Bookies on Wall Street (28 April 2010)

One of the most famous passages from Keynes is this one (bold added):

If I may be allowed to appropriate the term speculation for the activity of forecasting the psychology of the market, and the term enterprise for the activity of forecasting the prospective yield of assets over their whole life, it is by no means always the case that speculation predominates over enterprise. As the organisation of investment markets improves, the risk of the predominance of speculation does, however, increase. In one of the greatest investment markets in the world, namely, New York, the influence of speculation (in the above sense) is enormous. Even outside the field of finance, Americans are apt to be unduly interested in discovering what average opinion believes average opinion to be; and this national weakness finds its nemesis in the stock market. It is rare, one is told, for an American to invest, as many Englishmen still do, “for income”; and he will not readily purchase an investment except in the hope of capital appreciation. This is only another way of saying that, when he purchases an investment, the American is attaching his hopes, not so much to its prospective yield, as to a favourable change in the conventional basis of valuation, i.e. that he is, in the above sense, a speculator. Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism — which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object.

It's hard to follow the Goldman Sachs hearings without thinking of this. The standard ideological defense for the finance industry is that it matches savings with investment opportunities and leads to a more productive use of capital for the benefit of society as a whole. But the financial crisis and its string of revelations about what Wall Street was actually up to makes that notion seem ludicrous and naive.

What the financial innovators were doing seems a lot like bookmaking. Ryan Avent points approvingly to this passage from The New Yorker's James Surowiecki:

No one on any side of this debate appreciates the casino analogy, but I think it’s still the most useful way to think about this question: when you place a bet on the Super Bowl, the casino is taking the other side of that bet. In many cases, it’ll balance the bets it makes on both sides of the trade, so that it’s exposed to no risk and it collects the certain profit from the spread. Regardless, though, any individual bettor knows that if he wins, the casino loses, and vice versa. That is, he knows the casino is on the other side of the trade. Levin seems to be saying that this means there’s a conflict of interest between the casino and the bettor, and that it’s illegitimate for the casino to take the bet. But there’s no conflict, because everyone knows what the deal is. And as long as the bet’s honest, and as long as the price is fair, the casino is doing right by the customer, because the customer is getting exactly what he wants: a chance to speculate.

That Wall Street was running a casino for speculators seems exactly right, and who cares whether it bothers bankers? Call it what it is. When you make synthetic CDOs, you are basically facilitating gambling -- these instruments didn't contribute much to encouraging socially beneficial investing. (At Interfluidity, Steve Waldman sheds some light on what function synthetic CDOs originally served for banks -- basically it allowed for regulatory capital arbitrage.) (UPDATE: This NYT discussion looks at the social worth of CDOs. All the contributions are worth reading.)

The point Surowiecki wants to make here is apt, but the analogy he uses is wrong. His explanation doesn't read like an accurate description of how sports books work. As I understand it, Vegas bookmakers always try to balance bets on both sides of a game by adjusting the odds or the point spread to even out the action. Your bet for a team is matched with that of someone who has the other side. No one bets against the casino at all, unless the bookmakers have badly botched their job. (I think the Scorsese film Casino actually details some of this; De Niro's character, if I am remembering right, is an expert line setter.) The casino is trying assiduously to avoid having action. It doesn't make bets at all. (Unlike Goldman.) The casino collects the vig -- the percent it gets for matching the action (similar to the rake in a casino poker game) regardless of the outcome -- and orchestrates the orderly payouts to winners. But it doesn't care who wins the game, only that it gets played. Like Jay-Z, the casino will not lose ever and all but the most ignorant sports gamblers understand that. They are trying not to beat the casino (by definition impossible), but to beat collective wisdom that has misjudged a likely outcome, or they are trying to get action at a favorable spread before lines move or odds change.

