Wednesday, April 17, 2013
Amid mass unemployment, swelling poverty rates and falling wages, Wall Street hedge fund operators once again raked in astronomical pay packages last year. Four hedge fund managers each made over $1 billion in 2012. All told, the top 25 took in $14 billion, roughly equivalent to the gross domestic product of Jamaica, a country of three million people.
According to the annual ranking of hedge fund manager pay released Monday by Institutional Investor’s Alpha, David Tepper, the head of Appaloosa Management, took home $2.2 billion, largely by betting on a rise in the price of major stocks such as Citigroup, Apple and US Airways.
To put Tepper’s payout in context, on the basis of a forty-hour work week, he made nearly $3,000 every second, more than what a newly-hired US auto worker, slaving away on an assembly line, makes in a month. And while the auto worker contributes to the production of vehicles that are essential to the functioning of society, Mr. Tepper and his ilk produce absolutely nothing of real value.
The latest figures on the pay packages of hedge fund parasites confirm Karl Marx’s characterization of capitalism, written 146 years ago, as a system in which the “accumulation of wealth at one pole is at the same time accumulation of misery, agony of toil, slavery, ignorance, brutality, mental degradation at the opposite pole.”
The hedge fund managers’ payouts were boosted by the stock market bubble, as the S&P 500 index climbed 13.4 percent in 2012. Yet most of the hedge funds on the list performed significantly worse than the stock market as a whole.
Ray Dalio of Bridgewater Associates, second on the list, received $1.7 billion, even though Bridgewater’s flagship fund, Pure Alpha, returned just 0.8 percent.
2012 marked the fourth year in a row in which hedge fund returns failed to beat the rise in stock values. The Financial Times noted, “The average hedge fund made a 6.4 per cent profit for its investors in 2012… trailing the 11.1 per cent return of a simple passive portfolio invested 60 per cent in US stocks and 40 per cent in bonds.”
So much for the supposed drive in the aftermath of the 2008 Wall Street crash to tie executive compensation more closely to performance! In practice, the lords of finance are guaranteed stratospheric sums as matter of aristocratic privilege.
The hedge fund operators, who speculate with other people’s money, have the added benefit of being taxed—assuming they actually pay taxes—at the capital gains rate of 15 percent, well below the average income tax rate levied on working people.
At least one of the top ten earners has been investigated for financial fraud. SAC Capital, headed by the third highest-paid manager on the list, Steven A. Cohen, recently settled allegations of insider trading by the Securities and Exchange Commission (SEC) without admitting any wrongdoing.
SAC paid $614 million to settle claims that it profited by trading shares of pharmaceutical companies before the public release of unfavorable drug trials. Cohen’s payout of $1.4 billion was twice the size of the SEC fine.
Last month, Cohen, who is worth $8.3 billion, bought a $60 million ocean-side house in East Hampton, on Long Island, down the street from another house he owns. That same month, newspapers reported that Cohen had purchased Picasso’s painting “Le Rêve” for $155 million in one of the most expensive private art acquisitions in history.
The hedge funds managers’ astronomical pay is effectively subsidized by the infusion of cash into the financial system by the Federal Reserve, which is pumping $85 billion into financial markets every month through its “quantitative easing” program. This continues even as the Obama administration declares there is “no money” for essential social programs, cuts the already paltry jobless benefits of the long-term unemployed, and prepares to impose unprecedented and crippling cuts in Medicare and Social Security.
Hedge fund managers are far from the only ones cashing in on the financial bubble. In recent days, JPMorgan Chase, Citigroup and Goldman Sachs have all posted sharply higher first-quarter profits. JPMorgan, the largest US bank, reported a record $6.5 billion profit, up 33 percent from a year ago. The company has been at the center of numerous federal investigations and lawsuits, and was the subject of a 300-page report released last month by a Senate subcommittee documenting the bank’s systematic deception in connection with over $6.2 billion in losses from high-risk trades in financial derivatives in 2012.
The most distinctive characteristic of American society is the brazenness with which the ruling class gorges itself and displays its contempt for ordinary people. This shameless self-enrichment does not go unnoticed.
