The Job Market at Mid-Century

It is that time of year when students are celebrating high school graduations and college commencements.  Many are looking for jobs and I am starting to get some resumes from students looking for a little help. Students graduating this month are likely to expect that they will still be employed for at least the next 30 years. I am not so certain they will.

I also needed to buy a graduation present or two. I would usually go to the mall, but this year I opted to buy the presents online.  While I appreciate the convenience, I also appreciate what my decision means to the job market.

On-line shopping is one of those fundamental shifts in the way we do business.  By mid-century and likely before there will be no need for consumers to come face to face with a clerk or salesperson for most of the items they buy every week.  Those jobs will disappear and the retail space that those businesses occupy will have to be repurposed.     

Malls were no different than the Roman Forum in the first century or the bazaar in Istanbul in the Middle Ages. They were an “old” model that always had the customers physically coming to the sellers, originally to inspect the goods, exchange payment and cart the goods away. Into the mid-1990s retail malls were a gathering place and an iconic cultural symbol.  Just twenty years later hundreds of malls are closing or filing for bankruptcy every year. 

Amazon has proved that it can favorably compete with brick and mortar stores. The simple fact is that the stores will always require higher costs for labor and overhead.  Given Amazon’s growth and profitability, only those retail stores that provide a personal service (like barbers) are likely to survive. Even those may become “we bring it to you” mobile enterprises.

Amazon has already deployed robots in its warehouse and distribution center operations.  Based upon technology that is in the market today or about to be introduced, Amazon will likely become a series of fully automated distribution centers. Robots will take goods manufactured elsewhere from shipping containers delivered to the loading dock, move them, store them, sort them, package them and ship them out to consumers.  All of the billing and record keeping will be done automatically.  All the trucks will be become autonomous with no drivers. 

Jobs at all levels are being turned over to robots.  I believe that before mid-century people who call themselves truck drivers or bus drivers will disappear.  Longshoreman are not needed if pallets or containers can be on-loaded and off-loaded without them.  Retail clerks will disappear. 

If you call a large company for customer service today, you are likely to speak with a machine.  Bank tellers and customer facing bank officers are already on the way out.  Billions of dollars worth of investment portfolios are selected by “robo-advisors”.

The lectures on supply and demand that I gave to my Economics classes can be had today on-line from the author of the textbook I used or a professor at Harvard or the London School of Economics who is much more qualified than I to teach the course.  Why do we need high schools or colleges (buildings or teachers) when virtually any subject can be taught on line?

This trend of reducing the amount any company will spend on human labor will certainly continue.  There is nothing new about technology changing the world. New technology is often disruptive to any legacy industry and the people who work in it.  

There has always been a mantra that says that new technologies, especially disruptive technologies that obliterate jobs in some industries “always” create new jobs in new industries.  I think that mantra needs to be examined.  I am not certain that “always” includes the next 30 years.

For example, I do not believe that by mid-century the internal combustion engine will be the primary source of power for the transport of goods and people.  I expect that all vehicles will have electric engines, powered to some extent by solar panels on the roof or another non-fossil fuel source.   Alternative sources of energy like solar will continue to get cheaper and cheaper and electric engines will dominate.  

In the normal course jobs can be expected to be lost in the oilfields and replaced by jobs in the solar industries.  But will they? We are at the cusp of an era when a great many jobs that go back to antiquity will be turned over to machines that can “think” about what they are doing.  

Something as basic as farming will be turned over to machines that will plant and grow corn, harvest it, ship it to factories that will process it into cornflakes, re-package it and ship it to consumers all without human labor.  Even the graphic design and color of the packaging may be determined by analytics and algorithms without human participation.  

Today you can construct a house with a 3D printer. By mid-century machines may be printing thousands of new homes every hour. 3D printers print a lot of other things as well. It is impossible to imagine how this technology may develop in the next 30 years, but I do not think it far-fetched to consider factories full of 3D printers printing out more 3D printers.  

All of this is very deflationary and potentially very disruptive. 

If all this comes to pass a lot of people who are employed today may find their jobs automated by mid-century and potentially much sooner.  Which raises the question that the Economics teacher in me needs to ask: if we un-employ tens of millions of people, who will be able to afford to buy the cornflakes or the homes? 

In theory as the costs come down, prices for cornflakes and the many other things that adopt this technology should also come down.  But you still need to have job in order to buy anything. If all these jobs do disappear, exactly what will people do to earn a living?

What I find interesting is that a lot of people seem to think that the skill students graduating today need to have to earn a living is to know how to write computer code.  If anything, that recommendation points out another macroeconomic trend, globalization that is also disruptive and also deflationary.  Code itself will become more and more commoditized and coders in Mumbai and a dozen other developing markets will ultimately produce most of the code at a much cheaper price than coders in Silicon Valley, Seattle or Boston because their overhead and cost of living is significantly cheaper.

I have seen studies that suggest as many as one-half of the jobs that people are doing today may be automated by mid-century. If that is even close to being true, buckle up, it is going to be a bumpy ride.  I can state without reservation that this year’s graduating classes, next year’s and the one a year after are not preparing for this change in the job market in any way. I doubt that anyone knows where to begin.

