This is how the price of shares is really decided

Satyajit Das in The Independent



Equity investors – who have enjoyed strong gains over the past eight years – are unlikely to question the merits of stocks as an investment. US stock markets have tripled in price since 2009. In nominal terms the Dow Jones Index is up 70 per cent from its peak in January 2000. But 17 years later it is up only 19 per cent in real (inflation-adjusted) terms.

Investors rarely scrutinise the driver of equity returns. In reality stock markets have changed significantly over recent decades, driven by artificial factors that result in manipulated and unsustainable values.

The traditional functions of the stock market include facilitating capital-raisings for investment projects, allowing savers to invest and providing existing investors with the ability to liquidate their investments when circumstances require. Unfortunately, a number of factors now undermine these functions.

First, equity markets have increasingly decoupled from the real economy. Equity prices now do not correlate to fundamental economic factors, such as nominal gross domestic product or economic growth, or, sometimes, earnings.

Second, equity markets have become instruments of economic policy, as policymakers try to increase asset values to generate higher consumption driven by the “wealth effect” – increased spending resulting from a sense of financial security. Monetary measures, such as zero-interest-rate policy and quantitative easing, distort equity prices. Dividend yields that are higher than bond interest rates now drive valuations. Future corporate earnings are discounted at artificially low rates.

Third, the increased role of HFT (high frequency trading) has changed equity markets. HFT constitutes up to 70 per cent of trading volume in some markets. The average holding period of HFT trading is around 10 seconds. The investment horizon of portfolio investors has also shortened. In 1940 the average investment period was seven years. In the 1960s it was five years. In the 1980s it fell to two years. Today it is around seven months. The shift from investing for the long run has fundamentally changed the nature of equities, with momentum trading a larger factor.

Fourth, the increasing effect of HFT has increased volatility and the risk of large short-term price changes, such as that caused by the 7 October “flash crash”, discouraging some investors.
Fifth, financialisation may facilitate market manipulation, with the corrosive impact of insider-trading and market abuse eroding investor confidence.
US federal investigators found a spider’s web of insider-trading exploited by a small group of funds that benefited twice: from both trading profits and artificially enhanced returns. These, in turn, generated more investments and higher management fees. The investigations revealed expert network firms, which provided “independent investment research”. Redefining the concept of expertise, these firms seemed to specialise in matching insiders with traders hungry for privileged information, routinely allowing access to sensitive information on sales forecasts and earnings.

Regulators suggested that the practice was so widespread as to verge on a corrupt business model. Reminiscent of the late 1980s investigations into Drexel Burnham Lambert, Ivan Boesky and Michael Milken, the clutch of prosecutions has created an impression that a small golden circle of traders have an information edge, disadvantaging other, especially smaller, investors.

Finally, alternative sources of risk capital, the high cost of a stock market listing, particularly increasing compliance costs, increased public disclosure and scrutiny of activities including management remuneration as well as a shift to different forms of business ownership, such as private equity, have changed the nature of equity market. New capital raisings are increasingly viewed with scepticism as private investors or insiders seek to realise accreted gains, subtly changing the function of the market. The problems are evident in both the primary markets (lower numbers of initial public offerings of new shares) and in the secondary markets (reduced market turnover).

The recent Snapchat IPO illustrates the trend. Snap, a young, still unprofitable company, saw its shares soared 44 per cent on its first day of trading, although it fell sharply subsequently. Shareholders providing capital will not be able to control the company, as company insiders have not given common stockholders voting rights, which is inconsistent with conventional corporate governance models. In technology-intensive sectors, for example, entrepreneurs, such as those associated with Snap, now use IPOs to either facilitate exits for venture capitalists and founders, create a currency in the form of listed shares to compensate or finance acquisitions, or raise cash to fund shortfalls between revenue and expenditure.

The declines are symptomatic of the problems of excessive financialisation. Financial instruments, such as shares and their derivatives, are intended as claims on real businesses. Over time, trading in the claims themselves have become more rewarding, leading to a disproportionate increase in the level of financial rather than business activity. Longer term, the identified developments threaten the viability of the stock market as a source of capital for businesses and also as an investment, damaging the real economy.

Left, right, or the good fight?

Tabish Khair in The Hindu

Bestselling author Amish Tripathi recently set people arguing with his contention that he didn’t “believe in left-wing and right-wing ideologies”; he was “just proud of the land” in which he was born, and its culture. Immediately, some of my friends assumed that I would be hostile to such a statement, but I agree with Mr. Tripathi – partly.

The matter of ‘Indian culture’ is easily resolved. Born in Muslim circles, where many claim a similar pride in Islamic practices, I have long looked at matters specifically. As a Muslim I am not proud of the fact that we give fewer opportunities and legal options to Muslim women at times, but I am proud of Islam’s egalitarian and charitable requirements. Similarly, as an Indian I am not proud of our cultural preference for male children and our caste prejudices, but I am proud of a lot of other things: our art, music, philosophy and literature, our civilised ability to live with differences, etc.

I am sure Mr. Tripathi means what I mean: like me, he is proud of the fact that we have an increasing number of women authors, scientists and politicians and not of the fact that we also have female infanticide. So that part of the argument is hardly a matter of controversy.


Making sense of the demarcation

The left-right divide – or its lack – appears more contentious. As I am usually associated with the left by people, except, I suspect, overly assured people on the intellectual political left, who happen to hold tenure in universities like Cambridge or inhabit cities like Delhi and London, I am expected to take exception to this part of Mr. Tripathi’s claim. But once again, I agree – partly.

