Month: May 2009

Good article in today’s Boston Globe about the travails of being a Harvard undergraduate from a middle class family. The school doesn’t make sense academically for most undergrads; they’d be better off going to a college where the professors are paid to talk to undergraduates, rather than a research university where professors are paid to talk to post-docs and graduate students. The Ivy League line has always been “The professors will ignore you, but you’ll make a lot of connections with society’s future leaders.” It seems that doesn’t work for kids from average families. The future leaders don’t want to talk to them and they end up getting an inferior education to what they would have received at a school where they would have been an academic stand-out.

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Ford was in the news today, selling 300 million new shares partly in order to pay medical expenses for union retirees (source). This will dilute existing shareholders who might well ask “How come the company needs to pay so much for retiree medical expenses?”

I think the answer is that a typical unionized auto worker would join a Detroit automaker at age 18. He would be eligible to retire 30 years later, at age 48, with a full pension including medical benefits for a wife and kids. For nearly 20 years, until this guy is eligible for Medicare, Ford will be paying his medical bills, his wife’s medical bills, and possibly his kids’ medical bills.

What about GM and Chrysler? The companies have already receive billions from taxpayers that they’ve used to meet retiree health care obligations. Under the terms of the latest Chrysler bailout, the union fund gets stock in Chrysler and then the government puts billions of taxpayer dollars into the post-Chapter 11 Chrysler. Essentially the U.S. taxpayer is paying these costs, though in a way that looks like investment rather than direct transfer. (Forbes magazine published a related article on the Chrysler bankruptcy today.)

Consider a 48-year-old woman who gets divorced and is forced to reenter the workforce. She goes to work at Walmart, the nation’s number one private employer, at a salary substantially less than an auto worker earned on the assembly line, while playing cards in a “job bank”, or collecting a pension. She won’t be able to retire until age 70. Every year that she works she will pay taxes to support a 48-year-old retired United Auto Worker who is enjoying his vacation house on a lake, water skiing behind his boat, etc.

This would not have surprised Mancur Olson, but it seems rather tough on America’s older workers.

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Finished reading The Big Rich: The Rise and Fall of the Greatest Texas Oil Fortunes by Bryan Burrough. The first half of the book is the best, chronicling the discovery of different fields around Texas and Louisiana, the rise of some individuals, and the importance of oil to our efforts in World War II.

The second half is weaker, but it contains a full account of the Hunt brothers’ attempt to corner the world silver market in the late 1970s. Teamed with oil-rich Arabs, mostly Saudis, the Hunts ended up controlling 77 percent of the world’s privately held silver and, with the help of the Jimmy Carter-era hyperinflation, had driven the price up from $6 per ounce to $50 per ounce.

As government regulators cracked down on this speculation and the price of silver began to fall, banks who’d lent money to the Hunts were at risk. There were fears of a banking collapse and the Federal Reserve chairman, Paul Volcker, got involved to urge a rescue.

Intermittent chapters cover the pernicious influence of rich Texans on national politics. The author ridicules these guys for being “ultra right-wing” and mourns the fact that their money seeded a right-wing political movement. Burrough concentrates on the Texans’ fears of Communists and conspiracy. Burrough, who seems to long for a return to the days of FDR, does not describe what for modern readers would be an unimaginable degree of government control over private industry. The government decided how much oil a well owner could pump, at what price he could sell it, and where it could be sold. Shipping a petroleum product by rail? The government decided how much the railroad would charge for that. How about by truck? The government established rates (see Mancur Olson for how slowly the U.S. economy grew until the Ford Administration’s deregulation program took hold). It is not surprising that an industry hobbled by this much government regulation would attempt to lobby its way out, or at least get prices increased.

The book ends with a paragraph about how happy these old geezers might have been to see Ronbo, King Bush I, and then W. in the White House.

What about an account of how Texas morphed itself into the natural gas hub of the U.S.? Something about Enron and how those guys related to the old oil elite? Perhaps ending with Halliburton moving its headquarters to Dubai would have been more instructive for readers trying to understand how world power is shifting.

Conclusion: the book is worth reading for its family dramas and as a reminder that quickly built fortunes can evaporate just as quickly.

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Robert Arnott has written an interesting article comparing stocks versus bonds as an investment: “Bonds: Why Bother?”

A few excerpts: “Starting any time we choose from 1979 through 2008, the investor in 20-year Treasuries (consistently rolling to the nearest 20-year bond and reinvesting income) beats the S&P 500 investor. In fact, from the end of February 1969 through February 2009, despite the grim bond collapse of the 1970s, our 20-year bond investors win by a nose.”

Arnott goes back to 1801 and notes that stocks do tend to return 2.5 percent per year more than bonds. Unfortunately this is of little comfort to a stock investor who buys in at a peak. The U.S. stock market has spent 173 out of 207 years below a previous peak. “The peak of 1802 was not convincingly exceeded until 1877, a startling 75 years later. … the drop from 1929–32 was so severe that share prices, expressed in real terms, briefly dipped below 1802 levels.” How about more recent history? “In real, inflation-adjusted terms, the 1965 peak for the S&P 500 was not exceeded until 1993, a span of 28 years.”

Arnott notes that an indexed investor suffers badly from a bubble in a particular stock or bond. If a stock goes up to a fantastic price level, e.g., Cisco in the dotcom boom, the index fund is forced to buy a lot of it.

“For the long-term investor, stock markets are supposed to give us steady gains, interrupted by periodic bear markets and occasional jolts like 1987 or 2008. The opposite—long periods of disappointment, interrupted by some wonderful gains—appears to be more accurate.”

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