Year: 2002

David Smith: ‘Check out this very good article by Bill Gross of PIMCO about long-term trends.’

☞ Bill Gross is so smart! I got to interview him for a PBS series years ago, and he just blew me away. Here’s what I wrote about him in this space on December 11, 1997:

Bill Gross manages $90 billion or so in bonds, which has to be really boring until you realize that he somehow manages to squeeze an extra 1% return out of his portfolio year after year-an extra $900 million. But the image that impressed me even more, as we looked from his Laguna Beach living room out over the Pacific, was of a 53-year-old man determined to live to 100, getting it into his mind to run from Carmel to the Golden Gate Bridge-five back-to-back marathons over five successive days. On the last day of this run, his kidney ruptured. Blood was running down his leg. But he hadn’t reached the bridge, so he kept running. Only when he finished did he allow the ambulance to whisk him away.

It may be worth noting that if you try to beat the markets, you’re competing with guys like Bill Gross. (If your 401(k) offers a bond fund managed by PIMCO, it could warrant serious consideration.)

Those who don’t live and breathe yield curves may find his article – though deft and colorful – hard fully to follow. But that’s OK. If nothing else, it will give you a sense of the complexity of the markets and the difficulty of steering our economic ship.

A ZERO PERCENT TAX ON CERTAIN CAPITAL GAINS?

Several of you raised good and interesting objections to last week’s idea of a zero percent tax on capital gains realized from the purchase of newly issued securities. I hope to get around to presenting those objections, but in the meantime just wanted to note that my idea did not meet with universal applause. (I still like it, but your objections are very much worth discussion.)

AND SPEAKING OF LIVELY DEBATE

Tim Galpin: ‘Thank you for including the link on 4 Feb. to Mr. Clinton’s comments in the BBC forum. I confess to being generally predisposed to disagree with his politics and I might not have otherwise seen it.’

☞ Thanks, Tim. Few things are as impressive as an open mind.

YOU HAD A TRAIN?

Along the lines of Monday‘s ‘count your blessings’ column, I had lunch a day or two ago with my friend Meyer Berman, an investor of considerable renown and generosity – and earthiness – who tends to get sentimental about his good fortune and his great country. He told me the story of how he found himself chatting with Henry Kissinger (‘he’s a very funny man!’) at a White House party a few years ago.

Meyer mused to Kissinger, ‘How did we get here? I grew up in a little town in Lithuania, no electricity, no running water, no cars or faxes . . . outhouses . . . every two weeks a train would go thru and toot its horn.’

To which Kissinger replied, in mock wonder: ‘You had a train?’

YOU CAN SAY DIE, BUT NEVER SAY ‘SELL’

If you missed the PBS’s Frontline ‘Dot-Con’ documentary, Pieter Lessing suggests you click here for the transcript of an illuminating interview with one of Wall Street’s high-priced analysts. I hate to encourage cynicism, but it’s important to understand that – despite their reassuring advertising – financial firms are not always completely on your side. The analysis that full-service brokerage firms provide their clients might sometimes instead be called dis-service.

WHEN SHUFFLEBOARD IS NO LONGER AN OPTION

Vine Crandall: ‘How about your thoughts on long-term care insurance?’

☞ I haven’t bought it myself, because I’d rather save up a big bundle in my retirement plan and use that, if need be. If you can’t save a big bundle, and want the peace of mind, you may have to consider this – although, clearly (unless you know something the insurance company doesn’t), the odds are not in your favor. I.e., you’re paying enough to cover all the insurer’s considerable marketing and administrative expenses, plus – if they’ve done the math better than you – a decent profit to boot. Nothing wrong with that; it’s just a better way for insurance-company shareholders than for insurance-company customers to prosper. As to the specifics of what to watch out for in choosing a company and a long-term care policy, I’m no expert. But here is a site you may find quite informative. It even lets you compare offerings.

CHECK IT OUT

Ethan Pien: ‘Here’s a cool site worth a look: consumersearch.com.’

The Miami Herald
January 27, 2002
FLORIDA SLASHING CARE FOR DRUG ADDICTS
By Carol Marbin Miller

In a state where nearly a third of all crimes are drug-related, the Department of Corrections has approved a budget cut that will eliminate the bulk of drug treatment among inmates and greatly reduce the state’s program to help drug addicts outside the prison system. The cuts – expected to save Florida taxpayers $13 million this fiscal year – will eliminate in-house drug treatment programs at all but four of Florida’s 55 major prisons . . . [and] reduce by 34% the number of beds available to treat drug addicts at 20 residential treatment programs throughout the state.

Say you were the governor of Florida, which has no state income tax. Would you cut sales taxes, which everyone pays? You certainly would not! Would you cut property taxes, which most average Floridians pay? You certainly would not! Would you cut classroom sizes, to try to give elementary school kids the best possible start in life? You certainly would not!