So if Goldman was really like a bookie, its behavior would be sort of excusable -- it was providing a way for gamblers to find one another and gamble and taking its established cut. But if I understand correctly, it was making others responsible for basically bearing the risks of paying off the outcomes of the wagers, and shirking the responsibility of running a fair game that it is supposed to assume to earn its money. As Waldman explains: "When Goldman is shifting risk that it did not wish to bear or hedge to an underwriting client, it is not acting as a market maker. Rather it is acting as an agent for a client wishing to take a position, while imposing the burden of liquidity provision on uncompensated and uninformed underwriting clients. When a bank arranges and underwrites deals to meet its own hedging needs, or especially to take an opposing speculative position, that is also ethically questionable if not plainly disclosed." (That quote probably makes no sense out of context, but I hope it will prompt you to read Waldman's post, which is dense and complex but will reward careful attention if you are curious about what investment banks are actually supposed do when they are not operating like hedge funds.)

And as Surowiecki points out, the legal issue with what Goldman stems not from their bookmaking (though that is arguably the larger moral problem with all of Wall Street in recent years), but from their fraud. Perhaps the appropriate analogy for the allegations regarding the Abacus deal is this: Goldman knew Paulson had fixed the Super Bowl, yet worked hard to make sure enough people were betting on the losing team to fund the payoff on Paulson's inevitably winning bet. The question is whether Goldman should have taken this game off the board.

UPDATE: Subsequent posts by Waldman and Ezra Klein have made me reconsider my analogy. Klein argues that Goldman, like a casino or a bookie, has no obligation to tell bettors its opinion of their bets, even when it knows they are bad bets. It just takes the action. Waldman explains that the Abacus deal did not put Goldman in the position of bookie, and why the bookie metaphor may be altogether inapt:

Goldman wasn’t structuring a trade between two clients, as far as IKB and ACA were concerned. It was working to form a business entity called ABACUS 2007-AC1, LTD and underwriting an issue of securities by that entity. The only clients formally involved were IKB and ACA, and they were on the same side of the deal.
If this had been an adversarial deal, Goldman would have had no obligation to inform the side that wasn’t paying it whether they were making a good trade. But if this had been an adversarial deal, Goldman would have been advising one party or the other. Both parties could not have been its customers.
Imagine you are trying to buy a house. It is contentious. Disputes arise over price, warranties, settlement terms, etc. You would hire an agent, and the other party would hire an agent. Those agents would be different people. The hazards of relying on the same advisor in a difficult negotiation are obvious.

Then he adds what seems to me the key point to remember with regard to "market making": "Goldman was unwilling to make a market for Paulson at a price he would have accepted, so it manufactured an entity willing to do so. Investors in that entity were not informed that they were dealing with an active, involved adversary. And Goldman has the nerve to call both sides of the arrangement 'customers.' "

What we deem rational is ideological (26 Sept 2009)

Will Wilkinson highlighted this paragraph about economism and behavioral economics from the FT's Economists Forum blog:

Behavioural economists have uncovered much evidence that market participants do not act like conventional economists would predict “rational individuals” to act. But, instead of jettisoning the bogus standard of rationality underlying those predictions, behavioral economists have clung to it. They interpret their empirical findings to mean that many market participants are irrational, prone to emotion, or ignore economic fundamentals for other reasons. Once these individuals dominate the “rational” participants, they push asset prices away from their “true” fundamental values.

This helped me clarify in my own mind the muddle I've been in about the ideology of "perfect markets" and how that ideal is possibly used ideologically. The economists quoted, Roman Frydman and Michael Goldberg, seem to lay it out pretty clearly. At the behest of most economists, neoclassical or behavioral or otherwise, we've fallen into the habit of elevating what economists normatively deem rational to the only true form of rationality, while ignoring what human behavior seems to suggest should be called "rational" -- that is, what ordinary people tend to do when confronted with various incentives or dilemmas.

And the motivating force behind all this is the effort to isolate "true" asset values -- a quest that has had an ignominious journey through the history of political economy as Justin Fox's The Myth of the Rational Market well documents. (For what it's worth, I reviewed that book here.) "True" asset values underpin the financial sector, motivate its investment strategies and analysis. The pursuit of them keeps money circulating, which keeps economies growing (on paper, anyway).

