P/E HOG May 15, 2001February 19, 2017 Mark Murphy: ‘FORBES’ latest issue has a small piece on Harley Davidson, where FORBES admits that its P/E ratio of 38 is high, but that they still think it a stock worth considering. No matter what the financials are on a company, how could a company with a P/E as high as 38 be worth considering?’ ☞ My first thought is that Malcolm Forbes, irrepressible to the end, is irrepressible even after the end. He was crazy about motorcycles. Other than that, if FORBES didn’t answer that question re Harley Davidson, I can’t either. Generically, of course, you’d eagerly consider a company with a P/E as high as 38 — or even 83, for that matter — if you thought that, yes, it was selling at 38 times trailing 12-month earnings but just, say, 5 times your expectation of 2003 earnings. Or if it happened to own rights to a soon-to-be-approved cancer cure. Or if it held suddenly valuable drilling rights along the coast of Florida. But remember, sensible as it generally is, Forbes has to fill 200 pages every couple of weeks. It’s hardly infallible. Tomorrow: Coo-ba!
Mom (Do Not Open Until Sunday) May 11, 2001February 19, 2017 Happy Mother’s Day! (No matter what Rush Limbaugh says, in case you missed yesterday’s column.)
The Liberal Press May 10, 2001February 19, 2017 Chris: ‘Andrew, you’re going to get me disowned! I come from a very Republican family and I keep reading your column and agreeing with more and more that you say. Your political point of view is starting to brainwash me (cleanse my mind?).’ ☞ Music to my moderate, centrist little ears. But don’t credit me. Credit the shift in the political landscape, all of which has moved to the right . . . leaving the Democratic leadership (in my view) pretty much in the sensible center and the Republican leadership falling off the Right edge. The Republican leadership is not the Republican leadership of Eisenhower (who warned of the military-industrial complex), or of Rockefeller (who like Gates and Buffett and some of his heirs would probably be horrified at the notion of eliminating the estate tax on the very wealthiest families – a move that would devastate charitable giving), or of Gerald Ford (who was a pretty easy-going guy) or of former Massachusetts Governor Bill Weld (who could not even get confirmed as ambassador to Mexico, let alone be considered as a viable Presidential candidate). It is, instead, the leadership of Trent Lott and Jesse Helms and Tom DeLay and Dick Armey and John Ashcroft – of Rush Limbaugh, who apparently spent a recent show exposing the threat that gays and lesbians want to abolish Mother’s Day (because gay men are notoriously mom-o-phobic? I don’t think so) – and of two affable oil executives in the White House who, in the face of soaring gasoline prices, have actually proposed cutting back on government involvement in the very promising program to boost automobile mileage from 27 mpg or so to 80 mpg. I’m not suggesting all the issues are easy or one-sided. They’re not. At least most of them aren’t. But with some, it’s really hard to see how they’re not simple. The White House cut the standard on central-air conditioner efficiency from a 30% improvement for future units to a 20% improvement. The stated reason was to protect low-income people from higher prices. Yet low-income people buy new central a/c units less often than you might think (they buy window units or fans) . . . and the estimated $125 price increase that the 30% standard would have imposed would have been recovered in lower utility bills in 15 months, according to a report I read – making it the rough equivalent of an 80% tax-free annualized return on that extra investment. Not to mention its benefit to the environment. Yet Bush/Cheney nixed it. And every day there seems to be some astonishing thing like this – more than we can process. (Last week I read that they’ve eliminated all funding for the ‘Reading Is Fundamental’ program. Could this be true? By the time one investigates – and who has time to investigate them all? – it’s old news because there have been three new astonishments.) What a grand, grand time to be an oil man! Or just to be rich and powerful in general. The media, meanwhile – which made it international news for a week when President Clinton allegedly slowed air traffic at LAX for 20 minutes while he got an expensive haircut – seems almost numb to the implications of all this. (And where are the stories, still to come, I believe, but so far absent, about the overall Florida effort, worked out well in advance of the election, to deprive thousands of Americans of their right to vote?) So, Chris, I don’t think it’s I who have persuaded you. I just think the landscape has changed. Even someone like columnist Arianna Huffington, who was about as staunch a Gingrich gal as you would find, looked at all this close up and did what amounted to a stunning about face. There may be examples of ‘liberal’ columnists who’ve lately seen the light, now that they’ve had a chance to see the Bush budget, seen how effectively Bush was able to shut down the Korean peace process, and who have, as a result, flipped over to become conservative columnists. But if Maureen Dowd or somebody has gone conservative on us the way Arianna has gone liberal, well, I haven’t seen it. My point is: I don’t think you’re alone. For an interesting perspective on this issue of media coverage, click here. I will be out of touch for a few days, some of you will be thrilled to know. Back next week.
