31 October 2008
Why Investment Advice Stinks
If you are lucky enough to be an American with a 401(k) plan at work, you have heard for years the continuing mantra that it is best to be in equities over the long haul. Bonds, never mind money market funds, are for losers who will never retire comfortably.
Take a look at this link and click on "Growth of $10,000 chart view": it shows the return over 10 years ending on 30 September 2008 of hypothetical investments in Vanguard's Prime Money Market fund, and its Standard and Poor's 500 fund, its Total Stock Market Index fund, its Total International Stock Index fund, and its Total Bond Market index fund.
Vanguard is famous for having low fees for all of its funds, so these returns are probably a bit better than the typical stock, bond, and money market funds, but they represent returns of investments one might actually have made. And they do not include the awful month that the stock market had had in October.
The money market fund—surprise—outdid the Standard and Poor's 500 fund, and was barely below the total stock market index fund (but would be ahead for the 121 months ending today). Anyone who bought the total bond market fund would be well ahead of either of the domestic stock funds. And only the international fund beats the bond fund over the 10-year period (but it declined about 20% in October, while the bond index fund fell only 3%).
Some lucky ducks surely have done better than the indices: anyone who bought a mid-cap or small-cap index fund 10 years ago would be ahead of each of these funds, but a lot of 401(k) participants do significantly worse than market benchmarks.
When Republicnas or Vlue Dog Democrats speak wistfully of putting Social Security funds into the stock market, remember that chart.
What is truly remarkable about these returns is that the last five years have featured lower taxes on pital gains and dividends. In essence, the federal government has goosed stock market returns by taxing most of its dividends and all of its capital gains at only 15% for investors investing outside their retirement accounts. Imagine how lousy the stock market might look if the 2003 changes had not gone into effect.
Labels: investment advice, investment returns, money market funds, stock market, stupid financial tricks
Jon Friedman wonders, with some justification, whether the New York Times is doing its readers a service by hiring Bono to write for its op-ed page.
I have no idea whether Bono will do a good job, but hose readers already have to put up with the columnar stylings of David Brooks and Maureen Dowd twice a week, plus supposed economist Ben Stein every other Sunday. While I doubt that Bono is making it to the op-ed pages on his journalistic merits, how could adding him to this stable make it appreciably worse?
Labels: Ben Stein, Bono, David Brooks, Maureen Dowd, New York Times, op-ed columnists, stupid publishing tricks
Damned with Very Faint Praise
Lawrence Eagleburger served as Secretary of State under George H. W. Bush, and he is a prominent supporter of John McCain's candidacy for president this year.
But his support of Sarah Palin is, shall we say, less than fervent.
"I don't think at the moment she is prepared to take over the brains of the presidency," he says. "I can name for you any number of other vice presidents who were not particularly up to it either. So, the question, I think, is—can she learn and would she be tough enough under the circumstances if she were asked to become president?"
"Give her some time in the office and I think the answer would be—she will be adequate. I can't say that she would be a genius in the job," he adds.
She will be adequate? Adequate? There must be hundreds of Republican officeholders right now who know that they could do a good job as president is they had to. And all of them now hate John McCain and the fools who advise him.
Labels: faint praise, John McCain, Lawrence Eagleburger, NPR, Sarah Palin, stupid political tricks
John McCain is having trouble getting traction this year, even though he is running against a Republican dream candidate: a black man from Chicago.
and one reason is that the Republican message—that everything is fundamentally okay with the way that our capitalist society works just does not fly. For decades, a significant majority in this country want a more even distribution of wealth, at least according to the Gallup Poll over the years.
(Why this has not led the Democratic Party to seize the opportunity to at least pretend to be a party of at least watered-down socialism is another question altogether.)
Labels: Diostribution of wealth, Gallup poll, John McCain, socialism in America
28 October 2008
In North Carolina, we are told that some voters may mistakenly omit a vote for president this year because of a quirk of the state ballots. Here is what the Charlotte Observer told us about the way voting is done there:
Unlike in many states, a straight-party vote in North Carolina does not cast a vote for president. A ballot expert says the split makes it more likely that voters—especially new voters—will leave polling places without voting for president....
The presidential and straight-ticket votes are separate under N.C. law. In 1967, state Democrats feared Democratic presidential candidate Hubert H. Humphrey would be a drag on the ticket, and decided to cut the presidential selection loose from other partisan races.
The explanation is, alas, bogus.