Determining what constitutes value has vexed economists from the beginning of the discipline. Marx's Capital is essentially a long meditation on the origin of "surplus value" as it arises out of exploited labor -- a notion that depends on his definition of value as socially necessary labor time. The labor theory of value has been discarded by economists in favor of marginalism, which to remain coherent requires a human subject that exhibits the sort of "rationality" behavioral economists are undermining.

The alternative (and I am not entirely sure it is preferable) would seem to be to render "rational" those "other reasons" that people have for behaving -- the decision-making approaches that are not driven by straightforward utility calculus. That means returning to a morality or an ethos that is not based on the market but on other norms of human interaction, ones that evolve not from impersonality (the market's liberating feature) but from integrative social ties. The danger is that this would reinstitute tribalism and ethnocentrism as the source of norms -- a return to feudalism or something worse instead of the development toward cosmopolitanism that arguably the globalization of market forces has ushered in.

Private knowledge's value (6 Sept 2009)

Krugman's NYT Magazine article, which looks at shortcomings of economics as a discipline, reminded me of a question I have been mulling over. Does macroeconomics, in aggregating and potentially canceling out more localized movements in opposite directions within the data, gloss over the questions that are significant to individuals, which are typically a matter of where they stand in relation to other individuals? Macro data flattens out much of the relative differences in between individuals, but such differences are what register to those individuals and determine to large degree their sense of how the economy is faring and what their prospects are. So when economists and econojournalists begin prognosticating based on the macro data, they create a picture of reality that excludes everyday experience and alienates those whose relative story doesn't fit the general trends. Or what individuals experience as lost opportunities or jobs or wages may show up in aggregate data as something more hopeful about society generally. This means a disconnect between what passes for the truth about society and what people experience in everyday life can grow and deepen, intensifying the perceived antagonism between the two.

To make this less abstract: I couldn't accept the premise reported on in this Christian Science Monitor story that reducing the number of roads for drivers might cut traffic delays.

It all hinges on something called Braess’s Paradox, which states that adding capacity to a network in which all the moving entities rationally seek the most efficient route can sometimes reduce the network’s overall efficiency.... The price of anarchy drops if you close a few roads, because individual drivers are less able to selfishly optimize their routes. In their analysis, the authors identified six streets in Boston and Cambridge: By closing those streets, they say, the optimal collective travel time would decrease between the two points.

Granted, but we as individuals don't care about the overall efficiency of the system; freedom, from our limited point of view, is being able to use our wits (and alternate routes) to beat the system, or at least believe we are. When roads are closed, even if it helps the overall efficiency, it may appear to us as an arbitrary nuisance thwarting our creativity and improvisational skills. We may think, relative to other drivers, we know more and can get through a busy traffic network more quickly. If the state intervenes and negates the value of that knowledge, we are likely to feel unnecessarily frustrated, thwarted in our personal potential.

The stock market, and the efficient markets hypothesis (which Krugman covers, and is discussed at length in Justin Fox's The Myth of the Rational Market), is somewhat analogous -- individuals participate in the market because they believe they can beat it, even though financial theory (in its most dogmatic form) holds that any advantageous information is already priced in. Imagine if the state stepped in and forced investors to accept that they couldn't beat the market, on the idea that it would be more efficient socially to have a few large institutions allocate a country's collective capital. Would all that knowledge that those individual investors believe that they have be wasted -- or are they all deluded in their belief in that knowledge and would thereby be prevented from harming society by acting on it? And would the theoretical gains in efficiency outweigh the enforced impotence that individuals would experience?

Death of crocs (16 July 2009)

Here's a shock. The Washington Post reports that ugly-shoe-maker Crocs is about to go out of business. Wow. That seemed like a business built on a sturdy foundation, one that was built to last. Much like Krispy Kreme, it wasn't tied to a trend at all, and stock touts were surely right to recommend buying in back in 2007. Sometimes the economy is so unpredictable. Who would have thought that demand for Crocs wouldn't continue to grow forever, like the value of our houses?