Will Artificial Intelligence Pick Stocks?

I admit that I have always been a fan of science fiction.  I read most of the Sci-fi classics in high school.  When I was a senior in college I created and taught an accredited course called Science Fiction as a Literary Genre

Much of science fiction imagines or predicts the future.  The stories were often set in the future and gave us a sense of how we would get there and what it would be like.  Sometimes that future would be logical and orderly, other times dark or chaotic.

The idea of artificial intelligence (AI) as science fiction dates at least to Capek’s R.U.R (Rossman’s Universal Robots) (1920). Frankenstein’s monster had a human brain. Capek’s robots were machines that could think.  By 1942, Isaac Asimov introduced his “Three Laws of Robotics” based on the premise that if the robots got too intelligent they might do harm to  humans.  When HAL was introduced to a mass audience (1968) everyone seemed to accept that robots would eventually be smarter than people. 

The development of AI is certainly attracting a significant amount of funding and attention. I am starting to see references to it in advertising for various products and services.  There are certainly ethical issues to be explored, but I am a pragmatist.   AI is “real” enough today that I wanted to take it for a theoretical spin.

My first thought was to use AI to predict the future better than humans and to make money doing it. I wanted to consider if AI will eventually be able to pick “winners” in the stock market. 

Predicting the future accurately is something to which we apply human intelligence every day.  Capek predicted “thinking” machines 100 years ago.  Dick Tracy had a two-way radio in his wrist watch in the 1940s.  Anyone who sells anything is trying to predict how consumers will react to the price and advertising.

Humans make predictions using these two broad steps. First we collect and sort through the data that we believe to be relevant, next we analyze that data based upon assumptions often based upon our prior experiences.

Every day at racetracks the odds are fixed in such a way as to allow the track to take its cut and then have enough collected from bets on the horses that did not win to pay off the winners.  The odds and thus the payout are really set by the crowd placing bets. 

Every day at every racetrack there are people reading tout sheets, looking at track conditions, the horse’s and jockey’s prior races and gathering information from track insiders trying to do better by betting smarter.  Each will filter the data they collect using assumptions that come from their individual experiences.

There is a logical argument that says that these racetrack “handicappers” are trying to be better informed and smarter than the crowd, so they should be able to do better than the crowd and pick winners more often. Those who cannot do better will be weeded out.  

The same logic suggests that AI should surpass human intellectual ability if for no other reason than through trial and error it will continue to develop the way in which it collects data and the way it analyzes that data until it can do it better than humans.  It will do so because that is the goal we will set for it. 

A stock market outcome is far more logical and data driven than a horse race. People buy shares in a given company when they believe the price of the shares will go up.  Conversely, people will sell shares of stock when they think the price will rise no further. 

For every order to buy the stock there is someone entering an order to sell the same shares at the same price. Presumably many intelligent humans are looking at the same data and are coming to the opposite conclusion. That should set a pretty low bar for artificial intelligence.     

There have been computerized stock and commodity trading systems around for years. Most were a scam. They would create a “track record” by back testing their software.  These systems never took in a lot of data.  Traders are concerned with trends in a stock’s price and the volume rather than the company’s income or profits and assets and liabilities.  

The long term investors like the large institutions and small middle class households do care about the company’s financial health and that of its customers and competitors.  That requires a lot more data and a lot more analysis.  

In the US there are mandatory disclosures about financial and other information posted publicly about each company. In theory, everyone can look at the same data.  Analysts take that data and use it to predict the future performance of a company and often, its stock price as well.  Even those analysts who do a mediocre job are well paid.

Could AI do better? 

In theory, AI should be able to collect the data and do the analysis to make the comparisons that will tell it to buy the stock of Company A and not the stock of Company B.  If AI can demonstrate that it can do better than humans, then more and more humans will make a decision to let their money be managed by AI.  Eventually AI will decide which data to analyze and how to analyze it to get the best, consistent results.  The best AI stock pickers will rise to the top of the heap and the rest will be left by the wayside.

At some “tipping” point a significant amount of money will be managed by AI. When this occurs and AI decides to buy stock in Company A, the price of the stock will appreciate in response to the buy order alone.  It will be a self-fulfilling prophesy.  Is that stock-picking heaven? 

But if the AI says the share price of Company A will go higher, who is going to sell into this new demand?    A scarcity of sellers will certainly help the price to run up.  But it will also lead to market dysfunction.   If the AI starts to sell off a large position, there may not be enough buyers to prevent the price of those shares from dropping sharply.

For the stock market to fulfill its primary function to facilitate trading it needs to be a liquid market; there must be a lot of participants who are willing to buy and sell at every price level.  The market needs the smart MBAs who work for the institutions that can pay for their services. It also needs the mom and pop investors who get their “tips” from a Jim Cramer.  

For the market to work efficiently every time, someone’s prediction about the future price of a stock that they buy or sell has to be wrong.  Sooner or later I suspect that AI will realize that problem and act accordingly.  I predict that it will act to change the market rather than its methods of evaluating the companies that trade on it.