In 1967, Humphrey was anticipating running for vice president, as Lyndon Johnson's running mate. He did not enter the race for the nomination until April 1968, after Johnson had withdrawn from the race at the end of March.
No, what had happened in 1967 was that George Wallace had decided to run for president as a third-party candidate, because it was clear that the national Democratic party had decided that offering actual civil rights to black Americans was the right thing to do.
By June 1967, it was clear that Wallace was thinking about a third-party run for president; by the end of 1967, Wallace was actively campaigning. North Carolina Democrats knew that by removing the presidential election from the straight-party vote, they could protect their own offices while allowing their constituents to vote for Wallace for president.
Surely someone at the Observer could have figured this one out.
Labels: Charlotte Observer, George Wallace, North Carolina, staright party voting, stupid political tricks
26 October 2008
And sometimes, the folks at Barron's publish something so wonderful that you wonder if they are going to start clamoring, if not for revolution, then at least for a wholesale overhaul of the political and economic system in America.
This weekend featured a reminder that, w while mainstream politicians praise small businesses as if they were the apotheosis of all that is right with the world, the truth is much simpler and much more sordid. In short, the Internal Revenue Service has found that small businesses cheat. A lot.
[S]mall business owners already have given themselves a huge tax break, under-reporting on 57% of their income.
The IRS resisted releasing the document for so long that I entertained the thought that the gentle persuaders were playing politics! That style of aberrant behavior supposedly vanished from Washington, D.C., eons ago, along with Richard Nixon. A spokesman assured me that he had "moved heaven and earth" to get me the document that already had been leaked to Tax Notes reporter David Cay Johnston back in August....
University of Michigan economics professor Joel Slemrod, director of the school's Office of Tax Policy Research, estimated that Schedule C cheaters save themselves about $68 billion a year. The other side of this coin is that wage slaves pay higher rates to make up for the scofflaws.
Labels: bad Barron's, small businesses, stupid tax tricks
Barron's is certainly an odd beast until you think about it a bit. There is a lot of the old lean-Republican trope in its editorial pages, but there is also a good amount of fair coverage of corporate misdeeds. And the latter is particularly useful to lefties, even those the typical Barron's readers simply want to avoid getting fleeced any more than they have to.
Anyway, here is an exemplar of the bad Barron's, from Thomas Donlan's editorial two weeks ago:
Where are the Congressional hearings to put Rep. Barney Frank (D-Mass.), in the hot seat? He should be grilled about his judgment and integrity, along with hundreds of other legislators of both parties who indulged and subsidized home buyers, house builders and mortgage lenders, and started the country down the road to nationalized banking.
Where is the eagerness to make Frank—chairman of the House Financial Services Committee—eat his most intemperate words? In 2003, he said: "I want to roll the dice a little bit more in this situation toward subsidized housing." He also said then that Fannie Mae and Freddie Mac, the dice-rollers, were "fundamentally sound."
Actually reading the actual hearing text provides, as one might expect, a bit of context. At the time, Frank was the ranking minority member of the House Financial Services Committee; Republican Michael Oxley was chairman. In fact, even if Barney Frank could get every Democrat to act with him on anything, he would need Republican support just to get a bill through the House, let alone keep it from getting vetoed.
Indeed, what was clear to the members of the committee was that regulation in 2003 was inadequate and that the government needed something better. Remember, this is chairman Michael Oxley speaking:
There is a broad agreement that the current regulatory structure for the GSEs is not operating as effectively as it should. The Office of Federal Housing Enterprise Oversight is underfunded, understaffed and unable to fully oversee the operations of these sophisticated enterprises.
This was reflected in the surprise management reorganization by Freddie Mac and by Wall Street reports stating that GSE oversight is viewed with skepticism because OFHEO is largely seen as a weak regulator.
A strengthened regulator will send a signal to the markets that these entities have solid management and are engaging in safe and sound activities. Confidence will be restored in the GSEs and they will be able to get back to their important work of expanding home
ownership opportunities without the distractions that have been plaguing them over the past several months.
I should point out that Donlan's criticism is reasonable in one respect, in that it is not clear that Frank ought to have proclaimed Freddie Mac and Fannie Mae to have been fundamentally sound in 2003—on the other hand, the combined market capitalization for the two companies at the time exceeded $100 billion at the time.