Privatizing Social Security – Part II May 9, 2001January 26, 2017 Thanks for all your thoughtful comments, a sampling of which follows:David Maymudes: ‘I know you probably just said it so you could look like a moderate while criticizing the ‘invest 2% in the stock market’ silliness, but do you really think that raising the IRA/401k limits is a good idea? The 401k change only helps people who earn at least $65,000 and were hitting the old limit. The IRA change only helps people who have an extra $3000 at the end of the year that they weren’t spending before. OK, perhaps it’s better than the rest of the Bush tax cut, but how about something like ‘match IRA contributions dollar for dollar up to $1000,’ which would push some of the benefits to lower-income people and cost about the same amount?’ ☞ Good points. Friday, I said that raising the limits made sense, meaning that, yes, it would increase the pool of retirement savings, as intended – whereas the privatization idea would not. What I didn’t address, and should have, was whether raising the limits this way would be worth the cost. Or would it be better to use our resources to provide ‘matching funds’ as you describe, and Vice President Gore proposed . . . or perhaps some combination of the two. Ideally, I’d like to see both. I’m a big believer in saving for tomorrow; and I’d love to see families earning $44,000 a year live as if they were earning $39,000 – it can be done! some people do get by on $39,000 a year! (well, a great many people do, actually) – with the $5,000 difference going into their IRAs. At the same time, it would be great to start lower-income families saving as well by providing all-but-irresistible matching funds. (Who can turn down free money?) As expensive as it would be to do both, I would surely do both before I cut the top income tax bracket. But I haven’t costed any of this out, and that wasn’t the focus of Friday’s column. John Seiffer: ‘I think we got into trouble because social security is called retirement funds and there is some connection between what I put in and what I get out. This naturally leads me to ask whether I’m getting enough out, or whether I could have done better for my retirement with what I put in had it been put somewhere else. Yet this is actually the wrong way to describe social security. Social Security [isn’t an investment fund for our retirement, it is a taxpayer-financed safety net] – it keeps penniless people who can no longer work out of the gutter and keeps them from being a burden to their children or to strangers. This, by the way, is a benefit to EVERY individual. Aside from the moral issue, my life is much better off if I don’t have to step over old people in the gutter when I get in and out of taxis, and if I don’t have to buy a house with an extra room for my aging parents.’ ☞ Yes, and yes. Brooks Hilliard: ‘I have heard that the effective ‘return’ we citizens get on our FICA ‘investment’ is in the range of 2% or 3%. Is that true? Isn’t some sort of equity component of the social security funds a solution to this?’ ☞ No. Our FICA money is, for the most part, not invested for our future retirement. As fast as we pay it in, most of it is paid right back out to our parents and grandparents – just as the taxes they paid when they were working were paid out in benefits to their parents (and the taxes your kids will pay when they are working will be paid out to you). Social Security was never intended as an investment program, nor as being sufficient to provide a comfortable middle-class retirement. It was intended as a bare-bones, bare-minimum safety net – a pact between generations to assure that none would starve, each successive generation taking care of the last – and it has served that purpose, and is likely to continue to. The first generation paid very little in taxes and got, relatively speaking, huge benefits in return. (For one thing, people started living longer than the original draftsmen of Social Security expected they would. Instead of collecting benefits for three years, they might collect for twenty-three.) That first generation made out like bandits. By now, with so many more retirees to support, the ‘return’ you are likely to get on the taxes you pay in will be much smaller. But neither, as John Seiffer points out above, are you as likely to have your grandmother living in your house with you for the next 20 years. It’s true that in the past decade or so we’ve begun collecting more than we need to pay out right now, hoping to build a cushion for