Private Sector to the Rescue Part 1: The Google Price Index and Better Markets, Inc.

I expect this post to be the first of many on the topic of how to restore good leadership in our society.

To begin, I will set the context for the state of leadership in our society.

At a time when most of the public believes leadership of all sorts, especially political, to be weak, we should not focus on finding scapegoats but rather on assuming accountability to help fix problems.

As detailed in his book, Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism and in the Harper’s Magazine article, “Numbers racket: Why the economy is worse than we know”, Ken Phillips documents how since the 1960’s Washington has been playing with the official statistics by which the health of our economy and society are measured in order to avoid the perception of their legacy as having done a poor job. I borrow from the Harper Magazine article:

“The corruption has tainted the very measures that most shape public perception of the economy—the monthly Consumer Price Index (CPI), which serves as the chief bellwether of inflation; the quarterly Gross Domestic Product (GDP), which tracks the U.S. economy’s overall growth; and the monthly unemployment figure, which for the general public is perhaps the most vivid indicator of economic health or infirmity.”

The point is that: as getting-elected has become the primary business of politicians, less and less have we been able to trust anyone in political leadership to make the difficult but correct decisions. Evidence of this trend is all around us in the state of our economy and society. No one in office wants to take responsibility for excessive and profligate borrowing and spending for fear of being vilified as anti-growth, anti-jobs, anti-happiness or anti-anything that their political competitors believe pleases people in the current moment.

In the afore-mentioned context, I am pleased to learn of Google’s intentions to create its own Price Index and find it reassuring that we are not paving the Road To Serfdom. I believe the founding fathers would cheer this endeavor as a shining example of success of the innovative spirit empowered by free enterprise. Indeed, their original vision for the United States is to create a society that rewards citizens commensurate with the value they create. That, in my opinion, is the American Dream.

The longer we allow certain factions of society to exploit others or reap rewards greater than the value they create, the more our liberal democratic system declines. Our civilization depends on citizens trusting that their opportunity for achievement and success is equal to their peers and that no injustice will undermine their efforts to create value for themselves, their family and their society. Francis Fukuyama articulates this idea with terrific lucidity in his book, Trust: The Social Virtues and the Creation of Prosperity.

Given that our ability to trust political leaders is low, we must rely more than ever on private enterprise to lead our society. Keep in mind that the private enterprise is not to blame for Wall Street’s excesses and inordinate compensation. Blame the politicians, beginning with Greenpsan, who paved the way for Wall Street to loot the capital markets. In his inter­view with ABC, Larry Sum­mers points out the fact that the finan­cial ser­vices sec­tor (part Wall Street and part cor­po­ra­tions) spends, annu­ally, about $1mm per con­gress­man while employ­ing 4 lob­by­ists per con­gress­man. That is why Wall Street and Cor­po­rate Amer­ica con­tinue to get what they want and are not held account­able for what amounts, in many cases, to rob­bing the invest­ing public. That’s right – politicians and political influence can be bought.

All the more reason for private enterprise to step into the leadership void and help steer America back on track.

Google is not the only example of excellent leadership by private enterprise. There are many. A fairly recent arrival on this front is Better Markets, Inc. – a non-profit venture founded my Michael Masters of Masters Capital Management, LLC and run by Dennis Kelleher, a senior staff official from the Democratic Policy organization in the Senate. Better Markets aims to enhance the rational allocation of capital primarily within the derivatives markets. Mr. Masters has served society admirably over the past several years via his testimony to Congress and his numerous papers on the flaws in the current derivatives market. I highly recommend reading the interview by Welling@Weeden with Mr. Masters and Mr. David Frenk, Director of Research a Better Markets, in the attached article to gain a fuller understanding of the Better Markets undertaking. I also recommend reading the excellent paper by Mr. Frenk that refutes an objectionably poor study by Irwin and Sanders on the impact of speculators on commodity prices and markets.

I cannot fail to mention my own firm, New Constructs. Per our Mission statement, we are dedicated to improving the integrity of the capital markets because we believe that is in the best interest of the long-term prosperity of our society. Though not nearly as impactful as Mr. Masters, I also spent time in Washington meeting with Senator Corker, the SEC, the Senate Banking Committee, FDIC, Congressional Oversight Panel and others. My presentation focused how to improve the integrity of the capital markets most efficiently. As detailed in my letters (#1 and #2) to Senator Corker, my purpose was to provide our political decision-makers with a powerful tool to combat stock market manipulation – that tool is New Constructs research, which decodes Wall Street propaganda and delivers the whole truth about profitability and valuation. I submitted a list of over 20 Corporate Financial Disclosure Transgressions (request access to this report via research@newconstructs.com) to the Senate Banking Committee. I pointed out that not only were companies able to manipulate the accounting system, but also that violation of accounting was rampant and undetected. For example, as detailed in our Corporate Financial Disclosure Transgressions, over the last 5 years we found 10 companies whose income statements do not add up correctly and 20 companies in the last 11 years whose balance sheets do not balance. I’d say that is proof that when the cat is away the mice will play.

New Constructs can solve all of these issues and many more. Having worked on Wall Street for several years, I know how the “sausage is made”. I explained to everyone I met in Washington that New Constructs can immediately provide the public with additional information on the true profitability and valuation of companies that would empower investors to make more informed decisions. I do not believe that most investors make bad investment decisions because they are stupid. They make them because they are misled about the true profitability and valuation of companies.

The New Constructs approach to determining corporate profitability is straight-forward, simple and, most important, complete. Yes, building a complete financial picture of a company is critical to understanding its true profitability. Our patented Research Platform for reversing accounting distortions and discounted cash flow analysis leverages data from the Financial Footnotes to deliver research of unrivaled quality and accuracy.

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