This is how I predict AI will approach the problem of its own presence in the market where it makes better investment decisions than any human competitor:

Scenario No. 1- AI realizes that its success may cause the trading to become dysfunctional. It concludes that it would be better to buy shares in companies it would want to hold for the long term.  As new money enters the market, if managed by AI, the AI will eventually use that money to buy larger and larger stakes in those companies. Eventually it may purchase enough shares where it can elect the Board of Directors and control company operations.  It could very efficiently direct business relationships between the portfolio companies for their mutual benefit. It could even direct campaign contributions from portfolio companies eventually freeing itself and those companies from many regulations. 

                        –or–

Scenario No. 2- AI realizes that its best long term strategy is to invest where no one else wants to invest. There are currently many places around the globe where an investment of US dollars buys a lot more plant, equipment and labor than anywhere in the US.  The AI might conclude that its best investment opportunities are in underfunded markets where labor is cheap and investment funds expensive.  Funneling large amounts of money into these less developed markets might make a lot of sense to an artificial intelligence that is looking only at the bottom line, not preconceived ideas about race or nationality. 

There are already investment platforms that claim to incorporate AI into their services. I do not want to judge any of them because I do not think any of them are really ready to operate effectively.  My one hope is that as they continue to evolve they do not get too smart for their own good and for ours.

Two Years of Crypto Market Memories

I first looked at bitcoins in the Spring of 2017 because a friend asked me for my thoughts.  The price of a single bitcoin had run up sharply and the ICO craze was proceeding at full speed.   Up until that point I knew very little about either blockchain or cryptocurrency. 

I spoke with people who were actually developing blockchain projects for the big tech companies. I read a lot of articles which they thought would help me and a lot of other articles that I found through my own research. I spoke with traders, regulators, and with a lot of people who thought that they had cryptocurrency all sorted out.  There seemed to be a wide spectrum of thought about cryptocurrency, how it might be regulated (if at all) and whether it would augment or supplant the established financial order.  

I concluded that the bitcoin market was in a classic bubble, the price rising only because of hype, and the new money that hype always attracts. I was not alone in that opinion.  Still some intelligent sounding people were making an argument for continued price appreciation to ridiculous levels.  And that was what a lot of people wanted to hear. 

I wrote an article about my research, my thoughts and predictions for bitcoins.   https://laweconomicscapital.com/2017/06/the-bitcoin-bubble/   The article got the attention of a lot of people who were also trying to understand cryptocurrency and ICOs.

The article ends with an invitation to the securities lawyers who were writing the disclosure documents for ICOs to contact me for a professional conversation.  I would have had difficulty preparing those documents.  I confessed my professional curiosity to any and all that might satisfy it. 

A lot of lawyers and other professionals did contact me.  Many of the lawyers were doing what lawyers are supposed to do, marshaling the facts and applying the law as they saw it.  But it was clear that there was not a unified position as to what the facts regarding any cryptocurrency actually were. 

Some lawyers approached ICOs as if they were issuing securities and some as if they were issuing anything but securities.  Before the SEC issued its DAO Report, (July 2017) I was of the mind that a token offering might be structured so as not to be a security. Once the DAO Report was issued, it was clear to me that the SEC saw tokens as securities and would look at an ICO as the sale of securities with all that entailed.

The DAO Report led to a robust discussion, on line and off, with those same lawyers and professionals and more.  The discussion became somewhat convoluted as many non-lawyers often in other countries felt comfortable discussing the finer points of US securities law. A great many of those commentators had interesting takes on the Howey decision that no competent US lawyer would ever present to a judge.  Many of those “experts” just ignored the dozens of other cases cited by the SEC in the DAO Report and many other cases that should have been germane to the discussion. 

There was an interesting undercurrent of lawlessness in the cryptocurrency world.  It was impossible to search for articles about cryptocurrency without coming across many quoting regulators around the world who were reporting cases of money laundering and fraud.  That has not changed.  Fans of cryptocurrency were often happy to ignore these transgressions even though it was obvious that regulators would not.

By now I have read several hundred white papers for ICOs. Some were written by lawyers; other white papers were written by either monkeys or idiots. Some of the latter were using templates because the thought of actually hiring a lawyer to prepare documents for a multi-million dollar financing did not make sense to them.

These white papers are supposed to tell potential investors what they needed to know so they could make an informed decision whether or not to send their money.  That was rarely the case. I recall one white paper where the principals of the firm refused to disclose their last names. 

People were claiming to have advanced degrees they never completed and to have worked at firms where they were never employed.   Quite often, outrageous claims were made about the size of the market to be served and the profits to be made.  If these same founders had been sued by investors in a prior company for fraud, investors in this new company would never hear about it. 

I had my bio and picture hijacked and included in a white paper. So did many other people.  There was no way for any investors to know if what they were being told was true.  Very often, it wasn’t.

These ICOs were being sold by networks of unregulated, self-validating crypto “experts and advisors”.  They traveled in packs to frequent crypto conferences around the world.  They cross-validated each other in articles on websites that had popped up and which reached many thousands of people around the world. Some crypto “experts” developed 6 and 7 figure lists of social media followers.