No, you’d look at the state’s many problems and challenges, weigh your priorities, and cut taxes on the rich. Listen: you can’t do everything, so you do the most important thing.

That’s what Jeb Bush seems to have concluded as Governor of Florida, and that’s what his older brother seems to have concluded as President of the United States.

Soon after he took office, Jeb cut the Intangible Property Tax in half. Where Floridians with multi-million-dollar stock and bond portfolios had long had to fork over two-tenths of one percent of the total each year, now they fork over just one-tenth of one percent – a 50% cut. (In fairness, some loopholes were apparently tightened to make it harder to avoid the tax.* Then again, the tax is even less onerous than it sounds – if it sounds at all onerous – because U.S. Treasury securities, Florida municipal bonds, and retirement nest eggs are all exempted from the calculation, and because any tax that is paid becomes a deduction against your federal income tax.)

Another way to have reduced this tax burden would have been to greatly increase the exempt amount for everyone. With a higher threshold, almost no one would have had to pay it – cutting down on paperwork for a lot of taxpayers and Tallahassee employees – and those who did still have to pay it would only have had to pay it on amounts above that higher floor. But Governor Bush apparently felt this would give the truly wealthy insufficient tax relief, so he just cut the rate in half.

In a vacuum, of course, that was a nice thing to do. Not important in any way – even at two-tenths of one percent, the tax was hardly more than a nuisance. But nice nonetheless. What guy with $5 million in mutual funds (say), doesn’t appreciate having to pay Florida only $5,000 instead of $10,000?

But we don’t live in a vacuum, everything’s related, and so we get front page lead stories in the Miami Herald like the one excerpted above.

‘Make no mistake,’ the Herald quotes Broward County chief assistant public defender Howard Finkelstein – who himself battled drug addiction 14 years ago – ‘When we get done crunching the numbers . . . human lives will be lost or go unrepaired, and misery will be spread from generation to generation.’

But first things first. Do you know what it costs to resurface a driveway in Coral Gables? To outfit a private plane? And if the rich have drug problems – if their daughters are impersonating doctors and calling in phony prescriptions – they can afford to get help.

*UPDATE: I may have been a bit TOO fair.  Whatever loophole tightening they did became moot the following year: Jeb eliminated the tax altogether.  The 50% cut in the rate became a 100% cut: to zero.  The ultimate loophole.

The New York Times
January 31
BUSH BUDGET WILL SEEK CUTS IN PROGRAMS FOR JOB TRAINING
By Robert Pear

WASHINGTON, Jan. 30 – Even though unemployment has increased sharply in recent months, President Bush’s budget will seek cuts in several job-training programs for laid-off workers and young adults most affected by the rise in unemployment, budget documents and federal officials say.

Bush administration officials question the effectiveness of some of the jobs programs, which Congress created with overwhelming bipartisan support four years ago.

The United States Conference of Mayors sent a protest letter this week to the White House criticizing an administration plan to cut ‘youth opportunity grants’ to $45 million next year from $225 million this year.

It’s all part of the economic stimulus plan, I guess. As is cutting $9.1 billion out of federal highway spending, a 29% cut from last year.

A friend from Portland, Oregon, writes: ‘The President visited a job training center here about six months ago and last week announced that because of the war, they wouldn’t be able to fund that any longer.’ The rest of his message was unprintably disrespectful of the President. But if people really understood the extent to which the balance of the previous eight years has been shifted in favor of the rich and powerful – nothing against the poor and middle-class, mind you, but it’s just time the rich got a better shake – I think they would be upset.

(In 1980, according to figures from Business Week, CEOs of large corporations earned 42 times as much as the average worker – compared with 531 times as much in 2000. So you can imagine how their tax bills have sky-rocketed. That must be why it’s so important to cut taxes for those at the top, even if it means ending drug treatment or job training programs, or halving the budget for alternative energy research.)

Let me conclude with this clip, which I’ve already posted here once. Bear in mind as you read it that we devote less than 1% of our $2 trillion federal budget to foreign aid.

The New York Times
January 29
U.S. REJECTS BID TO DOUBLE FOREIGN AID TO POOR LANDS
By Joseph Kahn

WASHINGTON, Jan. 28 – The Bush Administration has rejected an international proposal to double foreign aid in the wake of the war in Afghanistan, contending that poor countries should make better use of the assistance they now receive, diplomats said today.

What are we thinking? Can the solution to every problem really be tax cuts for the best off? Is this really America at our best and brightest?

BUT FIRST A JOKE

Forwarded by a neutral party: The Prime Minister of Israel, Ariel Sharon, sits down with Yasser Arafat at the beginning of negotiations to resolve the conflict. The Prime Minister requests that he be allowed to begin with a story. Arafat assents.

