I'm surprised to see Mark Kleiman linking to this piece of silliness, which purports to "prove" that the Dow has fallen by 20% since GWB took office. Says Mark, "Turns out the "ownership society" hasn't even been good for the owners."
This little treasure comes from a website hilariously titled "Just the Facts", and achieves this result by using a market-weighted basket of global currencies. This is--what's the word I'm looking for? Right, right, utterly daft. Americans don't buy things in a market-weighted basked of global currencies. They shop in dollars. And we have a perfectly good mechanism for calculating the value of the Dow in dollars; it's called "inflation adjustment". The inflation-adjusted value of the January 2001 Dow in today's dollars is about 12,200; today's level is unambiguously higher about the same (oops! need to check stock market news even while on deadline. larger point stands).
But what about foreigners? I hear you cry? What about 'em? They hold almost no stocks--about $200 billion on a total market capitalization1 of 17.75 trillion.
What about the amount of foreign goods you can buy by selling your stocks? Trade is a relatively small part of the United States economy, and much of it is with places like Mexico and China, whose currencies haven't really altered much against ours. (To be fair, a lot of it is also with Canada and Japan, that have seen higher currency appreciation). Moreover, many of those places have dropped the prices of their goods and taken lower profits rather than lose sales volume. That's why, you may recall, everyone's complaining that our trade deficit is failing to adjust. Overall, the effect of the currency decline on the purchasing power of your stock investment is exceedingly modest unless you planned to blow every dollar on Paris vacations and BMW automobiles.
1 Of the Wilshire 5,000 index, which comprises all the stocks on the three largest exchanges
Crankery of this caliber usually relies on gold, not averages of foreign currencies. Still, it helps fill the void left in my life by the disappearance of Sterling Newberry from TPM Cafe. I note with pleasure that the author also neglected the existence of dividends.
If you had bought 3 month t bills in January 2001 when Bush took office and rolled them over your total returns would be greater then if you had held the S&P 500 with daily dividend reinvestment.
It only really strengthens MM's underlying point, but the Wilshire 5000 only includes the stocks of US-based companies on the 3 exchanges. It is NOT all the stocks on the 3 exchanges.
The inflation-adjusted value of the January 2001 Dow in today's dollars is about 12,200; today's level is unambiguously higher.
Actually, today's Dow is unambiguously lower. It is, in fact, 12,059. It's been a bad week I'm afraid.
The inflation-adjusted value of the January 2001 Dow in today's dollars is about 12,200; today's level is unambiguously higher.
Do you ever fact check?
The DJIA closed under 12200 (in today's dollars) yesterday. Short of a last minute rally, there's a good chance it will close under 12100 today.
Megan,
Brooksfoe is correct. You should have submitted this earlier this week.
lol - this post is just filled with horrible mistakes.
Please note that you are comparing absolutes levels of the Dow. In inflation adjusted (or real) terms, the dow must be down 25% or so at least, I didn't even bother to do the exact math, but 1.03^7 - 1 = 22.9% so we are absolutely in the 25% losses for the dow range.
The BEA says foreigners own about 2.5T of stock in the US.
Hey, since y'all are all about adjusting stock market returns for inflation, how about adjusting capital gains taxes for inflation?
Mick,
She was comparing the DOW on an inflation-adjusted basis.
The DOW was at 10587.59 on January 20, 2001.
Your point on foreign holdings of stock seems about right, however.
If McArdle had previously detected a high level of economic literacy in Mark Kleiman's work, she must have seen some posts that I missed.
For the vast majority of people, a diversified stock portfolio is still the best long-term investment, though.
The Wilshire 5000 was at 12,384 January 19, 2001. Today it closed at 13,387. By my calculations--which may embarrass me--that's a rise of 8.1%.
The CPI in January 2001 was 168.8. Today it's at 202.416. That's--same caveat--a rise of 19.9%.
I don't think your average investor would be very happy with this performance. I won't comment on McCardle's and Kleiman's performances.
This dispute brings to mind a paper by Larry Bartels that reports measures of the macroeconomic performance of the economy under Republican and Democratic presidents over the last half century.
http://www.princeton.edu/~bartels/income.pdf
Yetanothercalculator:
Oh no, inequality! If I go from making $20,000 a year to $100,000, but Bill Gates goes from $1,000,000 to fifty billion dollars, my life is therefor WORSE than if he had only made one billion dollars? All because the INEQUALITY of our income has increased?
