Comment by Rinzler89
2 years ago
>Boeing's stock price went up 10x in the time frame covered by the article. The people responsible for gutting the company have cashed out.
Why does the stock market reward idiot shit like this?
I've seen the same whit a a large US semiconductor company. In the 2008 crunch, the fired the most tenured employees and offshored the work abroad. Granted, the company didn't fail, their stock went up and now it's 5-7x that amount.
> Why does the stock market reward idiot shit like this?
Well at a first order, the answer is that the stock market as a system for promoting value creation is an imperfect approximation of an ideal value creator, and more and more we are beginning to see the myriad of ways this concept produces antisocial results. (See for example the state of hospitals and schools, and the rising rate of individuals with crippling medical and college debt.)
More directly there has been some criticism of the stock market for rewarding short term gain over long term value, which among other things has led to the creation of the Long Term Stock Exchange:
https://en.wikipedia.org/wiki/Long-Term_Stock_Exchange
I should add that our short term market-based approach to economic activity fails to produce appropriate housing outcomes, and that the approaches in Vienna or Singapore could end our homelessness crisis and make everyone happier. I recently read a doctor’s account of the homeless people who use the ER as a community space by complaining of minor illnesses, and it seems so clear to me it would be cheaper to give them small private subsidized housing (not the awful and alienating “shelters” that offer no privacy or storage and have strict rules, making the street more appealing). Fixing housing could be cheaper than them using the ER or paying for their prison space, and it would also make the streets of San Francisco smell a LOOOT better (and BART), but our short term market based system just chops up everything good, sells it for parts, and speculates on all the land and buildings.
https://www.shareable.net/public-housing-works-lessons-from-...
>I should add that our short term market-based approach to economic activity fails to produce appropriate housing outcomes
>Fixing housing could be cheaper than them using the ER or paying for their prison space, and it would also make the streets of San Francisco smell a LOOOT better (and BART)
It's extremely unfair to blame "market based solutions" for failing to fix SF housing problems when it's pretty clear the largest hurdle is NIMBYism politically blocking new housing developments.
For example here: https://www.sfchronicle.com/sf/article/s-f-housing-clash-yim...
The locals won't even LET other people build new housing. They definitely aren't going to start footing the bill and building the housing themselves
> streets of San Francisco smell a LOOOT better
What happened to all the public toilets in US/UK? I remember there being many more, am I hallucinating this?
Many 2nd world countries still have them, for good reason!
7 replies →
>and that the approaches in Vienna
Vienna's approach worked because it happened after WW2 when the country was bombed and broken, land, construction materials and labor were dirt cheap, so the state built over half the city's homes and turned them into public housing cheaply no problem.
But fast forward to today where most of the land and buildings in a city are privately owned, how to you expect a city, any city, to buy up over half the buildings in the city at today's market and turn them into public housing?
The city would probably have to go broke or into huge amounts of debt and everyone would be screaming communism.
Even in the rest of Austria, this approach today would not be feasible due to how insane the cost of urban housing ahs reached no city could afford to buy up over half of it.
The monetary appreciation of housing prices and and turning it into an speculative asset is the west's biggest policy failure. You'd have to undo this first before you can think of implementing Vienna's policies.
4 replies →
Hospitals and schools don’t support this thesis: in the USA, the bulk of the operators in both segments are either governments or non-profits.
> the stock market as a system for promoting value creation is an imperfect approximation of an ideal value creator
yet
> See for example the state of hospitals and schools, and the rising rate of individuals with crippling medical and college debt.
Ummmm. State hospitals and schools are not traded on our stock exchanges. If there's a failure here, it's not with equities markets.
There's an obvious common denominator between the examples you give, and that these are the most highly-regulated industries in America. My first guess as to where to lay blame would be on those regulations - although we'd really need to dig into whatever the specific failures you're thinking of, if we want to be sure.
“See the state of hospitals” meaning the situation with hospitals, many of which it seems are private. Our schools are a mixture of state and publicly owned (I’m including college) but even state funded schools suffer due to their reliance on stock market driven suppliers such as textbook companies and the housing the teachers live in.
