvious Truth! Markets In Turmoil!

If economics is "the dismal science" those MBAs, turned out like so many widgets during the past 20 years, who now control billions upon billions of dollars of investment capital have - yet again - proven to anyone paying attention that a university degree is no proof of intelligence, let alone of wisdom.

Google stock closed down 7%, or $27.75 per share, today.

Why has this happened, I hear you cry. Has Google blown a major investment? Is it being sued for copyright infringement or has it been targetted by US anti-trust investigators?

Er, no.

Well, has another company launched a vastly superior search engine?

No again.

Apparently, Google is "worth" 7% more now than it was this time last night because one of its executives, George Reyes told an obvious truth when asked about Google's prospects for growth in the short-term future. He said that Google is unlikely to continue growing at the pace it has maintened over the past 18 months.

To quote from the CBC's story,

"Most of what's left is just organic growth, which means you have to find ways to grow your traffic," Reyes said. "Clearly, our growth rates are slowing, and you see that each and every quarter."

Reyes later put a more positive spin on his remarks. "I am not turning bearish at all," he said near the end of a 45-minute session that was webcast. "I think we have a lot of growth ahead of us. I think it's just a question of at what rate."

I suppose it proves only that I am naive in thinking that, possibly, some of the traders out there investing your wealth (not mine; I don't have an RRSP to speak of) might have learned something from the last bust following a lunatic boom. After all, it was only 5 or 6 years ago, wasn't it, the last time we all expected economic growth to continue at an exponential rate for, er, ever?

But of course, the market isn't rational. That is, it operates according to certain mechanical rules, but the steering is done almost entirely by (almost entirely) men who are not nearly so clever as they believe themselves to be. And its original purpose - to raise funds for industry and enterprise - has been almost entirely lost in the short-term gambling that is stock trading as opposed to investing.

In other words, the stock market has become a game, a casino, where monomania is not just the rule, it is virtually a requirement. Like a conclave of shamans poking the entrails of a deer with a magic stick, stock "analysts" read corporate pronouncements for their "signals" and then, with a terrifyingly consistent mob-like behaviour, they buy or sell as one man.

Don't get me wrong. Investment is (often) a good thing. Capital liquidity is (often, and within reason) a good thing. But moving investments around like so many poker chips does no good for anyone but the traders themselves, who get a percentage of every trade.

It's time to make the stock market useful again. I just happen to have a Modest Proposal as to how this could be accomplished.

Basically, the idea is a variant of the Tobin Tax, in the economist James Tobin proposed "[a] uniform international tax payable on all spot transactions involving the conversion of one currency into another, in both domestic security markets and foreign exchange markets..." with the goal of discouraging speculation for and against, for example, the Canadian dollar.

I propose something simpler and possibly more radical: A graduated tax on financial gains from stock transactions.

In essence, traders would be punished for making a quick buck in the stock market, rather than investing for the long term. To do this, profits from "stock-flipping" would be taxed at a descending rate.

If one "earns" a profit of $1.00 on a $1.00 investment within one year, the tax would be 100%.

If one flips the stock within two years, the tax would be 75%.

Three years, 50%

Four years, 25%.

After 5 years holding on to the same stock, any profit would be the investors to keep.

What this would accomplish is two-fold. First, it would put an awful lot of stock brokers out of a job and force them to find honest work, while freeing up a good deal of potentially useful investment capital in the process. Second, it would strongly encourage those investors who remain to think about the long-term value of their investments, rather than to focus on their reading of the psychology of the market.

All right. That's it. There are at least two of you (probably) reading this who I know will think this the most stupid idea they've ever heard of. Have at me, kids. But no ad hominen attacks, this time, okay? I really don't like those.