I will never understand why economic inequality is so horrible if EVERYONE ends up better off than when they started.
When the value of the dollar goes down compared to other currencies, the value of dollar-denominated assets goes down, too. In a world of mobile capital, that makes US assets cheaper for foreign buyers.
Assuming that the price of stocks reflects the best current guess about the greater of (1) the present value of the dividend stream and (2) the present value of the price the asset will eventually sell for, the value of those US-based companies, measured against a basket of currencies, is lower today than it was when Mr. Bush took office.
No, that's not the same calculation as an inflation adjustment. It's a different calculation. As your commenters point out, even the inflation-adjusted calculation suggests no better than a break-even. But neither calculation is "daft" or "silly." They're two different ways of looking at the facts.
(Comparing to the price of gold is silly for the same reason that all gold-buggery is silly; the selection of gold is arbitrary. But this has also been one of the rare periods in which investing in a basked of commodities would have outperformed investing in US equities.)
You could ask a third question, "Would an investor have been better off taking all of his money out of the U.S. stock market on January 20, 2001 and putting that money into equities priced in Euros, sterling, yen, etc.?" Obviously to answer that question you'd have to adjust for currency changes. I'm pretty sure the answer is "Yes," but I don't have the data at my fingertips.
But neither calculation is "daft" or "silly."
Maybe not, but worrying about whether the US stock market is up or down from the perspective of a foreign investor who has diversified his holdings across a range of currencies is certainly unusual. And, I venture to suggest, of absolutely no possible concern 99.99% or more of the electorate that actually selected Bush and will be picking his replacement. We look at the Dow as a measure of domestic economic health, not as source of wealth for foreigners.
It looks rather like somebody was trying to cherry-pick the point of view that makes Bush look as bad as possible. After all, if you're worried about the fall of the dollar, why not just cite, you know, exchange rates?
The arrogant tone of this post makes all the inaccuracies that much more precious.
"I will never understand why economic inequality is so horrible if EVERYONE ends up better off than when they started."
Consider the following two systems.
System 1: total GDP growth is 10 percent. The top 1 percent of earners get 90 percent of that growth (~9 percent of total GDP), and the bottom 99 percent get the other 10 percent of the growth (~1 percent of total GDP).
System 2: total GDP growth is 8 percent. The top 1 percent of earners get 50 percent of that growth (~4 percent of total GDP), and the bottom 99 percent of wage earners get 50 percent of the total growth (~4 percent of the GDP).
Under system one, even thought there was a total GDP growth of 10 percent, for 99 percent of the country, there was only 1 percent total annual income growth.
Under system two, althought overall GDP growth was 2 percent lower (8 percent), income growth was four times higher for 99 percent of the population (a four percent income growth). And the top 1 percent aren't hurting much -- they still saw their incomes grow by 4 percent of the total GDP.
System 1 is has a 110 percent increase in growth for the top 1 percent. But system two is 300 percent better for the bottom 99 percent -- and the top one percent STILL get half of the total GDP increase (in other words, they're still growing faster than everyone else).
From the perspective of "everyman" (not knowing where you'll end up), under system 1, you have a one percent chance of having growth be 110 percent higher, and a 99 percent chance of 1 percent growth.
But under system 2 you have a 99 percent chance of 300 percent more growth, and a (worst case scenario) a 1 percent cance of cutting your potential growth in about half (4 percent vs. 9 percent).
Without knowing where you'll end up (top 1 percent or bottom 99 percent) which economic system would you choose?
"If McArdle had previously detected a high level of economic literacy in Mark Kleiman's work, she must have seen some posts that I missed."
Yeah, though you don't need the qualifier "economic."
Megan,
You'd be interested in this essay on inflation by Mr. Warren Buffett:
http://www.valueinvesting.de/en/inflation-equity-investor-by-warren-buffett.htm
An oldie, but a goodie.
True, Bartels is mainly concerned with income inequality. But incidentally, he shows that all income groups have fared better under Democrats than Republicans. In other words, national income, however distributed, grows faster under Democrats than under Republicans.
"Mixner" is right, of course. Generally, a diversified stock portfolio (often best implemented through index funds) is the best investment strategy. It's a compliment to Mr. Bush's overwhelming competence that he's managed to make that false for the period of his Presidency. Richard Nixon and Herbert Hoover accomplished the same feat.
