Why Even Rich Kids Could Soon Be Part of the 99%

It was a warmer than normal winter day in New York City, and Ethan was dressed lightly in low-slung Levis, baggy sweater, and flimsy windbreaker. The ends of his matted hair protruded stiffly from a tightly bound bandana. All were soiled and unkempt. As he entered 927 Fifth Avenue, the doorman, upon regaining his composure, wished him, “Merry Christmas!”
 
It had been three long years since he was graduated from Amherst College with a dual major in art history and philosophy. He had average grades, living off-campus with limited involvement in “Herst” activities. His expectations had been to land an entry-level marketing position at a major media company or training slot at a money center bank. Drained by endless applications and rejections, he had become disillusioned about his prospects and the “system.” Out of frustration, he joined the ranks of Occupy Wall Street. After months of “camping,” he had come home for a hot shower, hearty meal, and the warmth of his biological family. On the last, he had trepidations.
 
Ethan’s dilemma was, in part, the result of what Karl Marx referred to as the misery of the proletariat. This theory predicted that as capitalism matured, businesses, in search of higher productivity, would replace labor with capital. Wages would be suppressed and unemployment would rise. Today, as we relish the rewards of rapidly advancing technology and grapple with the effects of globalization, are we just beginning to understand the collateral damage?
 
The unhappy camper’s affiliation with the “99 percenters” was not driven by a desire to save the whales, fear of global warming, love for the Dalai Lama, fight for abortion rights, or gay pride. Ethan felt the concerns over income inequality were logically flawed and overblown, but was incensed that the CEOs of the five largest banks were not sharing “office space” with Jeffrey Skilling and Dennis Kozlowski. His protestation against the system was more about his fear of permanent displacement from productive society. Was Ethan one of the victims of technological change?
 
As the elevator rose toward the 11th floor, he was anxious about seeing his father. Alexander was a well-respected hedge fund manager, who as the result of 15 years of adept stock picking had amassed reasonable wealth and a rock-star reputation. Recent years, however, had been unsettling. The partnership incurred losses in the 2008 financial meltdown, but, as the result of the market recovery, it entered 2011 moderately above its high-water mark. After three years of no carried interest, there was hope for better returns and more prosperous times. But he, like his son, was anxious. He sensed that markets were different. His time-tested, fundamental investment process was not working. He also felt confused and disconnected.
 
Alexander was frustrated by the impact of new investment technologies on stock market dynamics. High-frequency trading, black-box models, complex derivative strategies, and exchange-traded funds were dominating market behavior. The quants with their Ph.D.s in mathematics were running roughshod over the practitioners of Graham and Dodd. Stocks of individual companies had become CUSIPs, symbol-less commodities. 
 
The resultant internal structure of the equity market had become abnormal. Despite strong earnings growth and extremely low interest rates, the valuation on the S&P 500 Index was only slightly over 12 times. With the majority of stocks moving in tandem, the correlation, within the equity market, was near a record high. There was a compression of valuations. Rather than a broad range of price-earnings multiples determined by growth prospects, stocks were clustered around the market multiple with a historically narrow dispersion. Heightened anxiety was causing an elevated level of directionless, schizophrenic price volatility.

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