The reality of the brutal, anti-democratic and exploitative nature of the capitalist system is working its way into the consciousness of the working class. A vast well of social anger is building up, which will erupt, sooner rather than later, in colossal upheavals.
These struggles must be guided by a conscious understanding of the nature of the capitalist system and the role of the existing political system, backed by the official trade unions, in upholding it, and a worked-out program for mobilizing the working class to put an end to the profit system and place economic and social life on rational and egalitarian foundations.
Such a program includes the expropriation of the financial parasites and utilization of their ill-gotten wealth to provide good-paying jobs, education, housing, nutrition, health care and pensions for all.
The facts in the public domain do not justify the sharp fall in the gold price over the past two trading days. At the time of writing, the price per 100oz is $1363, down over $200 since Friday's open. The scale of the sell-off was the worst in 30 years, with the volatility index standing at the highest level in its history. John Kemp at Reuters has calculated that based on a normal distribution, you would expect to see movements like Monday's only once in every 500 million trading days, or two million years. The news which would justify such a price swing is curiously absent – in fact, my view is that the market ought to be bullish for gold. Something doesn't add up.
In any market, price is determined by the confluence of demand and supply. In many respects supply of gold is relatively fixed. We know the extent of discovered gold reserves and the rate of production. While Cyprus is being forced to dump "excess" gold in order to meet the ever escalating bank bail-out bill, its whole holdings are worth only $750m, hardly enough to move one of the worlds deepest and most liquid markets to this degree.
In fact, most of the selling pressure has come from ETFs dumping holdings. A record $9.2bn of net outflows from gold ETFs in the first three months of 2013 are indicative of a loss of faith on the part of investors, as well as of a structural change in a market which has been opened up to electronic trading by the invention of these instruments.
But why would investors wish to sell their gold holdings? As an alternative store of value, it is easiest to think of demand for gold in terms of demand and supply of fiat money. When demand for fiat money falls or supply rises, people decide to hold less and move their cash into alternative stores (gold, silver and now Bitcoins being the most common). Likewise, when people are optimistic about the state of the economy, they demand more cash because they believe they will be able to invest it in dynamic assets like stocks which will generate better returns.
A surge in demand for money over gold (and hence a fall in the demand for/price of gold) can, therefore, be very broadly justified by either a contraction in the supply of money or a more general optimism about the economy. Are there grounds to believe either of these has happened?
Well, the world's stock of fiat money is not contracting. Quite the opposite, in fact. Japan has just launched stimulus on steroidswhich will see the developed world's most indebted economy create a proposed $1.4 trillion in Yen in a bid to break free from depression. Nor is money creation in the West likely to subside. Earlier this month the Fed hinted it would continue buying bondsfor the foreseeable future, while there is an expectation in London that Mark Carney's arrival at the Bank of England will see more activist monetary policy here, too.
Likewise, the recent decision of the eurozone to confiscate money directly from Cypriot bank accounts clearly creates a template for other crisis-struck nations in Europe and beyond. There is now a major political risk factor in holding large cash deposits. In the meantime, US growth is slowing, Britain's is still anaemic and China's rate of expansion came in below market consensus for Q1. It isn't a booming real economy which is persuading people to cash in their chips.
So what is driving the gold dump if not changes in the macro-economy? I have written in the past that, in my view, the gold markets have been rigged. In this context, the sale of 500 tonnes of paper gold on Friday takes on a different hue. As John Mauldin, one of the most impressive macro analysts out there, wrote in his newsletter this morning:
Five hundred tons of paper gold contracts were sold dumped into the market on Friday. That is a lot of gold. In short, some people sold gold like they had a gun to their heads, in such a quantity and with such ferocity that the likelihood of their being a for-profit seller is right up there with my chances of winning this week's Masters
I agree. I have written in the past of the links between the British gold sale at the turn of the millennium and the need to prevent the insolvency of a trading house whose short position had left them unable to meet their commitments at expiry. With this in mind,Andrew Maguire's comments that a similar situation led to a concerted effort to drive down the gold price this time around are interesting, although unverifiable.
The gold market remains one of the most complex and opaque in the world. None of the publicly available data justifies the incredible price movements we have seen recently. It looks as though the market has been rigged again.