Two weeks ago, on Palm Sunday in Grace Church, I found myself wondering whether my fellow congregants were praying for their souls or their portfolios–assuming that in these wealth-besotted times there’s a difference. Anyway, that’s a question that God in the fullness of His righteousness will decide.
Two days earlier, the markets had tanked–and how! Appropriately, Canon Andrew’s smashing Palm Sunday sermon portrayed the events of the Passion leading up to Pilate’s delivery of Christ to the mob as “mass hysteria” at work, a description that certainly applies to what transpired on Nasdaq screens and on the floors of various world bourses on Friday, April 14. The sermon took on additional poignancy thanks to the fact that sitting in the pew behind me was the actor David Suchet, who is (I hear) giving a performance for the ages in Amadeus , as Salieri, whom we might think of as the Pontius Pilate of music–that is, as another frail, ambitious human who, confronted with divinity, behaved badly.
Since then, at least up to the point this is being written (April 19), stocks have significantly redeemed themselves. But how it will play out ultimately, where it all will end or come to rest, only God knows, and He ain’t saying. At least He hasn’t confided in me, and I’m pretty sure that divine guidance cannot–should not–be defined, on earth or (I suspect) in heaven, to include investment advice.
When it comes to understanding markets and how and why they behave the way they do, we poor mortals are thrown back on our own mental resources and the explanations of experts. Most of the latter is absolute self-promoting crap, on the order of the stuff a James Cramer, say, dishes out. There are a few good people out there. When asked whom I read seriously, with some expectation of enlightenment, I say Paul Krugman in The Times (Op-Ed) and elsewhere, Gary Weiss in Business Week , Bob Lenzner in Forbes , Stephen Roach of Morgan Stanley Dean Witter & Company, Allan Sloan in Newsweek , my colleague Chris Byron. I miss the late Herbert Stein terribly. Now there was a man who grasped that in economic affairs, the principal constituent with which one has to deal is human nature, for which there is only one consistently useful interpretive tool: common sense informed by experience. On financial matters, the editorial pages of The Wall Street Journal invariably leave one thinking, the business section of The Times almost never. Good writing about stocks, bonds and the markets in which they trade is hard to find.
Recently, in about the most unlikely place I might imagine, I read what I think is the single most brilliant, intellectually penetrating and useful piece of financial journalism-cum-excursus that I have read in close to forty years on and around Wall Street. It appears in the April 13 issue of the London Review of Books (www.lrb.co.uk). The article is entitled “Fear in the Markets.” It is by Donald MacKenzie, “who teaches at Edinburgh University [and] is beginning research on the historical sociology of modern finance.”
Mr. MacKenzie’s piece is an examination of the collapse of Long-Term Capital Management, but it is much more than that. It touches on questions that need to be thought out and thought through in an era when the sheer volume of financial trading, coupled with a pandemic mistrust of past-based standards of human judgment, requires that high finance be computer-driven–usually, today, in accordance with slavish obedience to programs that seem similar enough to science in style and presentation to claim the name, but in reality are not. In other words, as this column has been trying to make clear for some years, the Black-Scholes model for options pricing, for all the elegance and ingenuity of its arithmetic, is not sister under the skin to, say, the laws of physics. The workings of nature that have been solved and codified by Newton, Boyle, Einstein and Planck are immutable: the discoverers do not by their own interjection distort, complicate or alter the events and sequences they purport to describe.
Here’s how Mr. MacKenzie concludes: “Finance theory describes not a state of nature but a world of human activity, of beliefs and institutions. Markets … remain social constructs and the feedback loops that constitute them are intricate, knotted and far from completely understood.”
Apart from the tangle of skewed concentricities that brought down L.T.C.M., whose risk models were so conservative that “the probability of the fund’s August 1998 losses was so low that its occurrence even once in the lifetime of the universe was very unlikely,” other feedback loops continue to puzzle me.
Take the matter of inflation. Only recently has the inflation number risen to a level of market-roiling concern. Possibly or probably in connection with rising oil prices, since a few hundred lines of computer code is not yet a viable alternative fuel for an S.U.V.; when it comes to filling up, it is to Mobil, not Microsoft, that one turns. Still, given the generally intense level of getting and spending in the U.S. economy since 1991, it has taken an ungodly long time for inflation at the consumer (as in “C.P.I.”) level to show up. One has to wonder why.
I’m beginning to wonder if dot-com might not be a significant part of the answer. The more I look around, the more I’m convinced that if there’s one thing that dot-com businesses–so-called “e-tailers” of goods and services–have in common, no matter what the goods or what the services, it’s underpricing. It may just be that the generic dot.com “business model” includes, in its price assumptions, a deflationary-disinflationary component that has wider economic effects than anyone has calculated.
Take Peapod.com, the “e-grocer” that essentially gave up the (cyber) ghost a couple of weeks ago. Compare Peapod to the marvelous D’Agostino up on Henry St., ten minutes’ walk from where I live. Filter out the experiential differences: store atmosphere, physical premises, wonderful staff, the assortment of goods within arms’ reach. Reduce the experiment to the simple matter of buying, say, a $100 basket of groceries.
Assume at the go-off, that–food-retailing margins being what they are–Peapod can sell me for $100 what D’Agostino will have to charge me $125 for. Actually, a young woman who does some work for another e-grocer told me they could cut my bill by 50 percent, but I doubt that. Not if they hope to survive much past the mezzanine round of financing.
Now here’s the thing. Peapod has certain advantages: centralized warehousing, no need for expensive storefront real estate, maybe even an edge in purchasing discounts. But what about this? If I order from Peapod, they have to pay someone to fill the basket with my order. If I walk up to D’Agostino, I’m the person who does the basket-filling, and my time costs D’Agostino zero. Moreover, does the $10-an-hour Peapod order-filler make maybe another $10 in impulse purchases on my behalf, as I’m likely to? Narrowing Peapod’s real-world price advantage from $25 to $15? You get the picture.
In my opinion, the “e-tail” and every other sector of dot-com Consumerland has been a protracted exercise in underpricing: either on a cash basis, or in consequence of a vain hope of making up the shortfall with advertising no one looks at–a fact that cannot be lost on advertisers and their agencies much longer. But as long as the game has gone on, it has worked to hold the prices charged by non-‘Net retailers down, and to suppress inflation at the cash register across the board.
But like all games, it must end, and it has. Peapod and CDNow are just the openers. I’m not saying that as other underpricers go out of business, inflation may get its shoulder back behind the wheel, but the deterrent effect is definitely likely to be diminished. What that may mean to the markets, long-term, I leave to others to formulate.