The company had expanded to meet demand, but financially pressed customers cut back. Last year the company lost $185.1 million, slashed roughly 2,000 jobs and scrambled to find money to pay down millions in debt. Now it's stuck with a surplus of shoes, and its auditors have wondered if it can stay afloat. It has until the end of September to pay off its debt.
"The company's toast," said Damon Vickers, who manages an investment fund at Nine Points Capital Partners in Seattle. "They're zombie-ish. They're dead and they don't know it."

I think that it is safe to assume that Crocs might have found itself in some trouble regardless of the recession. It always amazes me that companies like this get hyped in the financial press; it seems a bit irresponsible and cynical. The unspoken subtext seems to be this: Everyone knows that eventually the trends that such companies are built on will pass, but everyone also believes that the other investors are more naive than they are and have bought into the trend unthinkingly. Everyone then wants to exploit the other's presumed ignorance, assuming some other fool will be left holding the shares when the day of reckoning comes. And the press is there to cheer this game along, pointing to how much growth the company has seen during its peak trendiness, encouraging the extrapolation of such unsustainable figures into the future. I wonder if all the analysts who recommended Crocs a few years ago (or the ones, probably the same ones, who recommended Krispy Kreme in the late 1990s) feel any embarrassment at all.

Reinflating the housing bubble (5 Feb 2009)

Georgia senator Johnny Isakson's amendment to the stimulus package, which passed the Senate yesterday, is a stupid idea -- call it the Realtor Creation Act, and heaven knows we need more Realtors. The amendment doubles the existing unnecessary subsidy to new-home purchasers from $7,500 to $15,000, and intends to encourage more activity in the housing market and speed recovery in that sector, which remains afflicted with a massive inventory overhang -- we built too many houses, and the vacancy rate is at a record high. Of course, in practice, this is a tax giveaway to the upper middle classes -- the sort of people who already can afford to buy houses rather than rent -- and encourages the same sort of dangerous real estate speculation that helped create the recession we're in.

Calculated Risk is skeptical that the historical precedent for this -- a 1975 giveaway to home buyers that supposedly boosted sales -- holds water. And economist Dean Baker explains that the proposal is probably going to be far more expensive than advertised:

Isakson puts the cost of his tax break at just $19 billion. Let's break the Washington rules and try a little arithmetic. Even with weakness in the housing market, it is still virtually certain that we will sell close to 5 million homes in 2009. The overwhelming majority would qualify for the full credit. So, we get 5 million times $15,000. That sounds a lot like $75 billion. And this is before we get to any gaming. It's hard to see why tens of millions of people wouldn't figure out a way to buy a house from a friend or relative and get their $15k. If we can get one-third of the country's homes to change hands (lots of jobs for realtors) that would be good for $375 billion.

Economist Tyler Cowen says "boo to the Republicans" for generating the proposal, arguing that "the supply of homes is relatively elastic right now. The tax credit will subsidize the new buyers without propping up the price of homes. Demand will go up, supply will go up, price will stay more or less on the same trajectory, and banks won't be any healthier. The subsidy goes to new home buyers and why should we be helping them above all others?"

Brian Beutler laments that this sort of policymaking is the "benefit" of bipartisanship:

I suppose if we wanted to, we could build upon the Isakson amendment by suspending environmental regulations and setting aside money for construction workers to build more Kaufman & Broad communities, and coal-fired power plants. That might even technically count as great stimulus, but with Democrats fully in charge the hope was that the money could be spent both in great quantity and in ways that, at the very least, didn’t help entrench the habits that got the country in this mess in the first place. But I guess that’s bipartisanship for you.

Those who thought Obama would usher in a new regime of ideas and end the pandering to the suburban bourgeoisie are finding out they were wrong, and really, this should be no surprise. Obama didn't campaign as a progressive urbanist, even if his life experience suggested he might govern as one.

