Shareholder Value and Competition

The lack of understanding of most economists about human nature and nature (or the universe) per se is astounding to frightening. Shareholder value and competition do have a relationship that is not as direct as one might think because it involves human perceptions. Economy is a natural ecological (complex adaptive) system whose entities are after all humans. Rather than competing on natural resources of space and food, they compete on the abstract resource of money. The entity of a business and the even more abstract entity of shareholder value are illusions that have no counterpart in reality. Therefore it is the human illusion of perceived value that drives competition in economy and naturally the same applies to shareholder value.

Anyone involved in running a business knows how flexible accounting is when it comes to portraying a certain business result. That business result is used to sell the business as profitable on the stock exchange. Maddoff produced a lot of shareholder value for a long time by paying out newly received capital as interest, because there is only one value that produces profits and it is ‘perceived value’.

Stock markets are therefore a legalized form of Ponzi schemes because apart from being a gambling venue, their role is nothing else than to create illusionary shareholder value. I am not referring to influencing the shareprice with false information or cooking the books as Enron did. The price of one share being traded one day can change the market value of a large business by millions. That is nothing else than an illusion, because you cannot sell those shares at those prices as it will influence the price as such.

Can you see the wonderful tool that can be used to create ‘perceived value’ from nothing? You create some good illusionary story, or even fire people and reduce the competitive and service capability of a business and its value goes up in expection of the the coming rise in shareprice? Fantastic, self-fulfilling prophecy! In the very, very special situations of corporate takeovers – when one buyer wants to buy all outstanding stock – that shareholder value can be realized. The larger the merger the less it happens in cash terms and illusionary share values are exchanged for each other, therefore documenting the fact that the value is unreal.

Thus there are two reasons why we have global corporations: creating market dominating virtual monopolies of incompetence that thus can compete with much more competent smaller businesses and creating buyers for smaller corporations that as such can convert illusionary shareholder value to less abstract cash. The shareprice of the buyer typically goes down as a result of the diluted value, next to the problem of making money with a merger.

The problem is now that the share ‘value’ of the largest corporations can not be realized as there is no larger buyer. Therefore the value of the largest businesses are purely illusionary. It is supported by pooling the stocks into pension funds that are then bought by small citizens who buy them in hope of participating in a business. When that story pops, we need to call in the government so that the Ponzi scheme does not crumble. Apart from the CDO counterfeit money produced by the real estate lenders, that is the reason governments have to secure the debts that can no longer be secured by the collateral of illusionary shares.

Large public businesses have stop to compete for buyers for their products but they compete for buyers of their shares as otherwise their value and ability of dominating the market by buying much better competitors would erode. That is the true nature of relationship between shareholder value and competition. Competition is not only stifled within an organization only but also externally. Which is why global businesses sell product illusions today as they do no longer have the ability to compete on a product level. They need to outsource everything to smaller businesses, ideally in low-wage countries and resell it at an illusionary perceived value in their home market.

The profits that these large businesses produce are not real. They are created by constantly buying and selling other businesses at abstract market values, wringing them dry of assets and writing off illusionary market values to reduce the taxes on the book profits they would have to pay otherwise. No, I am not a communist or socialist. I am an observer who sees that a truly free market economy his destroyed by large monopolies. An unregulated flow of capital in stock markets kill the competitve drive of a large business and it kills the smaller competitors that are either dominated by sheer marketing power or gobbled up by using illusionary share price.

Cause and Effect in Global Free Markets

This is a post I wrote to a question on LinkedIn about the cause of the financial crisis. I wrote about it before, but I gave it a slightly different slant here.

Nature and therefore everything in it – that includes the economy – is a complex adaptive system. The reasons for that are unknown but similar dynamically interacting structures even exist on the lowest quantum physical level. Schrödinger’s Cat (which is neither dead or alive until you look at it) explains that paradox of not finding cause and effect in this universe. And there certainly is not a single cause to anything, but just a complex resonance of potential across a source and sink. It’s called supply and demand in economy. Yes, executives did what they did but so did consumers. And not just Americans but so many in the global economy we now have. Even the 20 million Chinese farm workers who dropped their hoes to work in Shouzou are now horrified to go back to their farms. They played the cheap workforce that fueled the American shopping spree and made China the largest holder of American dollars – which in the end is good.