when the baby boomers are retired, with too few workers to support them all. (When Social Security was launched, there were about 40 workers paying into the system for each retiree receiving benefits. Now it’s more like 3 workers – and headed for 2.) This surplus is invested in a special form of Treasury bond. I forget the exact formula that determines the rate, but it’s a lot more than 2%, at least before allowing for the effect of inflation. Chris Ficklin: ‘However much I may disagree with you on most things, I’d have to say that I agree with you on privatizing Social Security. I’m disappointed by the fact that it seems Bush is acting like an impulsive teenager; doing and proposing things that look and sound good without fully thinking them through. I know how much you enjoy people from the ‘other side’ agreeing with you. I’m so ashamed! I’m going to go hide in the corner!’ Marissa Hendrickson: ‘Your column left out what I think is one of the most important points in this debate. People who favor privatization frequently complain that the current structure gives taxpayers an abysmal return on ‘their investments,’ but to say this is to miss the point of the program entirely. Social Security was never conceived as an investment program or a personal savings plan; it is a safety net to minimize poverty among the elderly and disabled, funded by a payroll tax on today’s able-bodied workers. So far we as a nation have been able to agree that widespread poverty among the elderly is unacceptable. Will this belief really change if the stock market fails people and their private accounts don’t provide enough income? My prediction is that if that happens, people will still turn to the government to bail them out. Why can’t people accept that one of the most honorable roles of government is to provide such safety nets? Call me crazy, but I think people (like me) who have the means to save for their own retirements should do so, and be glad they won’t need a government check to stave off poverty and hunger when they can’t work anymore. And call me a socialist, but I think it is pure greed to whine about paying payroll taxes to support those who are less fortunate, when any one of us could be forced to rely on that support if we had chosen a different life or if a different life had chosen us.’ David LeFevre: ‘How does transferring money from the working poor to the wealthy retired serve any useful service?’ ☞ This is the case for a ‘means test’ to qualify for Social Security benefits. Many would argue, though, that fundamental to the success and widespread acceptance of the program is that – while it is weighted in favor of the less well off – everyone does get a benefit. A compromise solution is to fully tax Social Security benefits (as we now, at 85%, largely do), so that those in high brackets ‘give back’ in taxes at least a fair portion of what they receive. One might argue that – above a certain income level – the full 100% and not just 85% should be taxable. Joel Williams: ‘Social Security is a Ponzi scheme, and has been from the beginning, thanks to a bunch of politicians who wanted to promise high benefits for low cost. You cannot take a Ponzi scheme, convert it into a legitimate investment program and still leave the projected benefits intact without adding a bunch of money to the fund. That is simply the nature of a Ponzi scheme. It is high time that somebody just pointed that out.’ ☞ Well, it’s not exactly a Ponzi scheme, because, for one thing, the original schemes did not plan to profit from it personally to any great degree, and because, for another, unless our birthrate were to fall below the replacement rate (and if lifespans wouldn’t keep lengthening in the annoying way that they have), the numbers can work out – even if at some point the retirement age for receiving full benefits may have to be extended in recognition of people’s longer life spans and better health. Tom Wilder: ‘While I am a strong supporter of the Bush tax cut plan (and can’t wait to “get me a Lexus”), the idea of putting part of the FICA taxes into individual savings plans is unsound for all of the reasons you mentioned Friday. As a practicing member of the insurance industry I can only imagine the field day ‘financial planners’ will have ringing up the commissions on this.’ Coming Soon: What’s Wrong with the Missile Shield
Fly Fishing May 8, 2001March 25, 2012 I’m not fishing, I’m flying, and trying to collect your good comments on Social Security Privatization for tomorrow. Have a great day.