If I were prone to generalize from small sample sizes, Megan's post plus the comments "y81" plus "Sterling Newbury's ghost" would suggest to me that libertarians tend to confuse disagreement with their pet ideology with illiteracy, silliness, and craziness, and also that they tend to be seriously deficient in civility.
Fortunately, I know that to be false about Megan. y81 and SNg, on the other hand, should probably go back to reading Ayn Rand or comic books, since they're clearly not ready for grown-up conversation.
Phil,
I would, without hesitation, select System 1 - and here's why: I want to balance what is best for me and the current generation and what is best for my children and their children, etc. The power of an extra 2% growth compounded over several generations is not to be overlooked. Who knows what amazing devices/cures will be available for the society that chose System 1 that a System 2 society would not have after 50+ years (yes I am linking growth and the resultant wealth available to the innovation rate). Besides, a person's income quintile isn't fixed and typically improves over their lifetime.
In terms of just money after say 50 years of each system, an economy's GDP would be 117.4 times the original size for System 1 and only 46.9 times for System 2. That's a factor of 2.5 times more total wealth to distribute after 50 years in the first system.
Doing the foreign-currency adjustment isn't necessarily silly; there's just not a lot of point to it. What's silly is doing it and then identifying the result as "a constant dollar basis".
Mark, I take it you recommend the overwhelming competence of the previous administration, which led us to a stock market bubble?
Tell us, will you, what will the market do under Obama? Later, as a bedtime story, you can even invent the mechanism.
"Generally, a diversified stock portfolio (often best implemented through index funds) is the best investment strategy. It's a compliment to Mr. Bush's overwhelming competence that he's managed to make that false for the period of his Presidency. Richard Nixon and Herbert Hoover accomplished the same feat."-Mark Kleiman
The implicit premise here seems to be that the stock market is largely determined by the President and his policies. But that premise is highly dubious and few if any economists would defend it.
There was, as is widely known, an historic bubble in the stock market at the end of the 1990's. The most notorious examples of overvaluation come from the flashy tech sector, but even staid businesses saw their stock prices reach dizzying heights. Coca Cola, for example, saw its P/E ratio soar to more than 60. Clearly Coke couldn't have grown its earnings fast enough to justify such a valuation.
So there had to be a correction, and there has been. Now prices are at more normal levels. They might even be a little low now. What's clear though is that--whatever the merits of President Bush's policies--the principal reason that stock returns have been so low is that they got far too high before Bush became President. Corporate profits have been robust for most of the last seven years, but P/E ratios have returned to normal levels. So, even though Coke's earnings have risen from $1.42 in 2001 to $2.34 (est.) this year, it's stock price has actually dropped from a high of $85 to $62...
If Mark Kleiman really does believe that stock prices are a good indication of the effectiveness of a President's economic policies, though, he ought to be a big fan of Ronald Reagan.
The difference between Reagan and other presidents who presided over large rises in the value of the stock market is that Reagan's two terms involved a deficit spending spree unrivaled in postwar America. Kennedy/LBJ doesn't come close. Bush, of course, has also had a wild deficit spending spree, but still hasn't managed to generate any net inflation-adjusted rise in the stock market in the 7 years of his presidency. That's probably because of the ways he's chosen to spend the money he's borrowing - principally, giving it to rich people and oil companies, or using it to buy expensive objects and then detonate them in the Middle East.
"Reagan's two terms involved a deficit spending spree unrivaled in postwar America."-brooksfoe
Brooksfoe, you've missed the most important thing about Reagan's economic policies--the positive effect on incentives. Cutting marginal tax rates (from 70% to 28% at the top) dramatically improved the incentive to work, invest and take entreprenuerial risk. That, combined with deregulation and sound monetary policy had a substantial positive effect on long-run growth.
And Reagan actually improved our long run fiscal situation. One top economist explains:
brooksfoe, how do we know that any of those presidents actually presided over (or managed, depending on your view--I don't want to assume that you and Mark are wrong!) increases in the stock market? You're using the inflation-adjusted number, when Mark's view is that you should be using a currency-value adjustment. Since that's a novel take on things, I'm sure we need to go back and evaluate previous understandings of stock market performance. (The middle years of the Reagan administration look much better in retrospect, I'm guessing.)
