One reason I haven’t written much about money these last few months is that the topic leaves me glum.
My being glum is often a good sign, because I am often glum just as the market is about to spike. But with stock prices high and real estate prices higher, it’s hard for me to get enthusiastic about either.
Look at some of the Big Picture items:
1. Terrorism is a huge, productivity-sapping problem that is not quickly or easily resolved. Legions of security guards may make us safer, but not more prosperous.
2. We’ve gone from a giant global surplus of goodwill on September 12, 2001, to a giant global deficit. Having much of the world dislike and mistrust us can’t be good for business.
3. Having a higher proportion of our GNP go to nonproductive (even when necessary) military expenditures doesn’t make us richer either. On July 20, 2000, I was able to write in this space: ‘The U.S. used to spend 6% of its GNP on defense, now closer to 2%.’ What a huge, prosperity-aiding swing that was! The peace dividend. But now we’ve headed back up around 5%.
4. Interest rates – whose long-term downward march from 1982 to 2004 so aided business and stocks and bonds and real estate prices – seem to have bottomed. So at the very least, they will not continue to fall (not for ‘good’ reasons, anyway) . . . and at a time when we are running annual budget and trade deficits each in excess of half a trillion dollars, it’s possible to imagine they may rise.
5. Personal debt levels as a percentage of GNP keep rising. Yes, with higher real estate prices, homeowners have more to borrow against. But does a homeowner whose home value rises from $200,000 to $300,000 get any richer? Or does he still own exactly one home of exactly the same size? Does the fact that he is able to owe $250,000 on it, after refinancing, instead of the $160,000 he owed before, make him richer in some fundamental way?
6. Educating our kids well does make us richer in a fundamental way, as does deploying energy-efficient technology, to take two important examples. But have you noticed that we’ve been cutting back on after-school programs, and so much else? And that it is Japan, not Detroit, that seems to be leading the way on energy efficiency?
7. Oil is our major import. As we burn ever more of it, at ever higher prices, we shift more of our wealth to producing nations.
8. The gap between rich and the rest grows ever wider. There’s no hard and fast rule as to how prosperity ‘should’ be distributed. But, at one extreme, if a single family controlled all the loot and everyone else were too poor to buy anything beyond bare essentials, how would an economy prosper?
Broadly distributed, prosperity begets prosperity . . . even if, in the real world, mechanisms are needed, like the minimum wage and the Earned Income Tax Credit and a progressive income tax and Social Security – and scholarships – to help spread the wealth. In the long run, I would argue, such mechanisms, when not carried to extremes, make the rich richer, too.
And yet the powers that be have opposed the minimum wage and the Earned Income Tax Credit . . . and have succeeded in making the income tax less progressive (with rumored plans in their next term to make it less progressive still). The Congressional Budget Office study released Friday finds that the wealthiest 1% – folks earning an average $1.2 million a year – saw their share of the total income tax burden fall from 22% to 20% under George W. Bush.
The Bush administration looked at the world of 1993-2000, in which rich folks made out very, very well, and decided that they hadn’t made out very, very well enough, relative to everyone else . . . that the overall tax burden needed to be shifted in a significant way off the very richest among us and onto everybody else.
The way it was reported on NBC Nightly News, the annual tax cut for folks in the top 1% was $78,460, while for the 20% in the middle (average household income $57,000) it was $1,090. Tom Brokaw left it at that, as if these were the two extremes – the top 1% and the middle 20% – never mentioning all the households below the middle 20%, for whom the tax cut was negligible. Surely some American households fall into that last 40%, no? (Actually, about 120 million of us.) Might it not have been worth mentioning how tiny their tax cut was . . . or how it was overwhelmed by the impact of higher local taxes, tuition and health care costs? And by the cuts to various local and federal government programs and services?
(The other thing NBC did was run a man-on-the-street clip of a fellow untroubled by the $78,460 versus $1,090 comparison because, for heaven’s sake, the rich already pay so much more in taxes, it seems only fair. And we do pay a load more in taxes. But people are often surprised to learn that the crushing, confiscatory federal tax burden on the truly rich, even back in 2000, before Bush rode to their rescue, was only 22.3%, what with so much of it coming from long-term capital gains and tax-free bonds.)
9. The deep division in our country makes it hard for one side to cooperate with the other. Unity of vision and purpose (putting a man on the moon by the end of the decade!) do wonders for prosperity. As do trust and mutual respect.
10. And I haven’t even mentioned China and India, whose growth offers many Big Picture positives but lots of challenges as well . . . or global climate change, whose costs may be felt more and more in the years to come.
What I would love is for all these negatives to be reflected in the prices of stocks and bonds and real estate . . . and for an additional layer of irrational fear to have driven them lower still.
A little panic never hurt, either.
I remember the long, long bear market of 1973-1974, when every article I wrote could end cheerfully the same way: ‘If the world doesn’t end – and it generally doesn’t – stocks should be a great buy here. (And if it does end, what difference does it make?)’
Today, my sense is that while there are always special situations and interesting opportunities – I bought some more NTII last week because a very smart guy who does his homework (I don’t do my homework) thinks it just might work out – this is not a time of widespread bargains or irresistible values.
I wish TIPS were still at par (100) so I could recommend them with some excitement again. But closing over 126 Friday, the big fun would seem to be over.
Ditto sunny retirement properties. Hope you bought yours a few years ago and are enjoying it’s new value. Harder to recommend rushing to buy one now.
The stock market at these levels? Well, as always, if you’re in it for the long haul, investing something every month via one or two or three Vanguard index funds, keep it up. And hope the market goes down, so you can buy future shares at cheaper prices.
But I disagree with those who believe stocks are (or much of anything else is) cheap these days.
Our timber keeps growing, having given us a 20% total return in the year since it was suggested here. I’m holding that for the long term. The aforesaid TIPS in my retirement plan are a long-term core holding. I have my special situations and nutty speculations (largest among them, the ‘stock that must surely go to zero,’ Borealis). And I am not ashamed to have paid off my debts and credit cards and to have some money on the sidelines, just in case great bargains do one day appear. They always do.
Quote of the Day
Money is a singular thing. It ranks with love as man’s greatest source of joy. And with death as his greatest source of anxiety. Over all history it has oppressed nearly all people in one of two ways: either it has been abundant and very unreliable, or reliable and very scarce.~John Kenneth Galbraith, The Age of Uncertainty
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