Chicken Delight May 7, 2001February 19, 2017 Dennis Hoffman: ‘Great tip on Greatmeals.com. I came across it a few weeks ago and ordered one entree just to check it out – it was fantastic. I’ve ordered quite a bit from them since. Their prices are as reasonable as the grocery store and the quality is much better. I haven’t bought TIVO yet (my business partner promised one to me for my birthday) but I expect that GreatMeals.com is just as much a life changer. I know it gets me to eat better.’ Brooks Hilliard: ‘Three Jewish sons left home, went out on their own and prospered. Getting back together, they discussed the gifts they were able to give their elderly mother. ‘The first said, ‘I built a big house for our mother.’ ‘The second said, ‘I sent her a Mercedes with a driver.’ ‘The third smiled and said, “I’ve got you both beat. You remember how Mama enjoyed reading from the Torah? And you know she can’t see very well. So I sent her a remarkable parrot that recites the entire Torah. It took elders in the congregation 12 years to teach him. He’s one of a kind. Mama just has to name the chapter and verse, and the parrot recites it.’ ‘Soon thereafter, Mom sent out her letters of thanks: “‘David,’ she wrote one son, ‘the house you built is huge. I live in only one room, but I have to clean the whole house.” “‘Saul,’ she wrote to another, ‘I am too old to travel. I stay most of the time at home, so I rarely use the Mercedes. And the driver is so rude!” “‘Dearest Irwin,’ she wrote to her third son, ‘you have the good sense to know what your mother likes. The chicken was delicious.'”
Privatizing Social Security May 4, 2001March 25, 2012 Some things do make sense . . . like raising the annual IRA limit from $2,000 to $5,000 and the 401k limit from about $10,500 to $15,000, as have recently been proposed. Why? Because these hikes give people the incentive to shift behavior from consumption to saving. In the long run, saving more for retirement builds greater retirement assets. Obviously. But what would be the effect of siphoning 2% – nearly a third – of the employee’s share of Social Security tax to private accounts? The first effect would be to take a huge bite out of the funds we currently set aside to pay benefits to the tens of millions of people who are already retired or soon to be retired. The system was going to run out of funds in 2038, if I remember the latest estimate right (I may not) . . . and so now it would run out much sooner. Big problem. The Bush solution is simply to make up that 2% out of ‘general revenues’ – instead of funding Social Security benefits with Social Security taxes, we’d fund them partly with general tax revenues. That in and of itself, it seems to me, does not make us richer. In fact, because I don’t trust the 10-year budget-surplus projections, it makes me nervous. Nor do I see why it would lead to more national saving. The 2% we would have saved collectively, through the Social Security trust fund, would now be saved in 150 million separate little investment accounts. Some people, seeing these accounts, might even wind up saving less – why sacrifice to set aside extra savings when they’re already doing this, they might wonder. (So before, you had Social Security and your IRA. Now, you might wind up with this new version of Social Security – but nothing more.) The magic bullet, of course, is the assumption that, left to their own devices, 150 million amateur money managers could efficiently and effectively manage these accounts better than Uncle Sam. There are problems with this. One is that some people may screw up. John McCain was on TV suggesting that to protect against that, there should probably be a guarantee that, however badly you did investing the money, Uncle Sam would make sure you got at least as much as you would have gotten from traditional Social Security benefits. But that’s a problem, too. First of all, it could be costly. Second, it would send a signal to 150 million people to take lots of risk. If you’re lucky, it will pay off. If you’re not, no problem – Uncle Sam to the rescue. To the extent a portion of the nation’s Social Security funds should be invested in stocks (and I’ll get to that in a second), it’s not at all clear to me that the best way to do it is to split the money over 150 million separate managers, most of them novices. Would it not save an awful lot of administration and paperwork and commissions and fees simply to have this money invested in one massive market-weighted global index fund? Or is the idea that, on average, the 150 million amateur investors would – even after the costs of administration and fees – do better than the index averages? (If so, who would be doing worse? In any pursuit, it’s hard for ‘most people’ to be above average.) But whether the money were invested in stocks efficiently, without appreciable fees, commissions or paperwork . . . or inefficiently, with 150 million amateur managers . . . the larger question is: would shifting this 2% of the Social Security tax into stocks really make us collectively richer? If so, it would presumably be because the current capital structure in the U.S. suffers from a lack of equity capital. Starved for equity, we do not start or expand businesses as we might, and thus stunt our future prosperity. But does that really describe the last decade or two? I don’t think so. There are already plenty of incentives for equity capital (such as not taxing appreciation until a sale is made, and then giving it favorable tax treatment) . . . and there is a ton of money in 401k plans and elsewhere that could easily be shifted from bonds to stocks if people thought it made sense to do so. Siphoning off the 2% that’s currently, in effect, lent to Uncle Sam at a modest rate for future Social Security payments, simply leaves Uncle Sam – you and me – with a need to replace it at a higher rate. Or else cut benefits. Or else raise taxes. How does any of this make us richer or our retirements more secure? Social Security privatization purports to be a free lunch. I don’t buy it.