Sharon begins his story: ‘Years before the Israelites came to the Promised Land and settled here, Moses led them for 40 years through the desert. The Israelites began complaining that they were thirsty and, lo and behold, a miracle occurred and a stream appeared before them. They drank their fill and then decided to take advantage of the stream to do some bathing — including Moses.

‘When Moses came out of the water, he found that all his clothing was missing. ‘Who took my clothes?’ Moses asked those around him.

”It was the Palestinians,’ replied the Israelites,

‘Wait a minute,’ objected Arafat immediately, ‘there were no Palestinians during the time of Moses!’

‘All right,’ replied the Prime Minister, ‘now that we’ve got that settled, let’s begin our negotiations.’

TEST YOUR INVESTMENT SAVVY

Thanks to Kate for bringing this one to my attention – a site offering an investment in McWhortle Enterprises. I’m not recommending you take a flier on McWhortle; but, like Kate, I was impressed by its S.E.C. imprimatur. You don’t often see that. It shows up on the third page. Click here.

BIG-CAP, MID-CAP OR MADCAP?

Randy Woolf: ‘I would be interested in your thoughts on total market index funds versus midcap or small-cap funds. I have some midcap spider shares [symbol: MDY] and plan on buying more. Isn’t the total market index very over-weighted by large, problematic companies like Cisco and Enron, and thus not really representative of the ‘total market’?’

☞ No, a total-market index fund is more representative of the total market, because, like it or not, the total market includes problematic companies like Cisco and Enron.

That isn’t to say which will do better over any particular time period. Your midcap index shares may beat the total-market index funds — or, if Microsoft’s automatic spellchecker is to be believed, the way it keeps automatically changing what I type, they may prove to be ‘madcap’ shares.

Are midcap shares, as a class, undervalued relative to the market as a whole? I can imagine intuitive arguments on both sides.

You could argue that the big cap stocks are overvalued because of the herd mentality – all the big fund managers feel they have to own them (where else are they going to park trillions of dollars?), and in times of uncertainty people gravitate toward the big names. Right? So they’ve been bid up past where they should be.

Or you could argue that the small caps and midcaps are going to get hurt worse if we have tough times – they’ll have a harder time securing financing, they have less clout in the marketplace, less legal and lobbying muscle.

I’m quite sure I don’t know whether the stocks of mid-sized companies will do better or worse, over the time period you had in mind to invest, than the market as a whole. If I were looking for an index fund, I would probably go with whichever one offered the broadest diversification with no more than a two-tenths-of-one-percent (’20 basis points’) annual fee.

THAT EXPLAINS IT

Bob Ridenour: ‘I finally figured out why Ken Lay looks so familiar (and why he may seem nice) – he looks exactly like Tim Conway!’

Our American Airlines 777 had landed in Miami – 20 minutes early – and those of us in business class were right there by the door, waiting to deplane. The jet bridge wasn’t meshing with the door properly, and there was some understandable foot tapping. But the fellow next to me became really annoyed. Where a little world-weary wry humor might certainly have been in order, if one were in that sort of mood (I wasn’t), he was telling the flight attendant how incompetent the airline was. He pronounced it very precisely, several times, with increasing exasperation, as the wait stretched to what must ultimately have been six or seven minutes. Ultimately, the plane inched very gently forward a foot or two, the Jet Bridge meshed, the door opened, and we went on our way. ‘You would think after all this time they would have developed the competence to do this correctly,’ he was now saying to some stranger just ahead of me on the jet bridge.

And I am thinking, ‘Hmmm – let’s see. We have just flown across the continent in four hours and thirty-eight minutes. Our reclining Business Class seats offered extending leg rests, power for our laptops, head rests and an inflatable lumbar support. We had our choice of movies, a magnificent lunch, a choice of ice cream or tiramisu for dessert and then, later, freshly baked cookies and milk. The climate was controlled, the bathrooms ample. We landed early and safely. But the pilot stopped a couple of feet short and we had to wait seven minutes. And he’s steamed? What must this guy be thinking! (And what would Wilbur and Orville have been thinking? And what would the same journey have been like even a single lifetime ago, let alone two?)’

I mean, a little amused irony would have been fine – ‘Geez, we can do all this but we haven’t figured out how to stop on precisely the right dime?’ But this guy was steamed.

The irony, of course – because, yes, irony does abound – was that I could see he was headed to baggage claim. He was rushing for nothing. Baggage claim in Miami is horribly slow, and he may still be there waiting for his bags. (I kind of hope he is.)

