Wednesday, August 24, 2016

More Bernstein On Marx, Market Structure and ETFs

But first a brief ramble. Old Karl took the plunge in equities while his partner in crime preferred commodities. From May, 2012:

Karl Marx Dabbles in the Market (and rationalizes his success)
On his 194th birthday we celebrate Karl the Capitalist!

Letter, Karl Marx to his uncle, Lion Phillips, 25June1864:
"I have, which will surprise you not a little, been speculating partly in American funds, but more especially in English stocks, which are springing up like mushrooms this year (in furtherance of every imaginable and unimaginable joint stock enterprise) are forced up to a quite unreasonable level and then, for most part, collapse. In this way, I have made over £400 now that the complexity of the political situation affords greater scope, I shall begin all over again. It’s a type of operation that makes small demands on one’s time, and it’s worth while running some risk in order to relieve the enemy of his money."  
327: Marx to Lion Philips by Karl Heinrich Marx, in Karl Marx, Frederick Engels: Collected Works, vol. 41, Marx and Engels: 1860-1864.
And from August of the same year:

Friedrich Engels: Global Macro With an Emphasis on Commodities
Sunday will be the 117th anniversary of Engels' death. Here's some stuff he thought about, in addition to co-writing The Communist Manifesto:
...The minor panic in the money market appears to be over, consols and railway shares are again rising merrily, money is easier, speculation is still pretty evenly distributed over corn, cotton, steam boats, mining operations, etc., etc.

But cotton has already become a very risky proposition; despite what is so far a very promising crop, prices are rising continuously, merely as a result of high consumption and the possibility of a brief cotton shortage before fresh imports can arrive. Anyway I don't believe that the crisis will this time be preceded by a regular rage for speculation; if circumstances are favourable in other respects, a few mails bringing bad news from India, a panic in New York, etc., will very soon prove that many a virtuous citizen has been up to all kinds of sharp practice on the quiet.

And these crucial ill-tidings from overstocked markets must surely come soon. Massive shipments continue to leave for China and India, and yet the advices are nothing out of the ordinary; indeed, Calcutta is decidedly overstocked, and here and there native dealers are going bankrupt. I don't believe that prosperity will continue beyond October or November — even Peter Ermen is becoming worried....
Good yucks huh? Maybe not.
Here are the bits that precede and follow his market report:
...There seems little doubt about the advent of the crisis, even if the recent bankruptcies were no more than precursors. Unfortunately the harvests in north-cast Germany, Poland and Russia show signs of being passable, and in places even good. Here the recent good weather has likewise borne fruit. But France is still in the soup, and that’s enough to be going on with....
Now, from David Keohane at FT Alphaville, the headline story:

As an investment strategy grows more popular, the probability of a comparison involving Marxism apparently approaches 1
Is there a Godwin’s Law equivalent for Marxism? Do we need one since the Law basically means that the longer an argument goes on the more likely we are to reach for extreme examples while in attack or in defence? So, you know, this kind of thing is already covered?
That’s from Bernstein’s Inigo Fraser-Jenkins and team, with a ht to Luke Kawa.

Their argument isn’t new — that as passive investing grows and active investing shrinks there will come a tipping point where price discovery and capital allocation are threatened — but they put it just a tad more energetically than others have before.

Here’s their ranking of possible societies by capital allocation efficiency, for example:
  1. Capitalist society with functioning capital markets
  2. Marxism
  3. Capitalist society with predominantly passive capital markets
Despite that Marx-slap they’re not against passive per se. Lower cost of access to equity markets is a good thing and active management’s fee-soaked track record ain’t pretty. They’re simply against loads and loads of passive.

Their big concern is that “policymakers have regarded the rise of passive as entirely benign” and that they’ll come to regret that “as there are costs to the system overall if active management suffers a catastrophic demise.”...MUCH MORE
Sanford Bernstein: Passive Investing Is Worse for Society Than Marxism