> My first guess as to where to lay blame would be on those regulations
Considering medical and educational costs (total system costs including government expense) are much higher here than they are for example in Germany which has State run institutions for both, I would see this as a poor assumption.
However I’m not actually advocating for State-run institutions, as I would rather see locally owned cooperatives for housing and schools, and larger federations of cooperatives for medical research. My point is that short term market-based winner-take-all approaches are hurting us.
I should add that the broad topic of discussion here is Boeing, which degraded in critical safety metrics after moving to a relaxed regulation environment and focusing on market based short term optimization.
Because state hospitals aren’t publicly listened they aren’t broken by this?
Yes I forgot every aspect of state run hospitals are the same…
But except wait.. almost every aspect of what makes that hospital is on the stock market.
Because the entire rewards system is built around short-medium term financial gains.
It is a very old story. People build a company with deep knowledge and caring about what actually makes great products. Financial managers get involved to manage the money aspects of the business. Financial types want a lot more control to make the company more profitable.
The financial management has no actual clue what makes the company valuable. They only know what makes more or less cash flow in this or that direction. But, credit where due, they DO know how to make that work.
They start financially 'engineering' the company for near-term profits and higher stock prices. This works. This works fantastically well. Everything looks leaner, teams of younger workers are sometimes orders of magnitude cheaper than the highly experienced teams, and no one can tell the difference from outside. Profits are higher, stock prices hit record high after record high. Cash is spent on stock buybacks and not R&D or retaining institutional knowledge. Warning flags start showing up in product and service quality indicators, but are ignored and even suppressed. The problems start multiplying at increasing rates, then exponentially increasing rates.
Eventually, it starts to get serious. But by then, the "financial geniuses" have long since cashed out and the core of the company's workforce, ethos, and institutional knowledge has been so gutted that there is no recovery. The death spiral starts in earnest.
The only questions are whether for Boeing, being a critical keystone in the US aerospace and defense industry can or will be allowed to fail, and, if not, if there will be an actual engineering-based turnaround, or if it will be a Soviet-like zombie company for how many years?
Forkin' MBAs, they'll kill it every time.
Because, depressingly, the stock market is correct.
Boeing is one of two manufacturers for planes of this size. The other is totally backlogged with orders. The stock market has assessed, correctly, that Boeing can withstand this loss of knowledge and keep generating profit. Does it result in shit equipment that literally kills people? Sure. But how many people are going to stop flying because of it? Not many. Throw in the lucrative military connections and you’ve got yourself a sure bet.
I think that many of the managers honestly didn’t understand where the quality and safety came from. They probably thought that they could just coast and the quality would continue.
As a counterpoint, I work at very large financial firm in technology and in general, the 20+ year veterans who’ve been here forever are terrible. They are hidebound in their actions, years behind in industry best practices and they maintain little fiefdoms simply because of their intimate knowledge of the banks arcane and idiosyncratic policies. The place would be better of without the bulk of them.
That is to say we are the complete opposite of what Boeing was. But the most charitable interpretation you could offer the Boeing management is that they thought they were in the situation of my company rather than the situation they actually had.
You're being too generous. Boeing actively retaliated against people raising safety concerns. That's not the action of people who didn't know any better.
People won't stop flying until they do - or at least stop flying on Boeing aircraft. And if airlines can't make a profit on a Boeing aircraft flight, there won't be any more Boeing aircraft flights.
I don't know whether the point where the market for Boeing aircraft travel is one disaster away or ten disasters away, but it is out there. When it comes, people won't stop flying, but they will fly less, and it will cost more. It can happen.
Objectivly speaking flying with Boeing is still safe. People like us think news about planes and crashes are big but they really arent.
Most people dont have the faintest idea of who makes planes, and what plane models exist or how save they are.
And there isn't any system to activly avoid certain planes even if you wanted too.
Sure at some point with enough failures this can happen. But this is unlikely. Most Boeing plans are already built and are already flying and they are mostly very safe. They are flight proven.