I fondly recall the period just 18 months ago when Paul Krugman and others on the left assured us that the booming stock market was a result of a successful war on labor. The market was up, Krugman said, because "after tax corporate profits ha[d] more than doubled." (Then again, Krugman didn't tell us whether he took account of currency fluctuations in calculating corporate profits. I'm sure Mark will tell us that he should have.)
You're short-changing Bush by ignoring dividends, probably about 1.75% annually. Still, you'd have been better off in money markets. Considering all the tax breaks, regulatory breaks - including lack of enforcement, increased gov't spending and outsourcing, this a pretty sad showing.
Incidentally, by his own logic, Mark Kleiman must be absolutely enamored of Calvin Coolidge's laisezz-faire policies. During his Presidency the market rocketed from less than 90 to over 300, for an annual rate of return of about 23%. And since there was deflation at the time, the real return was even higher. Add in dividends and it was higher still. Coolidge's policies were a bonanza for stocks, I guess.
So I want to welcome Mark to the free enterprise club. He's in excellent company, with Adam Smith, Friedrich Hayek, Milton Friedman--and me.
McArdle's civility is a facade, Mark.
If she had her way, she have hired goons beat you to death with two-by-fours for opposing Bush's war. And she'd pay them 50 cents an hour to do it.
For the most part, I'm not too concerned with income inequality. Some degree of it even seems to encourage investment and proper valuation of human resources (i.e. excessively low government caps on doctor income can produce a shortage in doctors, which then requires subsidization to get people into the medical field). Where I think inequality comes into play, however, is in regards to the legal system. If the RIAA can afford a ten lawyer legal team to harass private citizens, they can effectively and legally extort private citizens who can't afford to defend themselves.
I can think of one or two other scenarios.
But doctors "make money off of sick people." Why would the mayor be opposed to something which might help unpack crowded emergency rooms?
I can't imagine why
excessively low government caps -> excessively low government HMO caps
metis314 said "In terms of just money after say 50 years of each system, an economy's GDP would be 117.4 times the original size for System 1 and only 46.9 times for System 2. That's a factor of 2.5 times more total wealth to distribute after 50 years in the first system."
So in 50 years, thanks to the extra 2 percent GDP growth, the bottom 99 percent will be getting to split 1 percent of 117.4x GDP, instead of 4 percent of 46.9x GDP.
Assuming that the distribution of growth remains the same, that also means that over time, the bottom 99 percent have accumulated 4x as much growth under system 2 than system 1 -- so the quality of life over the next 50 years will be markedly better for them. And they're STILL getting a bigger absolute gain in wealth each year than they would under System 1 in 50 years. Four percent of 46.9 = 1.876, while one percent of 117.4 is just 1.174 . . . So your kids 50 years from now, at least, aren't going to be thanking you for system 1.
I suppose sometime in the distant future (when the top 1 percent own virtually everything, due to their massive economic power, and the bottom 99 percent have stagnated utterly in proportion to the top one percent) perhaps these philosopher kings will eventually lead us to a brighter future in System 1. But not in 50 years.
Yeah, I used to read Mark Kleiman's website. But I got tired of an endless series of posts explaining that Jews are spiritually superior to other people, academics are intellectually superior to other people, and liberals are morally superior to other people. So I don't need advice on civility from people whose entire output is devoted to sneering at people like me.
I don't see the equivalence between saying a group of people have characteristic X, which makes them superior in certain situations to those who don't, and 'sneering at people who don't have characteristic X.' But I haven't read anything at that site, so I don't know how he comes across, other than your say-so.
Otoh, Huh? Are you seriously trying to suggest that academics as a group are not more intelligent than average? What are you smoking?
Speaking entirely parochially, I'd have to say that most of the people in my department are at least two standard deviations above the norm, quite possibly more.
Phil,
I don't care about the actual monetary value, I merely put that calculation there to show that over time System 1 isn't as bad for the poorest as one might suspect. I do care about the innovations that never happen because of lower growth. You know, innovations that make the poorest person in America today far better off than the richest in the late 1800's - early 1900's. I believe that the rate of these innovations IS tied to the absolute growth rate and hence in 50 (or 100+) years the higher growth system will lead to a society (including the poor) that is immensely better off (at least technologically) than the slow growth society.