IBM and the Holocaust – II May 2, 2001February 19, 2017 Tim: ‘Got no problem with a rant against the greed that seems to rule the world. I was an auditor for most of my career and know full well about people whose greed allows them incredible blindness to moral and ethical behavior . . . IBM, Ford, whoever. Then, suddenly, bang, you hit me with Jay Leno and Republicans. What’s the connection to Hitler here? Wouldn’t it have been just a little bit closer to connect that old Democratic Bootlegger, Joe Kennedy, to such a tale (which by the way I don’t think would be appropriate either)? After all, if I recall my history correctly, he was a firm advocate of certain fascist views when he was ambassador to the Court of St. James. Andy, everything evil is need not be tied, however tenuously, to your hated Republicans.’ ☞ I don’t remotely hate Republicans, Tim, and I’m sure Jay Leno doesn’t, either. The point is simply that in setting arsenic standards or salmonella inspections or air conditioner-efficiency standards, etc. etc., we really can’t be sure industry executives and their lobbyists will put the public interest first. Even the tobacco industry – so American you’ll find its leaves on the dollar bill – may not always have been forthright in its statements about life-and-death issues. So we really probably do want to be a little concerned about some of this stuff, and not leave it all up to industry, unfettered by government regulation. Yes, I believe the election was stolen in Florida, and that the facts will bear that out – and see no reason why this can’t be a legitimate topic for discussion. It involves no hatred. I also find it dismaying that the President is acting as if he had a strong mandate to move the country sharply to the right – because I don’t believe he does. It saddens me to see the Korean peace process shut down, hundreds of thousands of college students denied financial aid, funding for alternative energy cut back, the global gag rule reimposed – or the nation’s first priority set as massive tax relief for those already doing so much better than everyone else. But despite these disagreements, I have tons of friends who are Republicans – albeit mostly more moderate than the President or Trent Lott or Tom DeLay or Antonin Scalia. Indeed, even the Republican leadership must hold out some hope for me, as just last week I got a letter from ‘the Republican Leadership of the United States Senate’ conveying its ‘pleasure to inform [me] that at a recent meeting of the Republican Senate leadership, [my] name was selected to receive an invitation to serve in the exclusive Republican Senatorial Inner Circle.’ Jack Kouloheris: ‘You might take a look at what respected Holocaust scholars at various Universities have to say about the scholarship of IBM and the Holocaust. While I am in agreement with the general tone of your editorial, there is a danger in overpromoting someone who serious Holocaust scholars view as making sensational claims without following them up with the proper diligence. Also, see the reviews by Gabriel Schoenfeld in the New York Times [It concludes: ‘. . . there is room for a serious study of IBM’s complicated and by no means innocent relationship with Nazi Germany. This book, however, is not that study.’ – A.T.] . . . and by Richard Bernstein, also of the Times. Disclaimer – I do work for IBM. However, were I convinced this was an evil organization, I would leave at once. Noncooperation with evil is a moral necessity.’ ☞ Thanks, Jack. I don’t think I implied that IBM is an evil organization now, or even that it was evil then – just amoral. The Bernstein review you cited says it was clear as early as 1933 that the Nazis were bad guys. Had you been running IBM in the Thirties, you might well have opted for noncooperation, although it would have cost IBM dearly. And therein lay the dilemma.