Boeing wont interduce a truely new model for the next 10 years.
And after that, such a plane would need to comply to very strict regulation and it would take a long time for that plane to be built in large numbers.
So practically speaking the scenrio you suggest is impossible.
2 replies →
I'm not getting on a Boeing plane again. More on principle than fear of my life. And yeah, I'm probably in a group that is not statistically important.
I flew this week. There were two 737 flights at about 130€ then one with an A320 at 220€. I took the Airbus. Same reason as you.
Because if you look at it by the numbers, expenses went down whilst output remained. If you’re an investor that investigates annual reports on finances, this would pique your interest. There is no way to price the talent and knowledge of your workforce until after they have left.
I really like that last sentence. 'There is no way to price the talent and knowledge of your workforce until after they have left.' I think that captures so much in such a simple to understand way.
> Why does the stock market reward idiot shit like this?
Goodhart’s law, unfortunately. Whatever metric the stock market rewards gets gamed like there is no tomorrow (or next quarter, here.)
Yup. In the incentives align to motivate you to play the current game of the day. Another example I can think of. Google search has sucked for awhile now. Some people pin it directly on to Google, but I think its much broader than that. There is an entire cottage industry around around gaming whatever Google does to improve search. Its a cat and mouse game. Google tries to implement a new pattern that will punish people gaming SEO, the people gaming SEO learn the new pattern and adjust for it, and we are back where we are.
In both cases of the stock market and a popular search engine, I don't really know if there is a solution that prevents people from trying to game it.
> There is an entire cottage industry around around gaming whatever Google does to improve search. Its a cat and mouse game. Google tries to implement a new pattern that will punish people gaming SEO, the people gaming SEO learn the new pattern and adjust for it, and we are back where we are.
This implies that Google is helpless to do more, which I kind of doubt. I think the misaligned incentive here is that it's unprofitable to do more to fight spam. They already have the vast majority of the market, making search 40% better isn't going to get them 40% more money.
I think it's just a calculated decision to keep search "good enough" to not lose too much market share, while not having to spend too much on engineer salaries.
I also kind of suspect the markets left to try to capture are either less profitable or more difficult to serve (specializing in niche content).
1 reply →
Because the market is barely better than a ponzi scheme.
There's ___just___ enough laws around it to keep people somewhat okay with it.
That’s nonsense.
Markets are the best way we’ve come up with to allocate capital. Committees and commissars do not do a better job.
> Committees and commissars do not do a better job.
Then why is internal governance and resource allocation inside companies done by committees and commissars and dictators, instead of by an unplanned free market?
1 reply →
> Markets are the best way we’ve come up with to allocate capital.
Properly regulated, competitive markets. Aerospace regulation is based on a lot of trust, which Boeing seems to have exploited, causing this problem. The market is not competitive; there are only two players and the output of only one of them cannot meet demand.
> Committees and commissars do not do a better job.
Dichotomies are good for making punctual arguments online, but you do yourself a huge disservice by using them to frame the options in your own mind. Do you honestly think that the options are 1. Antisocial free market allowed to do whatever it wants for capital gain, or 2. Despotic communism? You are smarter than that.
1 reply →
The potential for benevolence of a market is lesser than an enlightened individual.
1 reply →
>Why does the stock market reward idiot shit like this?
Because Boeing is in an absolutely unique position where they are part of a duopoly in a market where demand for airplanes massively outstrips supply. Boeing's customers have no alternative and Boeing will be selling them planes and the market knows that.
Additionally the stock market can only look a tangible results. There is no measure of "engineering competency" which you could track year over year, which makes these mistakes hard to realize unless you are inside the system.
The stock market is all about near-term gains, and as a result it is often irrational and rewards destructive behavior.
Because the MBAs and financiers have taken everything over and are working their way through our government now.
> Why does the stock market reward idiot shit like this?
Wall St geniuses are not engineers.
That said, I bought Boeing stock and held over that time frame. I did so because I could see that humans were going to need more planes over the long term, and there are only two vendors. Also I visited the Everett plant with my family on vacation. It didn't occur to me that it would be worthwhile introducing KPI BS and McDonald's management style when constructing things worth 100 million and safety-critical.