An issuer could engage any number of these crypto gurus and just pay them in the tokens to be issued.   The “advisors” would notify their followers about the token sale and urge those followers to cough up real fiat money to buy them.  Along the way the advisors were selling tokens that they had gotten for nothing in exchange for their sales efforts.  

Several otherwise intelligent people tried to convince me that this was not just a dressed up pump and dump scheme playing out over and over again. The results were certainly the same because most people who bought the tokens in these ICOs were left holding the bag.

A significant number of the ICOs were out and out scams which, sadly, many people refused to see.  Fifty million dollars raised here; one hundred million there, all going down the toilet of financial history.  It got so bad that several of the large social media platforms banned ads for ICOs. Several countries banned the sale of ICOs altogether.

Many of the ICOs claimed that they were not selling securities but “utility” tokens instead.  That died down significantly after the SEC published its Cease and Desist v. Munchee toward the end of 2017.  https://laweconomicscapital.com/2017/12/sec-v-munchee-will-the-crypto-currency-community-listen/

Along the way some really bright lawyers thought that ICO offerings might be structured as SAFTS. I saw it as an attempt to solve a valuation problem by promising to set the value down the road.  They were touted as making the ICO market less risky. To me they looked to be a riskier “derivative” and began to write an article that said so. But I never finished that article. 

In short order one of the NYC laws schools published their research and pulled back the curtain on SAFTS. After that most securities lawyers stopped talking about them.  SAFTS were a financial flash in the pan and not a very good one at that.   

I also had conversations with a number of groups that wanted to develop a realistic scheme to regulate ICOs and cryptocurrency trading across borders.  Each failed because most of the participants had never worked at or had dealt with any market regulator.  I wrote e-mail after e-mail trying to explain that transparency is only useful if everyone in the market was honest and that without significant penalties for dishonesty no regulatory scheme can work.  All that fell on deaf ears and each of those groups disbanded.

I also spoke with several people who wanted to create trading platforms for cryptocurrency but most of whom had no idea what a trading platform does or how it operates.  I would ask questions like: What would be the minimum standards for listing on your trading platform?  It was apparent that they had not even worked out that simple, basic and necessary issue. When I asked about market-makers and liquidity I got a series of blank stares.

Today, at least in the US, most lawyers have accepted the fact that any ICO sold here will be the issuance of a security and that US securities laws will have to be followed.  

To sell securities to investors in the US the securities must be registered with the SEC or specifically exempt from the registration requirement.  Registration is an expensive and often lengthy process. By mid-to-late 2017 a number of lawyers were reporting that they were filing registration statements for ICO offerings with the SEC. Apparently, many never got approved.

Securities offerings in the US do not have to be registered if they comply with regulations which provide guidelines for un-registered offerings. Un-registered offerings are generally sold only to institutions and wealthier investors who have no real interest in owning crypto currency.  These unregistered securities are not intended to be traded.

More than one lawyer has reminded me in the last few months that unregistered securities can be transferred after 12 months if the company is putting financial information into the market or if the tokens are listed on a crypto exchange outside the US.  I am not certain that they have thought that idea through.

Investors in an unregistered offering in the US are usually required to attest to the fact that they are making a long term investment and not intending re-sale.  That is why most companies in the US that sell unregistered securities provide those investors with income from dividends or interest.   So if you are selling unregistered securities with the promise of liquidity and re-sale, you are likely to confuse everyone, except perhaps the judge who will ultimately set you straight.

Companies from around the world have always wanted to tap the US for capital investment.  It is often a difficult process for any company and especially for start-ups and smaller companies.  In the ICO market, it became apparent that political borders and local regulations were not considered to be important by the issuers.

Investors who should have seen the shoddy disclosures as a problem seemed happy to invest, convincing themselves that if the offering “complied” with the laws of the country of origin, then protections afforded to them by US law were unnecessary.   A lot of people who were touting blockchain because it was supposed to promote transparency were willing to invest in crypto offerings that provided none. 

Today, people are spending money to “tokenize” real estate, fine art and many other tangible items as if there was a market for those tokens or if it made any sense to create one.  If I can buy 1/10,000,000 of a Picasso, do I get to hang it over my fireplace for 20 minutes? 

If you are selling shares in a building that you call “tokens” and tell me that you believe that all of the laws pertaining to real estate syndications would not apply, I would suggest that you really need to re-think what you are doing.  There are established rules for selling “asset backed” securities in the US.  Not surprisingly, most of the articles I read about “tokenizing” this or that fail to mention those rules and most of the people with who I am now speaking who are preparing to “tokenize” this or that offerings do not seem to be considering them.

Back in 2017 a lot of regulators told me that the ICO boom came upon them suddenly and that they did not have the staff or budget to deal with them.  They do now and there is every indication that the leniency some regulators have exhibited is about to come to a screaming halt.  

Re-visiting Prohibition

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Next January will mark the 100th Anniversary of the start of Prohibition. It is one of the least talked about and poorly studied events in US history. Very little has been written about it, especially by economists, but I have always found the subject to be interesting.

