Mon Oct 20, 2003

International Monetary Fun

I picked up a copy of The Money Game over the weekend in a second-hand bookshop in Melbourne. It’s a minor classic in the literature on the stock market, so naturally I hadn’t heard of it until a few months ago when Daniel mentioned it in a comments thread. The book is thirty five years old and it shows. It’s also very good. That shows, too.

The Money Game is assiduously laid-back in tone. The author—the cover says “Adam Smith,” but the back page tells you it’s journalist and fund-manager George Goodman—tries hard to impress you with tales of the big money-shufflers he hangs out with, while working hard not to sound too impressed himself. He comes from the right schools, belongs to the right clubs and is comfortably networked with the right people. In matters of lifestyle, taste and fashion he lives bemusedly at the cutting edge of conventional wisdom. Adam Smith isn’t the right name for him at all. It’s more as though Richard Cantillon were being spiritually channeled by George Plimpton, or possibly Austin Powers. Much of the time he sounds a lot like this paragraph, and he clearly knows a great deal about how stock markets really work.

The book is permeated by anachronisms, small and large. Pretty young things who read it—I’m sorry, I mean women who read this book may find the pipe-chewing, bachelor-pad atmosphere a little rich (unless they are fun-loving Scandinavian air-hostesses). Internet junkies might think Smith’s description of the new computing machines to be merely quaint (“Not only can the computer print out all these things, but if it is really equipped it can change this linear information to graphics and draw you a chart”). And followers of intellectual fashion might be a little dismayed to find that Freud stands side-by-side with Keynes as the intellectual lynchpin of the book, inkblots and all.

But all of this just throws the real substance of the book into sharp relief. The stuff on Freud leads to some condensed observations on the relationship between the market, identity and anxiety. (“If you don’t know who you are, this is an expensive place to find out.” “The stock doesn’t know you own it.”) The two chapters on computers have all the basic insights on automated trading, dependence on data, and the possibility of hacking the machines in order to rig the output—this in a market environment where there are about five computers trading in a semi-automated way. Goodman’s chapter on accountants (“But What Do The Numbers Mean?”) could have been written last month:

For years, Wall Street accepted with religious faith an accountant’s certification as the Good Housekeeping Seal of Approval, especially those of the great national accounting firms … Then came a couple of cases in which corporations reported profits, had their reports audited and certified, only to come back several years later and say that the original reports were, for one reason or another, off by a very wide mark … Suffice to say that with lawyers and the SEC in full cry, the accountants have begun to thread some consistencies, but there is genuine confusion among these accountants as to what earnings really are.

Goodman even describes a real-estate scheme he lost money on that doesn’t really differ in its essentials from the likes of Global Crossing:

If memory serves me, you paid someting like $4.95 down on one of these houses and you got E-Z terms to pay the rest of the $50,000, say $25 a month. Certain-Teed reported as income the sale price of the whole house, even though the buyer had actually paid in cash only $4.95, and Certain-Teed’s reported earnings therefore went rocketing up. … I continued to fret about the difference between $4.95, abandoned, and the price of the whole house … And, feeling like Oliver Twist, I was ushered into one of the great senior partners [of the firm’s Accountants] … Timidly I asked whether everything was absolutely okay with reporting as income a whole house when all you had received so far was $4.95. And the great senior partnet drew himself up to his full nine foot three and indicated in stentorian tones that the great world-wide accounting firm of—would never sign anything that wasn’t true.

Two years later they had a little footnote to the financial statements. They said there were “certain readjustments,” recognizing that a lost of the houses were still standing there. This whacked the earnings back retrospectively to the price the market seemed to have recognized much earlier. “Sorry about that,” said the footnote.

All of which might lead one to ask how the likes of Enron and all the rest could happen again, and to wonder why commentators on those debacles began their columns on the topic looking back to a Golden Age in the 1960s which, as Goodman makes clear, never existed. But—and this is the great thing about *The Money Game*—the answer to that question is in the book as well. Another one of Goodman’s Irregular Rules is that “A stock is going up as long as it is going up.” And, he says,

since we are all watching each other, it is very comfy. This is called a Trend. And if we all stay with the Trend, then we have only to worry about how we will all get out when the Trend reverses, but maybe we can get the public enlisted for that.

One of the later chapters has a description of a stock crashing through the floor for no very good reason other than the market has lost faith in it—the point being that collective belief is what makes things run at all:

This is what the French sociologist Emile Durkheim called anomie. In market terms it means anxiety builds up as the market drops … It’s like alienation, only it means “Where’s the bottom? Where’s the bottom? Where’s the bottom?” Nobody knows where the bottom is; nobody can remember where the top was; they’re all the way out there in the blue, riding on anxiety and a shoeshine.

Go read the rest yourself. It’ll prime your palate for a dose of Keynes himself, whose writings on the market experience are the foundation of The Money Game’s Irregular Rules and whose view of life underlies its cocktail-party tone.