The bigger problem here is that Donlan is conflating subprime lending with subsidized housing. If he bothered to read the hearing transcript, he would find that the members of the committee and a number of witnesses discussed (1) housing subsidized under the federal low-income housing tax credit (Fannie Mae and Freddie Mac have been longstanding leaders in tax credit investing); (2) the Affordable Housing Program of the Federal Home Loan Banks and whether it could inspire similar programs; and (3) the need to have housing subsides for older rural and urban housing stock that was about to age out of existing programs. (In the interest of full disclosure, I worked with one of the witnesses, Terri Montague, when we were both with a previous employer.)
Indeed, when Frank makes his "roll the dice" comment, he was discussing the need for Fannie Mae and Freddie Mac to continue to have a commitment for low-income housing and not just the weak provisions that banks fulfill under the Community Reinvestment Act.
The problems that sank Fannie Mae and Freddie Mac had almost nothing to do with their commitments to low-income housing; rather, they got too clever with leverage. A good version of Barron's would feature columnists who knew how to read the original versions of the sources they quote.
Labels: bad Barron's, Barney Frank. Thomas Donlan, Barron's, Fannie Mae, Freddie Mac, Stupid reporting tricks
West Texas Repudiate
One might expect that with all of the time that George Bush has spent in Crawford, Texas, that he would have strong ties to the community and a few close friends there. As this New Yorker essay notes, neither seems to be true.
The plainspoken Dubya—who cleared brush, drove a pickup, and, by implication, was rooted in rural America and red-state values——and a Republican front-runner for President—bought fifteen hundred and eighty-three acres of riverfront property for an estimated $1.2 million....
Downtown Crawford, as locals refer to Main Street, is about eight miles from the ranch. It does not amount to much—a two-block-long business district, with several gift shops, a bank, two gas stations, a café, a granary, a video store, a custom-sign shop, and the Great Shapes beauty parlor. A blinking red stoplight on Main Street is the town's only traffic signal. East of the railroad tracks are the sagging frame houses and hard-packed dirt yards that belong to Crawford's few, mostly elderly, black residents. (The town is eighty-eight per cent white.) Rusted grain silos and a water tower make up the town's meagre skyline. Neighboring Coryell County is home to a training range for Fort Hood, the largest armored Army post in the nation, and what sounds like thunder is often the shudder of ordnance exploding across the plains.
The storefronts along Main Street, a sunburned, treeless stretch of State Highway 317 that runs along the Burlington Northern Santa Fe Railway line, were mostly vacant when I came to Crawford this spring. Of the seven gift shops that once hawked "Mission Accomplished" coffee mugs and "This Is Bush Country" refrigerator magnets and "Lovya Dubya" bumper stickers, three had gone broke. Only two, the Red Bull and the Crawford General Store, still kept regular hours. The Red Bull's manager, a sturdy woman named Jamie Burgess, sat on a bench outside the store. "They're closed, but we’re open!" she shouted down the street one afternoon as I peered in a rival store's window.
What makes the description of Crawford particularly pathetic is the extent that the Bushes used Crawford as a huge stage prop for a couiple that was dramatically out of place in rural West Texas.
During the 2000 campaign and his first term, Bush used to make regular, if highly choreographed, trips into town. Crawford was a backdrop ready-made for Karl Rove stagecraft. The President shook hands at the Coffee Station; signed legislation, flanked by hay bales; and chopped cedar in the height of summer as a White House photographer captured the look of steely resolve under his sweat-stained cowboy hat. The White House press corps broadcast standup TV reports in front of a pasture, dotted with bales of hay, that was not outside the ranch but in town, next to the high-school running track....
At Crawford High School's graduation[...] there was no mention of the President, who had delivered the commencement address eight years earlier. When Kevin Noack, the superintendent, spoke to the audience about how this fall would mark "the end of an era for Crawford," he was referring to the retirement of Mary Keltner, the school’s longtime custodian....
Bush's primary home, once he leaves office, will be in Dallas, a hundred and twenty miles away. His Presidential library will be there, at Southern Methodist University, not at Baylor University, in nearby Waco, as locals had initially hoped. (Waco, a city eager to rebrand itself after the 1993 Branch Davidian standoff, had posted a sign in its visitors' center that boasted, "How do you spell Waco? Well, it starts with a Dubya." It was later taken down.)
In July, at a closed-door Republican fund-raiser in Houston, Bush was caught in a video, taken by a guest, talking about the economic downturn. "Wall Street got drunk... and now it's got a hangover," Bush said. "We've got a housing issue," he went on, and then added, in a tone of mock gravity, "Not in Houston, evidently not in Dallas, because Laura's over there trying to buy a house today."
