Palpara Merchants

In his book, Anthill, E.O. Wilson uses 75 pages to describe in great detail the life cycle of a single ant colony. As Wilson describes: the colony’s existence is entirely dependent on the queen. A colony of ants is made up of hundreds of thousands of daughters (the worker and soldier ants), a couple dozen brothers (small brained, lazy creatures that lack jaws and the ability to feed themselves if they ever left the underground structure), and the mother- the queen. A healthy, functioning colony is similar to a healthy, functioning society of humans-  tasks necessary for the common good, food gathering, shelter construction and repair, and defense of the colony are divided and taken up by the members most capable. Soldier ants are much larger and their exoskeletons are much tougher than worker ants, so they defend the colony from attack and extend the colony’s territory through combat with competing colonies. The comparable human function can be seen in those that are called to serve in the military. The majority of the ant colony is made up of smaller, weaker-framed ants that gather food, construct new new tunnels, repair existing infrastructure, and tend to the eggs and larvae. The comparable human functions are seen in the several hundred Americans that produce 90% of our food, the companies that build our homes, cars, import our clothes from Asia, dig our energy out of the ground, make our medicine, create our IT infrastructure, and loan the money required to undertake large projects that require more money than already exists in the system. There are the male ants- I struggle to find an exact comparison as the male ants mostly inept. They lack jaws capable of fighting or gathering food so they must be feed by their sisters. They lack large brains capable of receiving and processing sensory information. Their main function in the colony is holding the genetic code in their sperm. I’m sure an opinionated reader can make some comparisons to humans, but I won’t. Then there is the queen. She is the only ant in the colony capable of reproducing. She sends out communications in the form of pheromones that gets passed down to every member of the colony. Her messages may be instructive: “we need more food, I’m in my prime and producing eggs at a very fast past,” or they may be inspirational: “we are a strong colony, and we should expand our territory- soldiers, be aggressors with our neighbors to seize their food gathering territory. This leadership function is similar to our elected leaders who decide what our national priorities are and unite us during times of strife with televised addresses.

These functions are essential and carried out by all members while the colony is healthy. But there is a catch: the queen is the only member of the colony that is able to reproduce properly. A few dozen of her daughters have the ability to reproduce, but they never mate unless they leave the nest. These daughters never leave the nest under their own volition. Without mating, they can still lay eggs that will hatch into larvae, but without fertilizing the eggs, all the larvae will be males- no females. We have already described the state of the male ant species so you can see the problem.

The only way these daughter ants leave the nest, is if it is no longer there. The queen lives as much as 20 years. It is her pheromone messages that instruct the colony. When she dies, the ants that pass along her messages have no way of knowing she is dead. Her exoskeleton hides the smell of decaying organs (whereas humans flesh is on the outside of our skeleton, and we pretty much know when one of our own is deceased. The attendants simply assume she is just not passing along any messages. They tend to the eggs and larvae as if all was well.

This is the beginning of the end for the colony. With no females capable of reproduction, their population declines, and the pheromone messages that give each daughter the instruction and inspiration she needs to do her work are not passed.  The colony breaks down as the members no longer perform their function. A colony in this late stage is susceptible to attack. And it is usually attack from a neighboring colony that brings the ultimate demise of the colony. A few daughters capable of reproduction may use their wings to fly from the nest and find a mate. The mate, if she finds one (and it may be one of her brothers) then dies as he doesn’t have the resources to fend for himself. She must survive 1 in 1000 odds of finding a suitable shelter and digging a deep tunnel and caring for her first eggs herself. The first daughters are very, very small and frail, as their mother never ate after she mated. These daughters are responsible for finding food for their mother so she can lay more eggs. If these eggs hatch, these ants will be a bit larger and stronger than their older sisters. This way, the cycle is complete. A new colony may emerge, but it takes the place of the old one. The old colony cannot, and in nature, does not have a chance of indefinite survival.

This is the underlying theme in Wilson’s description of the ant colony life cycle- the fate of the colony is determined. It will cease to exist in about 20 years. Of course the ants don’t know this, only scientists do after years of studying ant colonies.

After centuries of studying human civilization, historians know the probable fate of any great civilization. We need only to go to our history books to see what became of the Greeks (now look at that mess!), the Romans (sacked by Barbarians), the Ottoman Turks (remnants are now modern day Turkey), the Egyptians (defeated by the Romans), and the hegemon of two centuries ago- the British Empire (we discussed the fall of that empire in another post).

The point of this story is this: we all see what’s going on. I mean the big picture- Karl Marx was opposed to capitalism because he could see where it ultimately led: a world with winners, and losers (I think that Marx’s theories on commodities and labor were flawed because while he takes into account an important factor in why markets shouldn’t be allowed to conduct themselves- human greed, he fails to take into account an equally important factor arguing for free-markets- human potential and generosity). But we are here now. We are at the point where we have to decide if it’s OK that an increasingly smaller proportion of the population should control a majority of the wealth, and thus, the political agenda and national priorities. The events of the past three years have shown us the results of the excesses of greed abundant in any capitalist society.

Historians know our fate- it will go the way any great civilizations has in the past. We will pass the torch to another great civilization. They won’t be “great” by our standards, but they will have the will to be better than us and to be better off than us. In this case, we will most likely pass the torch to the Chinese (more accurately, they will pry it from our cold, dead hands).  But while we can become accustomed to our fate as we slowly add more indications in favor of the fateful outcome- inability of our leaders to lead, ownership of the productive capacity of society increasingly being owned by fewer and fewer members of society (in the form of average CEO compensation increasing from 40 times that of a rank-and-file worker in the 1950s to 300 times that of the average rank-and-file worker in 2011, the increasing margin of corporations and declining employment- we cannot let the acceptance of our fate blind us to opportunities to make money now.

The ultimate fate of our civilization will ultimately impact the stock market. But these are major trends that will take time to play out. Every time there is a 200 point decine, CNBC brings on talking heads like Dick Bove tonight on Fast Money to clamor about the end of days. It will most likely occur, but not tomorrow. Tomorrow will probably be an up day. We have lost 500 points in four days. We are at some key levels and expectations about a debt resolution have gotten more realistic. Complacency is evaporating as evidenced by the jumpy VIX. We will have some tradable lows. Major sector growth themes still exist- people have to eat (buy some DE) and bathe (buy some PG) and use electricity (buy some SO). This market is fun again- we have more natural ups and downs that create opportunity. The one way down market of 2007-2009 no longer exists, nor does the one way up market of 2009-2010. Trading to grow your wealth faster than natural rate of accent of the overall market works. Here at Palpara Merchants, we will take advantage of the excesses of fear and greed. We will buy low and sell high and ditch the momentum tactics of the past 4 years. We will adjust our timeframes and risk tolerances. We will learn to begrudgingly accept our fate, but not give into it.