Marx to Market

By Peter Coy

Illustration by Andy Martin

Society generally moves on from its mistakes. Doctors no longer drain blood from patients. Aviators don’t try to fly by strapping wings to their arms. Nobody still thinks that slavery is a good idea. Karl Marx, though, appears to be an exception to the rule of live and learn. Marx’s most famous predictions failed; there has been no dictatorship of the proletariat, nor has the state withered away. His followers included some of the 20th century’s worst mass murderers: Lenin, Stalin, Mao, Pol Pot. Yet the gloomy, combative philosopher seems to find adherents in each new generation of tyrants and dreamers.

You might even say the Bearded One has rarely looked better. The current global financial crisis has given rise to a new contingent of unlikely admirers. In 2009 the Vatican’s official newspaper, L’Osservatore Romano, published an article praising Marx’s diagnosis of income inequality, which is quite an endorsement considering that Marx declared religion to be “the opium of the people.” In Shanghai, the turbo-capitalist hub of Communist-in-name-alone China, audiences flocked to a 2010 musical based on Capital, Marx’s most famous work. In Japan, Capital is now out in a manga version. Brazilians elected a former Marxist guerrilla, Dilma Rousseff, as President last year.

The vogue for Marx should be expected at a time when European banks stand on the precipice of collapse and poverty levels in the U.S. have reached levels not seen in nearly two decades. Politicians know they can score points with their constituents by kicking job-creating capitalists like mangy curs.

Here’s the surprising thing, though: You don’t have to sleep in a Che Guevara T-shirt or throw rocks at McDonald’s to acknowledge that Marx’s thought is worth studying, grappling with, and possibly even applying to our current challenges. Many of the great capitalist thinkers did so, after all. Joseph Schumpeter, the guru of “creative destruction” who is a hero to many free-marketeers, devoted the first four chapters of his 1942 book, Capitalism, Socialism and Democracy, to explorations of Marx the Prophet, Marx the Sociologist, Marx the Economist, and Marx the Teacher. He went on to say Marx was wrong, but he couldn’t ignore the man.

As misguided as Marx was about many things, and as pernicious as his influence was in places like the U.S.S.R. and China, there are pieces of his (voluminous) writings that are shockingly perceptive. One of Marx’s most important contentions was that capitalism was inherently unstable. One only has to look at the headlines out of Europe—which is haunted by the specter of a possible Greek default, a banking disaster, and the collapse of the single-currency euro zone—to see that he was right. Marx diagnosed capitalism’s instability at a time when his contemporaries and predecessors, such as Adam Smith and John Stuart Mill, were mostly enthralled by its ability to serve human wants.

Marx has gotten an attentive reading recently from the likes of New York University economist Nouriel Roubini and George Magnus, the London-based senior economic adviser to UBS Investment Bank. Magnus’s employer, Switzerland-based UBS, is a pillar of the financial establishment, with offices in more than 50 countries and over $2 trillion in assets. Yet in an Aug. 28 essay for Bloomberg View, Magnus wrote that “today’s global economy bears some uncanny resemblances” to what Marx foresaw. (Personal opinion only, he noted.)

Consider the particulars. As Magnus notes, Marx predicted that companies would need fewer workers as they improved productivity, creating an “industrial reserve army” of the unemployed whose existence would keep downward pressure on wages for the employed. It’s hard to argue with that these days, given that the U.S. unemployment rate is still more than 9 percent. On Sept. 13 the U.S. Census Bureau released data showing that median income fell from 1973 through 2010 for full-time, year-round male workers aged 15 and up, adjusted for inflation. The condition of blue-collar workers in the U.S. is still a far cry from the subsistence wage and “accumulation of misery” that Marx conjured. But it’s not morning in America, either.

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FINRA Drowning In Complaints About Market Manipulation

Whether it is due to the general investing public finally realizing that the market is neither fair nor efficient, that the scales are tipped against the common man from the moment the 'Buy' (or, more rarely, 'Short') button is pressed, or that as the past two years have shown the market is dominated by insider trading, "expert networks" and big legacy investors surviving only due to the government's intervention on their behalf at critical times, is unknown, but Finra is now officially and finally drowning in a barrage of complaints about market manipulation. And to be sure such glaring reminders as 30 year-old UBS traders being singlehandedly responsible (of course, nobody noticed anything over the months and months of creeping illegal trades) for massive cumulative losses that amount to more than the entire net income for the bank (an odd and convenient scapegoat that), will surely not make Finra's life any easier. As Reuters reports: "A Wall Street regulator said industry complaints about market manipulation and trade reporting have spiked this year, raising questions about the adequacy of banks' internal controls over their traders. FINRA has received complaints this year about banks' audit systems, canceled orders, and brokers misrepresenting whether orders were on behalf of customers. "These are areas that for a long time we were not receiving complaints in, and all of a sudden this past year it's really spiked up," DeMaio, senior vice president in FINRA's market regulation unit, told a FIA options industry conference." That's great: so US investors can sleep soundly knowing full well fiascoes such as UBS' Delta One implosion will be confined to the UK (where, incidentally, the director of market at the local regulator, FSA, just resigned - it is unclear if he will follow a recent previous FSA departure straight into the willing clutches of such a non-market manipulative entity as JP Morgan), and that manipulation is being rooted out in the US at its core at a brisk pace.