Anyway, housing economist Ed Glaeser (no progressive -- you can find him on today's WSJ editorial page calling for more tax cuts) in this TNR book review, details the distortions of the subsidized lending schemes that Isakson wants to extend:

The popularity of subsidizing borrowing has led some to advocate a new round of federally subsidized lending, perhaps at an interest rate of 4.5 percent, aimed at pushing housing prices back up. But nothing is going to bring back the boom days of 2006. On average, housing prices go up between 3 percent and 5 percent when interest rates fall by 1 percent. A big loan program that pushes lending rates down to 4.5 percent would probably lead to a price boom of less than five percent. Such a modest impact would be barely noticeable in markets that have lost more than one-fifth of their value in the last year. It certainly would do little stem the tide of foreclosures. Housing in America is a $20 trillion market. It is no more plausible that the government will be able to bring housing prices back to bubble-like prices than it was for Herbert Hoover, or Franklin Roosevelt, to bring stock prices back to their 1929 levels.
I doubt that the government should try to make housing more unaffordable to ordinary Americans, even if it could manage that trick. Higher prices would just mean more overbuilding in places such as Las Vegas, which already have a glut of homes. In almost all cities, prices are still far above 2000 levels. Why is unaffordable housing now a national desideratum? The most recent housing boom made some of America's most economically dynamic and beautiful places unaffordable to ordinary Americans. Higher housing prices made it difficult for young and middle-income families to get by in America's costly coastal regions. There is much to like about housing's return to reality, not least its increased affordability, and much to dislike about artificially trying to make homes expensive.
Moreover, credit subsidies can be quite regressive. The Home Mortgage Interest Deduction is poorly targeted toward lower-income Americans who are on the margin between renting and owning; its benefits go mainly to the rich. In markets where housing supply is more or less fixed, subsidizing borrowing just pushes up prices, which means capital gains for existing homeowners, not increased housing affordability. In more flexible markets, the deduction encourages over-building and over-borrowing.
In the midst of today's housing crash, certainly, subsidizing borrowing looks particularly foolish. The government essentially encouraged Americans to leverage themselves to the hilt and bet on housing markets. Now a lot of those erstwhile owners have lost everything. Why exactly does it make sense to subsidize gambling on home prices?

Glaeser then details how homeownership subsidies basically mean that the government is encouraging us to live in single-family homes. That means when we make attempts to expand home ownership, it leads to more inefficient, energy-wasting, low-density development, perpetuating the stranglehold of suburban anomie for yet another generation.

The "idea crunch" (3 Feb 2009)

This passage by Steve Waldman gets at the fundamental issue in recessions (and in the arguments about the stimulus package), something that the byzantine complexity of structured finance tends to conceal. This recession is not the product of some specific financial misstep or one bad class of investment so much as it is the inevitable consequence of having too much money looking for too few investment opportunities.

Ultimately, a financial system has to find productive projects for the private parties to invest in. The government can invest directly, can delegate investment to the best and the brightest, can saturate the public's demand for money until private parties try to find other means of storing wealth. But it's what real human beings do with real resources that ultimately matters. Our financial system didn't fail because it was overlevered. It failed because it was uncreative: It could not conjure up worthwhile things to do with the capital it was asked to invest, and instead of owning up to that, it pretended that poor projects were good. Financial markets are ultimately information systems. The only way out of this is to discover worthwhile things to do, or more importantly, to develop better means of generating a diverse menu of worthwhile things to do going forward. Right now, the government is being asked to do what the semi-private financial system could not: generate a positive real return on trillions of dollars of undifferentiated future claims.

He is following up on an idea that investment banker/blogger Cassandra outlined in this post: After listing a bunch of dubious investment ideas that had been launched in the bubble period, Cassandra writes, "maybe credit crunch is wrong description. Maybe it's actually a useful productive idea crunch. Maybe, we are -- for the moment -- overbuilt, over-satiated, over-consumed, and just full-up. And that is before we ask anyone for credit."

This is similar to the Marxist idea of overaccumulation. Basically, workers are squeezed out of the production process by capital investment in technology. With fewer workers, you can't extract value (no profits), since all value ultimately comes from human labor making something socially useful. "Productive projects," in Waldman's terminology, are a matter of putting workers to work on projects the world is capable of using. And, to oversimplify radically, Wall Street used financial chicanery to evade the problem of actually being productive, which allowed more capital to flow to capitalists rather than the workers who would have to be paid at some point.

