I don’t own any Apple products. No iPhones, no iPads, no Macs. I’m not a fan of the company, its culture, or the late Steve Jobs.
And yet, I can’t help but think the market is hugely overreacting to Apple’s recent earnings disappointment.
It’s true, revenues and profits are down. Are they down enough to erase $40 billion in stock value, though? Does that make any sense at all? Apple is even being blamed for dragging the Dow index into the red.
Wall Street is notorious for being fickle. It is mocked for chasing trends, for not producing real value, for being detached from the so-called “real economy.” But the fact of the matter is that Wall Street is extremely important. It is not separate from the “real economy,” but instead has its hooks into every aspect of it. To understand how and why takes a bit of a history lesson.
In the aftermath of World War II, the United States had surplus production capacity. The war was over and we could turn all of the manufacturing infrastructure we had from building tanks and planes to consumer goods. Europe–the only other part of the world with any kind of industrial base–had been devastated, which left us in an advantageous position. We used that advantage to push American exports around the globe. It made us rich. It provided economic opportunities previously unseen in this country.
Over time, that prosperity drove American demand, too: televisions, nice cars, and an endless universe of consumer products. Once other countries caught up to us with their own industries, and were able to produce the same goods more cheaply than we could, we imported. But what is an import, really? It’s when one country trades some of its wealth for a tangible good. When a country trades much more of its wealth for foreign goods than the value of what it is exporting itself, it develops a trade deficit. (The country on the other end of this would have a trade surplus. See: China.)
What is wealth, then? What does it mean to lose wealth? Simplistically, we might think of wealth as money, or anything that you could conceivably sell for money. Money itself is an abstraction–a representation of value that has no purpose in and of itself except to facilitate the transfer of value from one party to another. I can’t eat money, but I can use money to acquire things I can eat. So, where does the money come from? I earn it by working a job. I have an employer who considers my work worth a certain amount of money per hour, and it is an amount that I have agreed to be paid. But the amount is, frankly, arbitrary. Would I accept less? Maybe a bit less. Would I accept more? Of course! A lot more? Definitely. But the company’s money is not infinite, and it can’t stay in business by paying exorbitant salaries to all employees. The company likewise gets its money from financial transactions: sales of products and services. Customers get their money from commerce. It goes on and on.
In the end–or perhaps, the beginning–it comes from a central bank. The US Federal Reserve ultimately controls the money supply. They decide how much money there is, at least when it comes to American dollars. They do this through the magic of interest rates. They lend money to banks, who then lend that money to businesses and individuals. The money supply can be shrunk when loans from the Federal Reserve are repaid and then not given out again. Expanding the money supply is as simple as lending more.
This leads one to ask why you don’t simply just create as much money as you want, since it’s so easy. The historical answer is inflation. The more money there is, the less it is worth–it’s as simple as any other supply and demand issue. Assuming equal demand for an item, if it is abundant it’s cheap, and if it is rare it’s expensive. Money has usually worked the same way.
Right now, though, it isn’t. In the aftermath of the financial crisis of 2009, the Federal Reserve exploded the money supply in order to keep banks solvent. It let banks borrow money to cover loans that were simply never going to be paid back, allowing the blow to be softened over a long period of time–a bank can always borrow again the next time they need to service a defunct mortgage, for instance. So while the money supply is much larger on paper, it’s tied up in existing debts rather than flowing out into the broader economy. This means that there’s no resulting inflation, despite a massive expansion of the money supply. It makes sense enough, since that money never went into circulation. It’s not “real” if no one ever actually gets to spend it, right?
But this helps reveal the constructed, arbitrary nature of money and the financial systems that spring from it. In this case, banks are lent money because they would otherwise be insolvent. The bailouts are a way of hiding the fact that the underlying loans are bad. They will never be repaid by the original borrowers, but it’s OK so long as there’s a low-interest loan covering it that remains in good standing. The alternative is to acknowledge that the original loans are bad, can never be repaid, and that therefore the bank’s liabilities outstrip its assets. The result: bank failure. A mere accounting trick–producing money out of thin air–is the difference between a bank staying in business, or going under.
The stock market is, in many ways, just like this. Revenue must grow quarter after quarter, year after year, and unless you’re a startup, you need to show profits, as well. Revenue declines are disastrous, but even getting the same amount from one quarter to the next is viewed as nearly as bad. The market will punish you regardless.
Why is constant growth so necessary, then? Why isn’t it sufficient to be consistently good at something, to turn a profit quarter after quarter, rather than show growth at all times? After all, Apple did not actually lose money. They remain one of the most profitable companies on Earth! And yet, their stock is being decimated and dragging down the rest of the market with it, all on account of one slightly subpar earnings report.
The underlying reason turns out not to be complex at all. The whole point of investing is to grow your money. Why buy a stock unless it is going to increase in value over time? The stock market has become virtually the only option for growing one’s wealth anymore. Savings account rates at banks don’t even pace inflation anymore, and the best money market accounts most banks offer barely manage to hold value. Bonds aren’t attractive since, again, rates on government borrowing are so low. This leaves stocks–domestic and international. That’s where you find the means to grow your wealth, but it is always a gamble. As soon as a company looks like any less than a sure thing, it’s time to pull out. This trend, in which the economy becomes ever more dependent on concentrated investment activity, is called financialization. It is why Wall Street continues to do well when so many Americans have been mustered out of the labor force, when our manufacturing continues to dwindle, when personal incomes perpetually stagnate. The investor class benefits because it doesn’t matter where the growth is happening–it could happen in the US, or China, or Germany, or Brazil. Any company worth anything is international, so Wall Street gets its cut no matter what. Trade deficits may be bad for American jobs and thus the livelihoods of working Americans, but Wall Street can afford to remain indifferent–a dollar is a dollar anywhere on Earth, and you can always grow it if you pick the right time, place, and company.
The point here is not to slag the wealthy, which I have done amply elsewhere. The point is that our obsession with growth as a goal in and of itself is based on little except greed, and has no relation to economic necessity. Indeed, as populations age, population growth slows down, entire sectors are automated out of existence, and climate change challenges consumptionist societies, growth will become more and more difficult, if not impossible. Investors will chase fewer and fewer opportunities, no doubt becoming ever more desperate in a quixotic effort to expand what is already large.
If we can’t break our addiction to growth for its own sake, then our inevitable forced withdrawal might well be fatal.
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