Americans have always had “issues” with the consumption of alcohol.  Laws restricting its manufacture and sale go back to the colonial period.  The temperance movement of the 19th Century is most often seen as a “moral crusade” or political battle.  Prohibition itself is often viewed through the lens of the speakeasy lifestyle.  As with most great movements much of the forces behind it were based in more practical issues.  

The real issue about alcohol in US politics and economics has always been about taxes. The very first tax levied by the brand new US Government in 1791 was a tax on the manufacture of alcoholic beverages. .The new Congress thought it was a good way to raise money to pay off the Revolutionary War debt.The tax was not well received especially by the people who were making and selling the product. 

Farmers in Western Pennsylvania and Kentucky were growing grain, distilling it into whiskey and shipping it east. Even back then it was a very profitable business. They saw the tax as the governments’ attempt to put its hand into their pockets.The farmers’ response to this tax was an armed rebellion against the United States. 

How big was the rebellion? The US Government sent 13,000 troops to quell it. There were no armed battles and the rebels disbursed. But many people still refused to pay the tax and more than one tax collector was physically assaulted.

The whiskey excise tax was the largest source of tax revenue in the early years of the U.S. and a substantial and reliable source of tax revenue throughout the 19th Century.  As the population grew, total consumption also grew and the total tax revenue collected each year kept going up with it.

Women were at the forefront of the temperance movement for a number of reasons. They were rarely the bread winners in their family and having the male breadwinner too drunk to work or injured because they were drinking on the job was not in women’s financial interests. Time spent at the local pub meant time away from the family and drinking has always been associated with gambling and prostitution, neither of which enhanced marital life. Drunken husbands also had a way of physically and mentally abusing their wives. For. many women Prohibition was a practical remedy for a practical problem.

The temperance movement was an amalgam of women’s groups and mostly Protestant churches or affiliated religious organizations. The movement was well organized. It claimed millions of supporters across the country. The goal was to outlaw the manufacture and sale of alcohol everywhere in the US.

By 1856 they had succeeded in doing so in 12 states and dozens of rural counties. It was a remarkable political feat for a group of like-minded citizens the majority of which were women and could not vote.

As the country moved west after the Civil War and new communities grew along the railroad right of way, saloons were often the first structures built and always a fixture in any new town. Many of those towns had more saloons than churches and many communities in America still do. 

As the 19th Century went on, there were more and more immigrants from Germany who began brewing beer in the mid-west grain belt. These brewers also developed a new business model.The breweries often would help to build or finance a local saloon in exchange for being the only beer offered in it. It was an early version of franchising.

Especially in urban areas, saloons were often a focal meeting place of the local immigrant communities. Saloons or taverns had always been places to drink and discuss politics. They also became known as places where politicians could meet and do business with voters and constituents.   Given that saloons were so prevalent, it is somewhat remarkable that the “drys” prevailed.  

By the turn of the 20th Century there were “wets” and “drys” in both political parties. Neither of the major political parties took a formal position one way or another but momentum for prohibition was growing. Competing products, like soft drinks, began lobbying for prohibition especially at the state and local levels. Eventually there were more “drys” than “wets” in the US Congress and the die was cast.

What actually paved the way for the ultimate success of the prohibitionists was the income tax which was enacted specifically to replace the excise tax on whiskey. Once that was in place, Congress in 1918 passed the 18th Amendment to the US Constitution, it was ratified in 1919 and the enabling legislation, the Volstead Act, began to put Prohibition into action in January 1920. 

The social benefits of prohibition derive from a reduced consumption of alcohol. They include a reduction of alcohol related health issues, less public disruption caused by inebriated citizens, and probably some additional domestic peace. Productivity at work rose as work related injuries and absenteeism decreased. But a lot of people never stopped drinking.  

Whatever romanticized image of Prohibition you may glean from Hollywood, it was not just fashionable people partying in a fashionable speakeasy near Times Square. During Prohibition thousands of poorer people died drinking homemade alcoholic concoctions.Manufacturing and bootlegging turned intolarge,  and profitable, albeit illegal ,businesses.

Still most people bought one bottle at a time from a family member or acquaintance. Everyone knew that they were breaking the law and no one really cared.

Overall enforcement was very difficult. Corrupting judges, politicians and law enforcement was part of the business model for the larger players. Small, person to person, transactions were almost impossible to detect.  It demonstrated to a lot of people that if you were willing to break the law, you were likely to get away with it.  

The Depression killed Prohibition. Roosevelt came into office in 1933 with big spending plans and declining revenue from the income tax as millions of people were out of work. Repealing Prohibition to allow all of the existing illegal transactions back into the mainstream and re-instating the excise tax was a no-brainer. And that is exactly what Congress did.

The post-WWII baby boomers have had alcohol integrated into mainstream family life.   Alcohol is a significant part of the socializing that the baby-boomers do. A drink after work or a beer around the barbeque is modern day normalcy.

The social issues today are the same as always. Excessive drinking frequently shows up in studies of marital problems, spousal abuse and petty crimes. According to the CDC: “Drinking too much can harm your health. Excessive alcohol use led to approximately 88,000 deaths and 2.5 million years of potential life lost (YPLL) each year in the United States from 2006 – 2010, shortening the lives of those who died by an average of 30 years. Further, excessive drinking was responsible for 1 in 10 deaths among working-age adults aged 20-64 years. The economic costs of excessive alcohol consumption in 2010 were estimated at $249 billion, or $2.05 a drink.”

