Motivation of Market Players in Capital Flow Analysis
Seeking Motives in Capital Flow Analysis
Although we learn a lot just by reading the flow of funds accounts, we can not fully interpret the data without knowing the motivation of sectors that are acquiring and disposing of assets, or borrowing and paying down loans.
Defining 'Motives'
By 'motives' we mean the reasons why a sector behaves in a certain way — not the personal impulses of particular individuals.
'Motivation' of a sector is usually related to institutional structures, law, custom, and common beliefs.
In lesson 4, some questions relevant to motivation were suggested.
In lesson 24, we defined 'level two analysis', which means:
' to go beyond the tables, studying the history, sociology, and institutions that motivate the actions of the various classes of players.'
Some essays on this site and articles on the Capital Flow Watch weblog demonstrate 'level two analysis'.
Questioning Motives
Often, the reasons that a sector acts in a certain way are based on laws or contracts that do not permit varying behavior or ethical choice by the players.
For example, once owners of IRAs reach 70 years of age, they must withdraw a portion of their retirement plan each year or be subject to fine. In this process they may be forced to sell shares.
This reason for selling shares would be morally and ethically neutral.
However, in other cases, players may freely make decisions with results that are not ethically neutral and may be morally questionable.
In such cases, simply explaining such motives may raise hackles, which may be a problem if the hackles raised are those of your boss or client.
For example, corporate executives that approve stock repurchase plans will resent any suggestion that their motivation might be to drive up stock prices and give value to their stock options, even though this may be the reason for the practice.
Executives have developed elaborate justifications for remuneration with stock options, although corporate buybacks are almost always contrary to interests of the long-term shareholders to whom executives are supposed to show fiduciary responsibility. (See the essay, 'Stock Buybacks, A Fable')
Societies Cloak Motivation
Rarely does a large sector of society admit that it is doing something wrong or immoral.
Sector 'motivation' is usually cloaked in respectability and righteousness, supported by societal high priests that justify behavior on religious, moral, patriotic, historical, logical, or purportedly 'scientific' grounds.
Are there just a "few bad apples", or is certain behavior pervasive?When we ourselves are part of this society, it may be particularly difficult to get past these justifications and understand that the reasons things are done may be other than what we have been taught.
An example of this 'cloaking' was the infamous bankruptcy of Enron in December 2001 that brought in its wake a show-trial that closed-down the international auditor, Arthur Andersen, and tarnished the reputation of large financial institutions.
The establishment rushed to claim that Enron was the fault of 'a few bad apples' and not representative of the rest of Corporate America.
However, it may be that Enron, although extreme, was not an isolated case, but rather a manifestation of pervasive problems in corporate governance that have been evolving for a generation, since baby boomers began to take over management and corporate control passed to institutional intermediaries. (See the essay: 'Corporate Governance')
Enron was perhaps symptomatic of a common way of thinking that has fostered expansion of stock buybacks and options, the asset-lite movement, and that uncritically accepted ethically-blind theories of the Nobel gods in corporate finance and investment management.
However, to starkly express such views to a corporate client may be unwise.
Economics Without Ethics
Today's economics is different from the economics of Adam Smith in at least one important way.
Adam Smith was primarily a moral philosopher who said that his first book, 'The Theory of Moral Sentiments', was more important the his second, 'The Wealth of Nations'.
Today's 'economic science' is often stripped of moral and ethical considerations, presenting instead charts, graphs, advanced mathematics, and paradigms purloined from physics and engineering.
As religion has left the Great Universities, replaced by political correctness and moral relativism, the philosophical base of the Economics Departments has shifted from moral and ethics to imitations of physical science.
The dominant bias of modern economics is that behavior is based on maximizing economic advantage, presumably the rational advantage of the sector represented by the decision maker.
Over the last twenty years, American corporations have bought back more than one trillion dollars of their own stock, thereby driving up the price of equities.
However, the size, scope, and real purpose of this buyback movement was rarely mentioned or discussed in the financial press.
When the practice is even noted, buybacks are justified by spurious arguments that these operations are to the economic advantage of shareholders. (See the essay, 'The Great Misleading'.)
In the 1930s, Benjamin Graham, the founder of 'fundamental analysis' and the teacher of Warren Buffett, criticized stock buybacks as immoral, even when a company buys stock on the market below intrinsic value.
Today the dubious ethics of stock buybacks is recognized by few, although the 1940 edition of 'Security Analysis', the Graham and Dodd classic, is still selling briskly.
This does not mean that buyback behavior is appropriate, only that it is generally accepted and that those benefiting from the practice have managed to delude the market.
There is no doubt that stock buybacks have helped to drive prices upwards and that this has been to the advantage of corporate managers, whether or not the practice is ethical.
Before proceeding, check your progress:
Self-Test
In Capital Flow Analysis, motivation refers to:
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In Capital Flow Analysis, we should expect:
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Adam Smith was an economist and:
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