Another way to look at this: Capitalism has no incentive to develop socially useful ends. The category of the socially useful, though not given by human nature and immutable, is not automatically elastic either; it needs to be fostered. (The growth of this category is the flowering of the species to its full potential.) Marx contends that capitalism, basically, fails to foster the socially useful -- that is, the pursuit of surplus value prevents resources from being devoted to developing and reproducing human capabilities so that more things can be considered socially useful. (This may be part of the answer to why don't Chinese workers consume more -- at the site of the most intense capitalist exploitation of labor, the capacity to consume is stunted both by inadequate wages and inadequate cultural capital.) The point of the stimulus package, when you abstract away from the numbers and the "shovel-ready" projects and so on, is to invest in developing the category of the socially useful directly, rather in the indirect and haphazard way private investment deals with it. But will the state will necessarily be any better at finding "productive projects" than private investors? Won't most of the money end up in pork projects and boondoggles like this? Megan McArdle argues stimulus spending should be able to pass some test of economic efficacy.

It is not enough to argue that the projects are worthy, as, say, covering the healthcare over people aged 55. To go in the stimulus package, it should provide stimulus--that is, either spur real economic growth directly, or at least convince people that it will, improving their animal spirits. Programs that do not meet these criteria should not be part of the stimulus package. There are better ways to assist the unemployed than to build a bridge we don't need. If a project won't "pay" for itself, then it should be justified on its own terms, not packaged into a stimulus so that politicians don't have to explain their choices to the American people.

But what is this test? Often we rely on sheer profitability to determine worthiness, but these investments are to a degree, by definition, non-capitalistic -- these are programs private investment wouldn't touch, and if you view that as a sign that they are inherently wasteful, all stimulus packages will be anathema to you. It seems like an investment in ideology.

David Leonhardt's long NYT Magazine article "The Big Fix" looks at this question as well. He argues that our consuming habits in recent decades constituted an "investment-deficit disorder" that left the forces of innovation crippled. Thus the government must step in with infrastructure investments.

Governments have a unique role to play in making investments for two main reasons. Some activities, like mass transportation and pollution reduction, have societal benefits but not necessarily financial ones, and the private sector simply won’t undertake them. And while many other kinds of investments do bring big financial returns, only a fraction of those returns go to the original investor. This makes the private sector reluctant to jump in. As a result, economists say that the private sector tends to spend less on research and investment than is economically ideal.
Historically, the government has stepped into the void. It helped create new industries with its investments. Economic growth has many causes, including demographics and some forces that economists admit they don’t understand. But government investment seems to have one of the best track records of lifting growth. In the 1950s and ’60s, the G.I. Bill created a generation of college graduates, while the Interstate System of highways made the entire economy more productive. Later, the Defense Department developed the Internet, which spawned AOL, Google and the rest. The late ’90s Internet boom was the only sustained period in the last 35 years when the economy grew at 4 percent a year. It was also the only time in the past 35 years when the incomes of the poor and the middle class rose at a healthy pace. Growth doesn’t ensure rising living standards for everyone, but it sure helps.

Growth is another way of saying "expansion of the production of social utility" -- people have more meaningful projects to work on and more fulfillment as a result. GDP, however, doesn't necessarily measure that kind of growth; it can't been massaged through financial manipulation, the creation of what David Harvey calls "fictitious capital." As Leonhardt points out, recent "growth" has been illusory: "Richard Freeman, a Harvard economist, argues that our bubble economy had something in common with the old Soviet economy. The Soviet Union’s growth was artificially raised by massive industrial output that ended up having little use. Ours was artificially raised by mortgage-backed securities, collateralized debt obligations and even the occasional Ponzi scheme." The fiscal stimulus could be directed at real growth to compensate for the capital destruction going on with the unmasking of the fictitious capital Wall Street had been creating.