Today most alcoholic beverages are served up by large multi-brand, multi-national conglomerates.   Mass media advertising has made them ubiquitous. It is virtually impossible to watch a sporting event and not see ads for alcoholic beverages.

The US government still collects a tax on every can and bottle. The tax on alcohol today makes up about 12% of the total excise tax revenue and a very small amount of the US Government’s overall income.  Not even the tax collector really cares any more.

Most studies of Prohibition overlook the seemingly constant demand for the product, even when the consumers knew that it was illegal to purchase and consume it.  The simple truth is that banning anything is not a viable policy.  America prides itself as being a nation of laws. Prohibition demonstrated that a wide swath of the population was willing to say: let the laws be damned.  

FINRA vs. the NARs- Round 3; Same Old Nonsense


A simple question: If a “bad” stockbroker rips you off, can a “bad” lawyer help you recover your losses? The answer should be obvious; but for some people, especially some lawyers, it is not.

For the third time in the last 20 years FINRA has asked the SEC to allow it to restrict an aggrieved customer’s right to have the representative of their choice at FINRA sponsored arbitration.  The previous two attempts were dead on arrival because there was no compelling reason to enact that limitation. The same is true this time. Let’s hope that the Commission staff is not asleep.

The issue is whether or not you must be an attorney to represent a party in a non-judicial arbitration proceeding. There have always been non-attorneys (NARs) representing parties in securities industry arbitration. Member firms would often send branch office managers into arbitration to collect a margin debt from a recalcitrant customer or to defend against a customer claim. Non-attorney representatives in securities arbitration was never an issue until the lawyers realized that they could make a lot of money for a lot less effort than they would put into resolving the same disputes in Court.

In the early 1990s, as real estate took a dip in various parts of the country and the value of real estate backed securities fell, a lot of people who were promised appreciation and steady income from these investments wanted their money back.  It was shown that Prudential Securities and other firms had sold billions of dollars’ worth of questionable real estate backed securities to 10s of thousands of investors around the US. 

The number of arbitration claims skyrocketed.  A lot of attorneys and others saw an opportunity to represent these investors on a contingency basis and an industry of customer representatives, both lawyers and non-lawyers was born. 

As these claims wound their way through the arbitration system the number of new claims began to slow down.  Appalled that they might make less money because there were fewer claims to file, the lawyers started a turf war with the NARs, seeking to get the latter barred for an ever-changing number of reasons.

At that time, the vast bulk of labor arbitrations around the country were being handled by shop stewards because they knew the shop floor rules.  Other state and federal government agencies permitted non-attorney representation in their arbitration forums. The trend was to leave the courtrooms to the attorneys and view arbitration as an alternative system where disputes could be resolved quickly and efficiently with or without lawyers.

Notwithstanding, the lawyers claimed that by representing customers in an alternative dispute resolution system, the non-attorney representatives were engaged in the un-authorized practice of law.  This was absurd on its face, especially since they did not think that true if a non-lawyer represented a member firm.

Admission to practice law is governed state by state.  Out of state lawyers need permission to appear in local courts and then usually with a local lawyer beside them. The same lawyers who claim that you must be a lawyer to represent a party in FINRA arbitration do not seem to care if you are not a lawyer in the state where the customer lives or where the arbitration is being held.  There are many lawyers who specialize in securities arbitration who are admitted in one or two states, but who have a national practice.  If NARs are practicing law in states where they are not admitted to practice law then so are these lawyers.

The lawyers also know that the large wirehouses often send inhouse lawyers to defend these claims and the wirehouses do not have lawyers licensed in every state on staff.  So not being admitted to practice law in the state where the customer resides has never been an issue to either the customers’ lawyers or the industry, unless they are referring to NARs.

The current iteration of the proposed rule allows non-attorneys to continue to represent customers in smaller cases. That is like saying: okay, you can be a little pregnant, because it is not the un-authorized practice of law if you only handle the smaller claims. The “unauthorized practice of law” argument, which never made any sense in the first place, seems dead.

Because of the continuing complaints by lawyers, in 1994 the NASD commissioned a study of its arbitration system chaired by former SEC Chair David Ruder. The report specifically looked at non-attorney representatives and left them in place. It called for more study on the subject and called the complaints against the non-attorney representatives “anecdotal”.  The actual complaints against the non-attorneys were never disclosed and more than one person at the time questioned if those “anecdotal complaints” had any substance.

The Ruder Commission Report did express its concern that “the increasingly litigious nature of securities arbitration has gradually eroded the advantages of SRO arbitration.”  FINRA has always advertised arbitration as a quick, inexpensive way to resolve a dispute with your stockbroker.  When I started doing arbitrations in the 1970s, a dispute could usually be resolved with one day of testimony or less. Now they often take weeks because lawyers have complicated a system that should be easy.   