And the man who has publicly said that Jesus changed his life? "Bush has apparently gone to church in Crawford three times in eight years, once at the Methodist church and twice at Canaan Baptist."
What a guy, and what a neighbor.
Labels: Crawford, George Bush, stupid advertising tricks, Texas
14 October 2008
Seeing Russia From Here
The next time the Republicans extol Sarah Palin's foreign policy experience because one can see Russia from parts of Alaska, consider this: what part of Alaska can one see Russia from?
Little Diomede is an island with a population of 147. There is no running water or sewerage. And Big Diomede island was so important to the Soviet Union (and is so important to Russia) that it is uninhabited.
Labels: Alaska, Little Diomede, Russia, Sarah Palin, stupid foreign policy tricks
It was indeed discouraging to hear that delegate at the Republican National Convention this summer had reduced the case for offshore oil drilling to a mind-numbing chant.
Since voters say they care most about energy, and since [Sarah Palin] governs an oil state, she spoke about it at length. She scoffed at Democrats who oppose drilling for oil on the ground that it won’t solve all America's energy problems—"as if we didn't know that already"—and promised to promote nuclear, solar, wind, geothermal energy and clean coal, too. The crowd chanted "Drill, baby, drill!"
Once upon a time, the Republican Party could justifiably point to its record on the environment. Of course, that was before my grandfather could vote. No, the base of the Republican Party gave up on environmentalism long ago.
But not so long ago, John McCain was actively buffing his image as a throwback to teddy Roosevelt, a Republican who thought that being good to the environment was both good politics and good policy. In November 1996, an op-ed in the New York Times under McCain's name and bearing the title "Nature Is Not a Liberal Plot" hinted that John McCain would not be the candidate of a party hell-bent on offshore drilling.
Too often the public views Republicans as favoring big business at the expense of the environment, and as too eager to swing the meat ax of repeal when the scalpel of reform is what's needed. Last year, a Republican bill to repeal the Clean Air Act and Republican attempts to pass riders on appropriations bills blocking the enforcement of environmental laws contributed significantly to mistrust and skepticism....
Republicans should not allow the fringes of the party to set a radical agenda that no more represents the mainstream of Republicans than environmental extremists represent the mainstream of the Democratic Party. Only by faithfully fulfilling our stewardship responsibilities can we expect to remain the majority party.
While hardly stolen from the Green Party website, this sounds like something that a maverick Republican might write. Of course, John McCain figured out a while ago that a true maverick would never win the Republican nomination, let along the presidency.
Labels: environment, expediency, flip-flop, John McCain
05 October 2008
Last week, General Electric announced that Berkshire Hathaway would make a $6 billion investment in General Electric. The financial press reported this in two ways, both correct in their ways.
One slant was that the investment represented a vote of confidence in General Electric by Berkshire Hathaway and its Chief Executive Officer, Warren Buffett.
The other slant was that Berkshire Hathaway was getting excellent terms. First, it bought $3 billion in preferred stock that pays a 10% dividend and that can only be redeemed at 110% of par. Second, it received warrants to buy $3 billion of common stock at 90% of the current share price. A 10% dividend rate is particularly high, and costs the payer more than debt at 10% per annum because the dividends do not reduce the tax liability of the payer. (There are other reasons to issue preferred stock rather than debt, most notably that preferred stock counts as capital and has its dividends paid only after interest payments are made on debt.) It is worth noting that Berkshire Hathaway's recent investment in Goldman Sachs was on remarkably similar terms. What this seems to mean is that firms like General Electric, which were not supposed to be as exposed as investment banks like Goldman Sachs to the credit crisis, are in fact very exposed.
To put it another way, in December 2007, when Freddie Mac faced a dire need to raise capital, its preferred stock issue bore an initial coupon rate of 8.125%—and Freddie was obviously in dire trouble at the time.
While big investors like Berkshire Hathaway are getting very good returns on their money, what do small investors get from general Electric when they react to advertisements for investing in "Corporate Notes"? Not nearly that good a deal, it turns out. Investors are promised coupon rates of 3.05% to 3.45%, not much better than money market funds that might even be insured thanks to a recent guarantee program. There may be only one Wizard of Omaha, but General Electric hopes there are a lot of suckers out there who are willing to settle for a lot less.
Labels: Berkshire Hathaway, General Electric, stupid financial tricks