Right? Maybe not:

The UBS rogue trading case could intensify pressure on regulators to ferret out wrongdoing. In the United States, it will also put more pressure on rulemakers to craft tough regulations as they implement the Volcker rule, a part of the 2010 Dodd Frank financial oversight law that limits banks from betting their own money in financial markets.

FINRA has made stopping manipulation a priority the last couple of years. The regulator, funded by the financial services industry, monitors trading and reports to the U.S. Securities and Exchange Commission.

"We're seeing a large number of order misrepresentations, we're seeing problems with our audit trail," DeMaio said, adding some brokerages have identified orders as customer orders when in fact they originated from the firm itself.

FINRA has asked firms if they have seen some of the problems internally, and whether they've taken steps to address them, DeMaio added.

And while, rhetoric aside, everyone knows that Finra is completely incapable and actively dissuaded from handling anything that could potentially harm any of the real market "manipulators", because after all Finra is a self-regulating organization which in a market that depends on manipulation means it can't really do much if anything, concerns about record plunge in market confidence are pushing regulators to extend the Volcker Rule to overseas banks with US operations to make sure the Kweku Adoboli incident does not spread to the US courtesy of lax internal risk controls such as that exhibited by UBS, and present the optics they are doing at least something:

Regulators writing a rule limiting proprietary trading by U.S. banks are considering extending the restrictions to overseas firms with operations in the country, according to four people familiar with the proposal.

“There is no question that we would lose jobs,” said Wayne Abernathy, vice president of the American Bankers Association in Washington. “A lot of what the banks have been doing in recent years to diversify their services are activities that can easily be done by foreign competitors.”

The rule, named for the former Federal Reserve Chairman Paul Volcker, includes exemptions for government-guaranteed investments, hedging, market-making and insurance-company transactions. It also exempts proprietary trading conducted “solely” outside of the U.S.

The language of the bill is subject to interpretation by regulators at agencies including the Federal Reserve and the Federal Deposit Insurance Corp. Dodd-Frank, signed into law by President Barack Obama last year, requires regulators to adopt rules to carry out the provision by Oct. 18.

Regulators are considering how to define operations conducted “solely” outside of the country. Trading managed in the U.S. or involving U.S.-based advisers may be subject to the rule even if it takes place overseas and has no U.S. investors, the people said.

Well, courtesy of the staged UBS scandal, that will not be the case any longer.

What also won't be the case, is the plan to promote Delta One in replacing and recycling the correlation-cum-prop trading revenue generator that was implicitly eliminated with the Volcker Rule, but was merely morphed over to a new form of correlation desk trade only this time with a fancier name.

The WSJ reports on the imminent demise of yet another form of pseudo-hedged prop trading:

Delta trading has gained momentum in a markets environment in which the mortgage-bond trading business is on the skids and global regulations require banks to set aside expensive capital for loans.

Wall Street is counting on trading large volumes of stocks and derivatives to bolster revenue.

There is nothing inherently improper about such Delta trading. And many large financial institutions employ this strategy, including Société Générale SA, BNP Paribas SA and Goldman Sachs Group Inc. in Europe and Goldman and Morgan Stanley in the U.S., according to a J.P. Morgan Chase & Co. report.

The trading requires state-of-the-art technology systems and can produce as much as $1 billion in annual revenue at top banks, J.P. Morgan said, which noted, "Delta One products in one area of growth in our view, with strong growth in client volumes, resilient margins and untapped potential in emerging markets."

But it earlier gained notoriety in 2008, when French bank Société Générale said that Jérôme Kerviel had worked on a Delta One desk while trying to hide $7.2 billion in losses in another rogue trading scandal. Last year, Mr. Kerviel was sentenced to three years in prison.

It is safe to say that in an attempt to scapegoat their stupidity and to cover up for internal bank risk control lapses, regulators will once again lash out at banks (which they themselves saved and in doing so encouraged them to take any and all risk knowing too well they can never fail again), making "Delta One" a thing of the past. In the meantime, we are confident that Wall Street is already hatching plans of "financial innovation" for the next big "revenue" thing: probably called Vega 100 or Gamma 69. In the same time, we also expect the following chart showing the relentless outflows from US domestic equity mutual funds - the truest indication of what the US investor thinks about the stock market - to continue bleeding mutual funds dry until there is nothing left.