And no, it is not a problem of greed because greed is not a part of Capitalism. There are greedy people in any political fragment. Competing for more resources is the most natural thing and a part of evolution. What you call executive greed is no more than an outlier in potential (income). Everyone says now, we knew it couldn’t last but we played the game like everyone else. And rightly so. It is not the pay-packages that are the cause of this, because they are no more than a symptom. So what causes are there possibly on a larger scale? Economy as a complex adaptive natural system works best when the dynamics of change are unbridled. That’s why free markets work better than others. And that is the problem, because we do not have free markets as the entities (businesses and governments) involved are too big. Cascading or domino effects are normal in such systems but when the entities are too big then small changes can topple one giant and the other giants simply fall into the void created. If those giants are infrastructure relevant then a global structural crisis will ensue.

What we have right now is freedom of capital, which is not the same as Capitalism. Capitalism just needs free markets but not freedom of capital. Monetary instruments are a resource of free markets and need to be carefully controlled and tuned, much like running an electric grid. Both too much or too little can cause a collapse. Governments gave the financial business giants the authority to create monetary instruments (CDS) without any limitation or control and without the need to back them up with secured debt value. AIG simply insured that debt risk with some strange insurance model. When the real estate market crumbled, the dominoes came down one by one and governments now are trying to stop the dam from breaking. There is a fair chance it still will. Hang on …

The economic crisis that hit the automakers is not connected to the financial crisis. It was created by the media panic mostly. But also that would not be a problem if those car manufacturers were smaller. Some would fail, be reestablished, new more creative manufacturers would grow into the void. Resonance at work again. The unions however want to hang on to their power in those large automaker giants and thus want them kept alive. It is really not about American jobs there at all. Also large unions work against free markets and thus send American jobs to China.

There you go – we are all at fault and if by no more than voting for these governments that made these laws and buying Chinese made products or American cars. So all that I can see is that we all need to change. Start with the (wo)man in the mirror! Go vote differently (America already did) and buy at the small vendors rather than the super-chains where you are no more than a number …. don’t forget – consumer demand shapes the market.

In Memoriam Dr. Wilhelmine Pucher (1919-2009)

Dr. Wilhelmine Pucher

Hier zum Nachruf auf Deutsch.

Today, March 19th, 2009 is a day for emotions but not for mourning. My mother passed away peacefully after only a few days of hospitalization. She was still up and walking yesterday evening refusing to be considered immobile. She truly died like an oak – standing up. I just remember that as I drove to the hospital this morning, a completely fresh, white blanket of snow – very unusual for this time of spring – covered the trees, lawns and houses in the outskirts of Vienna, as if to dampen the noises in respect.

My mother had a full life with all the ups and downs that one can imagine. She first learned to be seamstress only to turn to nursing shortly before the Second World War. Her life was however focused for ten years on her career in aquatic sports as a competitive diver in 10m platform and 3m springboard diving. She was Austrian Champion for many years and did participate in the last Olympic Games in Munich before the war. Her first husband died early in the war leaving her with a daughter. After the war she remarried and had another daughter and three sons, me being the oldest. After the war she was diagnosed with tuberculosis that only fully healed while she was pregnant with me. She said many times that I saved her life.  After the war she studied medicine and became a medical doctor and worked as an anesthesiologist until she retired. Her extremely high medical ethics were always cause for discontent at the hospital, when she refused to perform at operations that were done without regard to the patient.

She always said that the hardest time of her life had been the fatal accident of my older sister Gabriele 20 years ago. That was even harder than my mother’s diagnosis with cervical cancer at 45 and her fight for survival. Before my father’s death 17 years ago she nursed him patiently for 7. Afterwards she did not rest but restarted a very active life, travelling with her friends in her camping van all over Europe, reaching Gibraltar, the North Cape, as well as Istanbul. I always expected her to die while on the road. She had been fairly well for the last years and only stopped driving last summer to her great disappointment but all our relief.

For me she was a lioness who was willing to risk her life for her family. She was however not the homy kind of person and always considered housecleaning a waste of valuable time. She lived a life of jolly chaos.

Considering all of the above how can someone be in sorrow? Yes, we will all miss her deeply but the grief is our emotional weight that does not weigh on her life. She lived her’s to the fullest and in many ways she set an example. She has enriched and touched the life of so many people who will keep her in respectful and loving memory. Please, spare us the condolences, but let’s continue to celebrate life like she did as the wonderful gift it is, until and beyond the day we die.

Goodbye, mother. We love you dearly!

Your son Max, in the name of my brothers Albert and Michael and the wonderful large family you built.