Quite simply because investors are often chasing after money only (ie profitability), not necessarily a company's productivity or product quality. And the quicker the profits the better (meaning short term is valued over long term).
Additionally, not all investors are savvy on what's going on with companies, so they decide to invest in ETFs (which mind you, is now the lion's share of investment activity). Now not all ETFs are the same basket of stocks. Some may have 15 stocks, whereas others may consist of 50. This is done so people can "choose their risk tolerance", which is calculated based on various things such as how diversified the fund is (50 stocks is more diversified than 15), what the market caps of the companies are, etc. Anyhow, the point is, choosing to invest in said investment vehicles, has little to do with investing based upon fundamentals, or rewarding productive companies, and more to do with managing a person's personal investment risk. The result? Companies are detached from fundamentals because, quite literally, the majority of investors are not investing based on fundamentals, but based on risk.
> Why does the stock market reward idiot shit like this?
I don’t think the market rewards it, at least not by itself.
The problem is that the real money isn’t in the market, the institutional investors make most of their money on commissions. So while short term gains are a nice bonus, it’s only secondary to driving volatility and with it trade volume. So the incentive is to just stir shit up, because that’s what makes them money, both as stock prices go up and down.
Also institutional investors have disproportionate voting power that lets them put their own shit stirrers on the board and subsequently in the C-suite.
Few stock market investors bother to look beneath top line numbers like profits, revenue growth, etc. Number go up, so stock goes up.
They're exploiting the uninformed, which in this case are retail investors.
> Why does the stock market reward idiot shit like this?
Because Boeing boosted revenue from $60 to 101 billion during the time frame. And had just a single competitor.
The current stock price is less than half of its 2019 peak.
For the same reason that Ponzi schemes are so successful.
> Why does the stock market reward idiot shit like this?
Because as someone buying stock, I have no idea whether these kinds of things are right and necessary to reduce bloat and redundancies in the firm, or idiotic and self-destructive.
All I know is that I probably want to be buying stock in firms that are more profitable, as opposed to less profitable. Or, at least, firms that other people think are going to be more profitable.
I blame index funds. Pump the % gain, index funds buy it up because it looks like a better ROI. Abuse that by doing short term shit and ride the wave of self fulfilling prophecy by the index funds buying into it (amplifying noise into a signal) and leave retail/workers holding the bags.
I get that statistically DIY'ing your portfolio will almost always lead to worse returns but I really do wish I could exclude certain stocks from my index funds.
1) That's not how index funds work: they attempt to track a target market index. At most, it happens indirectly: get your company into the major indices by a short-sighted depletion of capital, and you can get some level of lift from index funds blindly purchasing your stock (though IIRC it's not a huge effect).
2) You can effectively remove certain companies from an index using derivatives in addition to the index fund. Alternatively, look into direct indexing, where you attempt to track an index by directly owning an appropriately weighted basket of stocks, though it tends to be more complicated, have greater tracking errors, and have higher fees.
>At most, it happens indirectly
Oh this is exactly what I was trying to claim. I don't have any source for it though, just general distrust of our financial system and awareness that there's many incredibly smart people trying to find every loop hole and turn every random fluctuation to their advantage.
Thanks for the info on how to effectively remove certain companies from an index though, I'll put that to use
Index funds do not buy shares because shares “look like a better ROI”. Index funds buy because non index funds buy (and same with selling).
I don't think the timing adds up for this explanation. Friedman introduced the shareholder value doctrine in 1970, and Jack Welch's Pierre Hotel speech that kicked off the era of slash-and-burn management was in 1981. Meanwhile, index funds were a tiny fraction of assets under management until well into the 2000s.
I am starting to believe more and more that the shareholder value movement has done enormous damage to the social fabric. It basically declares that the only stakeholders of an economy are owners. Anybody else doesn’t count. If this doesn’t change, then progress in AI and robotics will lead to a very dystopian society with a few haves and many have nots.