*

Half the people on earth live on less than two dollars a day. A billion people go to bed hungry every night and a quarter of the people on earth never get a clean glass of water. Like most of us, I tend to ignore that and get annoyed when there’s traffic or my cell phone drops a call. Still, I would argue that these are – for most Americans, Europeans and Japanese, and certainly for those of us fortunate enough to fly business class – the good old days. But what’s next? It could go either way. If you have time, click here. No one has a clearer worldview.

(Like yesterday’s column, this one is adapted from a column I wrote for Time a decade ago.)

A broad tax break for capital gains, as has been pushed by some, would be expensive and dumb.

To begin with, applying the break to investments we’ve already made does relatively little to encourage new ones. Any tax break should be on future investments only.

But even there, aggravating our already problematic two-tiered system – with one income tax rate for “ordinary” income and a much lower one for capital gains – would do little more than increase the incentive to concoct schemes to convert the former to the latter. As a nation, we don’t need more tax lawyers devising tax-driven strategies; we need a simple tax system that doesn’t distort economic decisions.

The notion of indexing gains to inflation – to tax only “real” gains – would add a whole new level of complication in computing taxes. And is it fair? It insulates those with assets from the effects of inflation, but not those without assets, whom inflation already hits hardest. (And homeowners ALREADY have big tax breaks. The first $250,000 in gains on the sale of a primary residence, or $500,000 if filing jointly, are tax-free.) Furthermore, insulating voters from inflation makes them more tolerant of it and, thus, its rise more likely — but its effects, ultimately, no less devastating.

And why cut the capital gains rate on real estate or fine art or collectibles? To inspire construction of even more shopping centers?

Yes, the capital gains rate should be cut — to ZERO! — but only on future investments, and only on the purchase of newly-issued stocks and bonds. Found a company in your garage? You are the owner of newly-issued securities. The tax rate on gains when you sell would be zero. Dump some venture capital into your neighbor’s garage start-up? You, too, have bought newly issued securities. The tax rate on gains when you sell would be zero. Snap up a few shares when the stock eventually goes public? You, too, are the owner of newly-issued securities. The tax rate on gains when you sell would be zero.

But once those securities start trading in the secondary market, they are no longer newly-issued. There would be the same tax as now on trading gains.

There’d still be just as much reason to buy and trade in the secondary market as there is today – God bless America’s liquid capital markets – but the ZERO capital gains rate would be reserved for the thing we most want to encourage: funding new enterprise.

Such a rifle-shot tax cut would be a huge incentive to invest in new companies, and to fund the expansion and modernization of old ones, but at a tiny fraction of the cost of an across-the-board cut. It would be a boon for Wall Street, making it that much easier to find buyers for newly issued stocks and bonds.

And it would be a snap to administer. If you’ve ever bought stock in a public offering, you’ve seen that the broker’s confirmation slip already denotes this. (‘Prospectus sent under separate cover,’ the confirm you get in the mail usually says.) So the computer already knows which shares and bonds you own from a new securities offering. The year-end statement you get would have one more box with this information. TaxCut and TurboTax and H&R Block could all handle this with ease.

It would be cheap, it would be simple, and it would do exactly what the administration claims it wants to do: stimulate new investment to improve productivity and create jobs.

(Meanwhile, it should be noted that the emphasis on a “long-term holding period” – or the new ultra-long 5-year holding period beginning with assets purchased after the year 2000 – may be overdone. Why reward people for holding something even a minute longer than they think it represents the best available value? Why distort the market this way and dampen its liquidity? Why shackle the invisible hand? The decision of how best to invest one’s capital should depend on where it can get the best return, not on tax strategies. There’s ALREADY plenty of reason to hold assets a long time: first, you minimize brokerage commissions; second, there’s NO tax due until you sell – you can let your profits build tax-free for decades! The real movers and shakers in the market, the pension funds, pay no capital gains tax anyway, so imposing a long-term holding period on the rest of us would have little impact on management’s rightly-lamented short-term focus.)

You can argue for the old six-month holding period, or even today’s one-year period, as a means to discourage our worst gambling instincts (not that it always does much good). But five years? The beauty of the capital markets is their ability to allocate money efficiently. That’s the ideal, anyway. So why erect artificial barriers to capital’s free flow?

Unlike yesterday’s much more important tax proposal – a huge gasoline tax phased in from 2004 through 2016, every penny of which would be used to lower the tax on working and saving (with an increase in the earned income credit to help the working poor) – this one, it seems to me, actually would have a prayer of passing. It’s the sort of targeted, stimulative tax cut Democrats have been talking about, and contrasts sharply with the massive tax cuts geared largely to the rich and to large corporations that our friends in the other party seem to believe are needed to get the economy moving again. Yet how could any Republican oppose a zero percent tax rate on capital gains, even if it were limited to where it might actually do some good?