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Market America's American Dream Machine

Martha Camarillo

By Karl Taro Greenfeld

JR Ridinger, 61, has the master salesman's knack of seeming intensely interested in you. He leans forward, tense with anticipation, as he asks about where you live, what you do, whether you are married, have children. He remarks at how wonderful your life seems, at how exciting it all must be. Ridinger is a multimillionaire who lives in a 35,000-square-foot mansion on Biscayne Bay with a 150-foot yacht moored at the dock. He has a beautiful wife and celebrity friends, a $25 million Manhattan condo. He is the president, chief executive officer, and 93 percent owner of Market America, the e-commerce dynamo that made $393 million last year, according to company figures. And he is happy for you! That salesman's gift, that ability to make you believe in yourself, is why he has all this.

Market America is the latest and most sophisticated incarnation of multilevel marketing (MLM), that controversial business model that exploits the get-rich-quick dreams of every red-blooded American. The basic idea is that every member of Market America pays a fee for the right to sell an exclusive product—vitamins, makeup, potent herbal tonics, kitchenware—and then recruits other distributors who also buy the product and pay a commission upward. Each distributor finds new distributors, and so on, so that money flows upward in a pyramid shape, from many to fewer to, eventually, just one person—Ridinger—at the top. Plenty of large and successful businesses have been built around this model, Amway, Avon Products (AVP), and Tupperware Brands (TUP) among them, but Market America is the first to integrate the Internet, e-commerce, and social media into the scheme, in the process elevating not only the products being sold but the act of the sale itself.

In this world, sales is far more than a career choice: It's an act of self-expression, a pathway to happiness, and the fulfillment of one's wildest imaginings. And few Americans better embody that ideal than JR Ridinger.

On a hot Miami morning, JR and his wife Loren, 43, are sitting on suede sofas in a sumptuously furnished den. Around them on highboys and end tables are golden-framed photos of JR, Loren, and their daughter, Amber Ridinger, with various famous people—"Eva" (Eva Longoria), "Kim" (Kim Kardashian), "Jennifer" (Jennifer Lopez), etc. The room is festooned with high-end bric-a-brac: dragon-handled urns, brocaded curtains, pillows with lion's mane fringes, silver trays as vast as air hockey tables, crystal-bead chandeliers. In one arched hallway connecting ballroom to dining room, there are 18 images of Cupid, a motif Loren calls "Roman." In JR's office, there are several shelves of embossed Norwegian encyclopedias and sagas. When asked if he reads Norwegian, JR laughs and says, "I wish. Loren buys those books by the yard." JR prefers listening to cassettes of his own motivational speeches, sometimes when he's doing yoga. "I make myself laugh," he says. Ridinger's dyed comb-over of black hair, his angled slabs of cheeks, his short, sharp nose, narrow mouth, and dimpled chin create an almost-cherubic appearance that is at once pleasing and—this is key—nonthreatening. You feel instantly, completely, at ease.

"JR's great gift is, well, a lot of guys can sell stuff, but JR sells belief," says his brother-in-law, Marc Ashley, Market America's chief operating officer. "JR sells the idea that you too can be a great salesman. He sells that belief in yourself. Only the very top fraction of salesmen can do that."

The Market America website sells more than 3,000 proprietary products, an array of health tonics, nutritional supplements, cosmetics, weight-loss programs, and household cleaners, all of them "unique, exclusive, and developed by and for Market America," Ridinger says. Actually, those products, the most popular and profitable of which are the Isotonix line of nutritional supplements that sell for about $70 per 10-ounce bottle, are almost interchangeable with what you could find in your local CVS or Duane Reade for half the price. But that hardly matters. The business is driven, instead, by distributors finding customers, introducing them to Market America products, and then explaining to them that by selling this product, they can become as wealthy as, well, JR Ridinger.

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Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market

According to Jim Rogers, "commodities get no respect." Here are a few reasons why he thinks they should: they are easier to comprehend and study than stocks and behave more rationally since they are subject to the basic laws of supply and demand; they have outperformed many other investment options in recent years; it is foolish to ignore an entire sector of the marketplace; and a bull market is currently under way in commodities--a trend that Rogers expects to last for a least a decade longer. Further, Rogers believes that you cannot be a successful investor in stocks, bonds, or currencies without an understanding of commodities. Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market is designed to introduce the novice to the basics of investing in commodities as well as explain what they are and why they are important. In doing so, he shatters some myths about the relative risks of commodities, explains the relationship between the stock and commodities markets, and provides a succinct analysis and history of the global oil, gold, lead, sugar, and coffee markets.

Rogers also offers practical advice and information for beginners, including the best resources, how to read the commodities reports in the newspaper or on television, the various ways to open an account, information on index funds (such as Rogers' own index fund that he started in 1998), mechanisms, terminology, and other vital details people must know before investing. Clearly written and entertaining, Hot Commodities offers a solid introduction to investments that many people, including financial advisors, fail to give the proper respect. --Shawn Carkonen

Price: $15.95

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