Yes, the demarcation between the left and the right – in terms of political ideologies – does not make sense. It stopped making sense at least as far back as the rise of Stalinism in the Soviet Union. That is so because the left – as Karl Marx understood – needs to be contextual and relational. The main difference between the left and the right is that the left, if it is really the left, looks at a matter in the present context, and tries to judge it in that living and material context. The right, if it is really the right, depends on the authority of ‘custom’, ‘religion’ and similar inherited matters for justification. Failing to shut you up with ‘god’, it hits you with the fetishised ‘gene for crime!’

With the rise of Stalinism – and similar communist ideologies – a part of the political left basically started thinking like the traditional right. It started justifying its positions not by engaging with the living and the always changing world of people and their social relations, but by telling people how to live and think based on inherited ‘sacred’ ideas and texts. The fact that these texts were attributed to Marx or Lenin and not to the Gospel writers or Luther makes no difference.
Now, one of the problems the actual left has always had – because it (rightly to my mind) wants to engage with the lived materiality of social relations – is its tendency to privilege change. Because the actual left is particularly alive to changes and sceptical of tradition-based arguments, it tends to see change in largely positive terms. You have nothing to lose but your chains, thundered Marx and Engels, momentarily forgetting that people always have more to lose than their chains, and the poor have more to fear losing the little that they have than the superflux-rich.

Similarly, as the right bases its arguments on traditions and custom, it tends to believe that everything inherited from the past – as culture or religion – is necessarily good. This again may not be the case. Inheritances from the past might be good or bad; they might even have been good once and turned bad now. Similarly, a change might be for the better or for the worse.


An unwillingness to engage

Given this basic realisation, just as there are those on the left who think like the right, there are also those on the right who think like the left. In short, there are those on the left who act on the basis of inherited ideas that may have no validity today, and there are those on the right who test traditions on the basis of a lived engagement with the changed conditions of the present.

Actually, many of the political problems of the world today stem from exactly this situation: the fact that there are many on both the left and the right who are unwilling or unable to engage with the changing socio-economic relations of power today. For instance, the political left keeps talking of the proletariat even as workers have been cleverly changed into minor managers of their own labour by neo-liberalism, and the political right keeps talking of the free market of capitalism, even as neo-liberalism survives by enforcing governmental interference in the market but only on the side of the very rich!

Fatah ka Fatwa - Islamic Banking

Whiplash: the myth that funds a £20bn gravy train

Patrick Collinson in The Guardian


Ten years ago I was in a country lane in Leicestershire, indicating to turn right to go into a hotel for a family event. Seconds later my car was a write-off after a young driver careered round the bend, smashing into the rear of my VW Golf. Fortunately I stepped out uninjured. And from that moment I was pestered, again and again, to make a false whiplash claim.

One of the hotel’s guests was first in. “You’ve got to get down the doctors, tell them your neck is really hurting. You’ll easily get £3,000,” said one (I’m summarising here). But my neck, while a little stiff, wasn’t in pain. Others told me I was mad not to apply. But a decade later there is no evidence the crash caused anything other than a mild sprain that lasted a couple of days. And certainly not deserving of the £3,000-£6,000 that is routinely paid out to “victims” of even the mildest of rear-end shunts.

Now one brave consultant neurosurgeon, who has carried out thousands of operations involving neck and back issues, has declared that whiplash is a myth, nothing more than a multibillion-pound gravy train for lawyers, doctors and the victims suffering from “mainly non-existent injuries”.

In a remarkable piece for the Irish Times, Dr Charles Marks, a lecturer at University College Cork, says the medical profession is as guilty as the lawyers. “For 20 years I wrote medical reports which were economical with the truth … the truth being, there was very little wrong with the vast majority of compensation claimants that I saw. I was moving with the herd.” In Ireland, where payouts have reached levels that even the most avaricious ambulance-chasing lawyer here can only dream of, a doctor can earn as much as £3,000 a week in fees after spending 20 minutes with someone involved in a minor car crash, then writing a largely templated report. “It’s a fee of around €350 and you can easily do 10 a week,” Marks says.

Yet whiplash is “almost impossible to prove”, says Dr Marks, with patients self-diagnosing pain that can never be detected using sophisticated imaging techniques such as MRI and bone scans. “All whiplash is minor. Moderate or permanent whiplash is simply non-existent.”

He cites one study of 40 “demolition derby” drivers in the US who had an average of 1,500 collisions each over a couple of years. Compare that to a mild shunt in slow-moving traffic that, somehow, warrants payouts of thousands. Yet just two of the demolition derby drivers reported post-participation neck pain that lasted more than three months.

Dr Marks adds that in Greece and Lithuania, where there is no expectation of financial gain from whiplash, chronic neck pain following a car crash appears simply not to exist.

But one (British) consultant in Ireland is barely sufficient evidence. So I spoke to another whiplash expert, Dr Stuart Matthews, consultant surgeon in major orthopaedic trauma at the Leeds Teaching Hospitals. He sounded even more dismissive than Dr Marks. “There is not a single test that shows abnormality directly attributable to this condition. Diagnoses are purely on the say-so of the person involved. Many orthopaedic surgeons do not believe it is a genuine condition.”

He says early research that provided medical endorsement for whiplash claims has subsequently been rejected. “It’s the emperor’s new clothes. People just go along with it, there is a bandwagon.”

Neck sprain is genuine, he says, but recovery is relatively quick with little evidence of significant physical injury.

Yet the victims of whiplash receive £2bn a year in payouts, a fair chunk of which goes to personal injury lawyers. That’s £20bn over the past decade, paid for out of galloping increases in car insurance premiums. The forthcoming election means that reforms to whiplash payouts, promised in the prison and courts bill, have been shelved.

A new government, of whatever complexion, should reinstate the reforms – and order a major medical review to determine if we have all been conned for years.