The policy prescription that follows from this seems clear to me. The government should spend on those worthy but noncapitalistic projects that expand human potential and create public goods, and they should not spend on projects whose only purpose is to prop up asset values for those fat cats who hold vast amounts of fictitious capital. In other words, build transit systems and pay teachers better; don't bail out banks. Of course, chances are we will do the opposite.

Retail stocks (23 September 2006)

Amateur stock picking is generally a bad idea, and every straight-talking guide to personal finance will tell you to invest in low-fee mutual funds that track certain indexes -- take the guesswork out of it, since changes in stock prices are generally a random walk that no analyst or fund manager could predict. The theory is that whatever information an investor could act on is already priced in to a security by the time you get your order for it in.

But this doesn't stop financial publications and financial service providers from pimping stocks and urging stock tips on readers. In One Market Under God Thomas Frank describes some of the hoopla about personal investing during the 1990s bubble, and what he calls "market populism." The idea was that anyone could use the stock market to get rich and that purchasing power rendered political power insignificant and made giant gaps between rich and poor immaterial. Part of the hype of the time regarded wise amateurs who could follow their gut and invest in companies whose products they believed in, as though it were as simple as having a good experience in a Home Depot (I know, a far-fetched example) and then phoning your broker the next day for 100 shares of it. Frank notes that one financial guru advised going to the mall and writing down the names of your favorite stores as a way to generate stock-investment ideas. Then you can have a personal stake in the success of the brands you prefer; you can cheer them on like sports teams, but have a legitimate reason for it.

I'm prone to do the opposite. Not that I'm a big-time stock picker, but whenever I read about recommended securities from the retail sector, I'm skeptical, and it has everything to do with my personal bias against brand-name shopping. I rationalize by thinking that it's foolish to bank on the overtapped American consumer's propensity to continue on a discretionary spending binge forever, but really it is that I don't want to believe that American Eagle Outfitters (AEOS) or Abercrombie and Fitch (ANF) are simply going to continue to grow; that duping teens with sexed-up advertisements can constitute a business strategy that Wall Street respects. I don't even want to take them seriously as businesses; I prefer to think of them as dark cultural forces that will be thwarted once everyone eventually wakes up and realizes how pointless brand-name clothes are. Investing in a company like Chico's (CHS) or Coach (COH) would not only be hypocritical, it would be against my utopian vision of the world, against what I want to believe about universal common sense. (Maybe this is precisely why I should be buying retail stocks. Never a bad idea to bet against utopias.) Perhaps the behavioral finance theorists have a term for this kind of bias, but I'm fully aware that it is irrational. But rejecting retail stocks because of a reactionary personal philosophy seems no less coherent than picking them because of the weather. And it turns out the weather is one of the most significant economic factor for retail stocks, perhaps more than fashionability or personal belief in the brand or a good feeling about a marketing strategy. Justin Lahart's column in Friday's WSJ noted the tendency for September's weather to determine a retail stock's fortunes:

September temperatures tend to vary a lot. And September is a crucial month for retailers. That means the weather plays an outsize role in the month's sales and can trump other economic factors, says Paul Walsh, a meteorologist at weather-analysis firm Planalytics, which advises retailers. September is when retailers, especially in the apparel business, are stocked with fall fare. Cool temperatures early in the season make it easier to sell sweaters and furry boots at full price. Last year, warm weather lasted across much of the U.S. until October, leading retailers to cut prices deeply in an attempt to clear inventory. The jolt of Hurricane Katrina also hurt many, meaning comparisons to last year are especially easy this month.

Obviously, if we follow the money, retailers must be scheming along these lines. Control the weather, control your portfolio. But it's amazing to me to think of all the sophisticated mathematical tools and spreadsheets and models and algorithms, and the vast sums of money at stake, and the myriad of different brokers and analysts who work everyday to try to harness the market, and in the end the kind of logic that is seen retrospectively to have affected the market can run along the lines of "Retail is thriving because September was sort of cold and more shoppers bought sweaters."