There was another study and a similar request to limit NARs in 2007. The SEC staff asked FINRA to withdraw that request because the Commission staff thought it not in the customers’ best interest.  That reality has not changed.  

Over the years there were a lots of problems in the arbitration system specifically caused by lawyers. After the “tech wreck” claims went through the system in the early 2000s a significant number of the member firms were sanctioned for repeated violations of the arbitration rules specifically because they intentionally hid documents that the customers sought. Several of the member firms were fined $250,000 and FINRA noted that the practice of hiding documents occurred in multiple claims. 

In virtually every claim where a FINRA firm had been sanctioned for discovery violations the firm had been represented by an attorney. It was attorneys who time and again stood before different panels of arbitrators stating, falsely, that their client had no more documents to produce.  Were any of these lawyers sanctioned for lying to arbitrators? (No). Were any attorneys barred from representing parties again? (No.) Are the “anecdotal” problems with NARs worse than this? (Not by a long shot.)

I think that the SEC staff would be appalled to read the pleadings and briefs that a lot of attorneys present to FINRA arbitrators. Many will cite case law that is not applicable and often out of context. FINRA does not provide arbitrators with law clerks or even a law library. Briefing can be a useless exercise that often obfuscates more than it clarifies.    

Arbitrators are fact finders, not judges. They should examine the actions and utterances of the brokers and compare them to industry rules and regulations.  In many claims the panel is examining a transaction that began with an order to purchase a particular security.  In industry parlance, the question that the arbitrators consider is often the same: is this a “good” order? Did the order comply with the industry rules? Was the broker correct in submitting this order and was the supervisor correct in approving the order for execution?

Industry rules can be nuanced and complex. But every day, in every brokerage office, managers, supervisors and compliance personnel review and approve orders written by stockbrokers and ask and answer that question.  If you have a dispute with your broker because you believe your broker broke those rules, why should you not be allowed to be represented by a retired branch office manager or someone else who has worked with those rules and who can explain them to a panel of arbitrators better than most lawyers?  

It is comical that anyone would think that just because you went to law school you can competently represent a party in securities arbitration.  I have lectured at one of the law school securities arbitration clinics.  Students get taught the arbitration procedures but not what they need to know about the investments or the transactions that are at issue.   

Over the years I worked with a number of attorneys who represented public customers and with several of the large and small NAR firms. The simple truth is that you either know how the securities industry works or you don’t.The best arbitration lawyers often started their careers in house at one of the large brokerage firms where they learned how the firms operate and why.  

Over the years NARs have successfully handled thousands of claims. If the NARS were so bad you would think that there would be stacks and stacks of complaints from their clients about them but there aren’t.

I know that there are arbitrators and industry lawyers who have referred their family and friends to NARs. I know that there are professional traders, fiduciaries, sophisticated investors, lawyers and government officials who have sought out and hired NARs to represent them at FINRA arbitration. They do so specifically because the NARs understand how the rules are actually applied and how firms and brokers are supposed to act.

The lawyers’ current beef with NARs is that the NARs charge investors too much which is a sick joke coming from lawyers. No one really knows what NARs charge because no one asked.  And I suspect that the lawyers would object to disclosing their fees for a meaningful comparison.

When the Ruder Report came out suggesting further study of the NARs, there was some hope that the research would tell the investors what they really wanted to know: which representatives get the best results for their clients. That never happened.

FINRA could break down that data so that consumers might also see which representatives have handled more claims involving annuities or options and what percentage of the amount of the claim was actually returned to the investors through awards or settlements.  We live in a time of almost too much data. Why not collect the data and let the consumers decide?

This issue has come up again because the rising market has substantially reduced the number of claims that are being filed. There were over 10,000 claims being filed in the years after the 2008-2009 crash. I expect the number of claims filed in 2018 will be closer to 4000.  That is the only reason that anyone is talking about banning NARs from arbitration, again. The lawyers do not want any more competition.

I do know that this time out,several of the NARs are thinking about litigating any restrictions that the SEC approves.  That should provide fodder for a lot more articles going forward.

More On Internet Stock Manipulations; SEC v. Lebed (2000), revisited


I was reminded recently of the story of Jonathan Lebed, a 14 year old kid from New Jersey who was investigated by the SEC for stock manipulation using the internet back in 2000.  This case was a big deal at the time, garnishing a segment on 60 Minutes and some interesting discussions in the financial and legal press.

Even though he was underage, with the help of his parents, Lebed had managed to open an account at one or two of the discount brokerage firms. He was apparently trading his accounts in low price stocks when the SEC came knocking on his parents’ door. 

It seems that in the course of trading Lebed liked to post positive comments about what he was buying on various websites, bulletin boards and chat rooms where people who might be interested in purchasing these stocks would see them.  This was in 2000 when the chat rooms were not sophisticated and the web reached a fraction of the people it reaches today. 

Lebed would buy a low priced stock and then say something nice about the company in a message that he posted in a chat room. Using multiple e-mail addresses he might get that same, positive message posted in 200 chat rooms.  Some of the people who saw his posts would re-post them again. 

Lebed knew that his simple postings would create significant interest in these shares and that the price would move up.  He commented that posting the messages with key words in all capital letters would actually get even better responses. 

Bringing a lot of attention to a more obscure, low priced stock can, indeed, lift the price. The SEC called it an intentional market manipulation.  Lebed said that he was only doing what the research analysts at the big firms did, publish their opinions about companies whose share price they wanted to go up. 

Lebed did all this out in the open. Several of his classmates and school teachers followed his leads and invested with him. They were willing to take a chance of doubling their money if the share price of one of these companies went from $.30 to $.60. 

Many of these investing neophytes did understand the positive effect that Lebed’s postings and his quasi investor relations campaigns had on these stocks.  They wanted to buy before he posted and get out as the buyers reacting to his posts pushed up the price.  

Lebed was not the only person or group at that time that was using the internet to enhance the price of shares of small public companies.  But he demonstrated that in the year 2000 the power of the internet to sell investments directly to investors was underrated.  In the almost 20 years since, the use of the internet to sell almost anything, including investments, has become much more powerful and pervasive. 

In the regulated financial markets the dissemination of information is encouraged, but it is also controlled.  Regulations require that information be accurate and complete. Public companies are required to report specific information about their business, to present that information in a specific manner and to release that information on a regulated schedule. 

For a licensed stock broker or investment advisor every e-mail, tweet, posting, comment and utterance about any investment is subject to the scrutiny of his/her employer and by regulators. The SEC depends on the market professionals and market participants to play by the rules. There are significant penalties for non-compliance. 

But Lebed was not a market professional. He was an outlier. He was an independent investor, not a licensed participant in the marketplace.  In the end the SEC let Lebed keep most of the money that he made from his trading as long as he promised to stop.  

At the time, no one really questioned the SEC’s jurisdiction over Lebed or what he was doing. Lebed was a US citizen, operating out of New Jersey. His posts were about US companies whose shares traded in the US markets. Many of his posts were made through a US based internet company (Yahoo Finance). 

In the ensuing 20 years, social media and on line platforms, publications and unregulated “experts” have demonstrated that they can easily sell investments directly on line to millions of investors.  Moreover they have demonstrated that they can disseminate information about public companies and new issues without regard to the truth of the information.  And they can do so without regard for regulations or national borders.

In the “direct to investors” investment world, social media “followers” has replaced “assets under management” as a measure of how many investors’ dollars a person can bring to an investment or new offering.  And you can buy people who have a lot of followers.

If I wanted to hype a stock, either a new issue or one that is already trading, I can make a financial arrangement with any number of independent “experts” who have a lot of social media “followers”.  Some may write articles for financial publications, some write books and blogs and many can be found going from conference to conference and podcast to podcast. 

Any financial “expert” can purchase the right to give the keynote speech at a conference and purchase any number of other speaking slots and sponsorships as well.   Anyone can buy interviews on financial websites, blogs and podcasts or pay for the right to create and distribute positive content on these sites.   

If you look at the numbers you can get an idea of how this works.  I can hire a financial “expert” to tout any stock that I wish. The “expert” will send his/her followers a series of e-mails, appear at a series of conferences and write a series of articles about that company. An expert with 1 million followers might reach 2 million other investors who see re-prints and references to it.

If only 10,000 investors of those followers invest an average of $1000 a new issuer can raise $10,000,000. That much new money coming into a thin trading market can often raise the trading price of the shares of a smaller company.  

There is no limit to the number of experts I can hire or the size of the e-mail lists I purchase for their use to augment their own list of followers.  If I hire multiple experts to hype the same stock, other experts who have not been paid may mention the company independently.  And before you say that this type of scheme using paid experts to hype the stock may be questionable under US law, who said that US law applied?   

If you solicit investors in the US for a new issue the offering is subject to US law.  That would require full and fair disclosure to investors in the US and provide for government penalties for non-disclosure.  But what if you donot make the necessary disclosures and you only solicit investors in other countries? 

The capital markets are regulated country to country.  Each country has its own rules which apply to financial transactions involving its citizens and issuers.  Each has rules governing transactions executed on the exchanges domiciled in their country. The laws of the country where the issuer is domiciled, the exchange is located and where the investors reside may all apply to a single transaction.  An overriding question with the direct to investor market is which country has jurisdiction and over what actions and activities.

If an article about a company’s share price or prospects from a European website gets republished or re-distributed in the US is the author subject to US law? What if the author knew the information in the article was false; do US investors have any recourse?  Does it matter if the author got a royalty for the re-print?

Would the answer be different if the false information originated with just one shareholder who bought a large block of shares cheap and now wants to pump up the price?  Does it matter if that person is in a country other than where the shares trade or the articles originate? 

I recall that when the Lebed case was discussed a lot of people thought that the internet would change and globalize the capital markets. It clearly has.  

I think that there is still a lot of discussion that needs to be had and a lot of questions that need to be asked and answered.  In the meantime, it should be obvious that the current international regulatory scheme does not overlap as well as it could.   

The current and expanding global reach of social media create opportunities and but also highlights problems.  The flow of capital and information continue to globalize. At the same time I am certain that it would is a lot easier today for a 14 year old to manage a single successful, global stock manipulation.