But just to clarify further - the bottom 99% in System 1 (10% GDP growth, bottom 99% get 1% of the GDP) will surpass those in System 2 after only 76 years. But again, that's not my main concern. The amount of money available to the bottom 99% is not the same thing as "quality of living" for the bottom 99% when comparing across two hypothetical scenarios. One must take into account far more than just the absolute dollars (or even technology for that matter).
As for people living now, the average person (in the US) starts working in the bottom income quintile and by retirement has made it into the third or fourth quintile with very few remaining in the bottom quintile their entire lives. Since in reality it's more than just the top 1% that sees significant growth, an unequal wealth distribution (that results in higher growth) is not such a bad thing with people starting at the bottom and working themselves higher up as they gain experience and valuable skills. Please note that I am not saying that an extreme wealth inequality would necessarily be best since that would most likely result in a lower growth rate and I am certainly not defending "excessive" CEO salaries, etc. (though what you and I deem excessive probably differs).
I have no sympathy for index investors lamenting their lack of gains. If you mindlessly follow the herd, you get what you deserve. The 1970's would have been a crappy decade for index investors, but not for long-term investors who bought then out-of-favor stocks like Exxon. Today there are similar bargains for enterprising investors. For example, one of the best performing stocks of the last 30 years is now yielding almost 7.7%.
Another point: how many investors today invest only in domestically? Judging from the growth in assets under management in funds like Dodge & Cox International, plenty of Americans have profited from overseas growth over the last several years.
"So your kids 50 years from now, at least, aren't going to be thanking you for system 1."
That sounds like an incredibly narrow measure of economic well-being for future kids to be judging things by. It's always been my basic economic understanding that the health, value and weight of a nation's economy is measured by just a bit more than what the average individual is worth.
If you mindlessly follow the herd, you get what you deserve.
This is a very silly viewpoint to take on any kind of asset prices. Prices are driven by demand. Demand is simply how much people are willing to pay for things. The idea that one should buy things that other people aren't willing to pay very much for, and this will somehow lead to wealth, is incoherent. It's simply a distorted offspring of Romantic idealism that has no place in economic thinking.
As a friend of mine at Columbia Business School once said, "The thing is, in the markets, it basically pays to think pretty much like everyone else."
ScentofViolets,
Sure, some academics might be "smarter" than average by whatever objective test you like (e.g., IQ > 100).
So freakin' what. That's not a license to sneer, and it is not a measure intellectual prowess useful in the real world.
First, high IQ doesn't mean "intellectually superior." IQ is one measure of intelligence (developed by academics, of course) that is biased to over-rely on certain intellectual strengths and is not a measure of others.
There's more than a bit of truth to the old saw, "those who can't do, teach."
Second, academics generally have no experience outside of the insular academic world. The term "ivory tower" is an insult for a reason.
Third, many academics suffer from the inability to get out of their comfortable academic setting. I don't know why, and the ones I know attempt rationalize it away, but many just can't ever leave school and are scared sh!tless of the real world. That huge personality defect surely clouds one's judgement--and is another reason to carefully evaluate what comes out of academia before applying it to the real world.
Fourth, academics aren't always all that bright even on the objective tests:
http://www.ssc.wisc.edu/cde/cdewp/98-07.pdf
Looks to me like some college professors out there have an IQ of 95, and several occupations arguably are full of smarter people depending on gender and cohort.
Just based on the numbers, we should listen to lawyers at least as carefully as we do academics.
I think taht its just obvious that there is a moral obligation to have higher taxes on the rich even if that has bad economic consequences, but it doesn't. The people who want lower taxes are just greedy and don't care about the poor. I care about the poor. I know some poeple say I ramble incoherently and dont offer any real arguments but even if thats true I dont think its true but even if tis true I think its alright becuase what really matters is passion not reason. I think Plato said that but anuywya even if he didnt he was right or whoenbver said it was right. Someone called me a fanatic but I dont think Im a fanatic but evne if I am its okay because I know Im write. I dont even know what Im saying but I feel it with such passionate intensity that it must be ture. George Bush and Dick Cheney are evil, there polciies are very very bad like Mark keliman says and hes smart so you know hes right.
Uh huh. Whatever you've got to say to yourself to make it through the day.
But let me get this straight - you're against 'sneering', even though it has not been demonstrated, yet in the next breath say that academics 'don't deal with the real world.'
Tell me, my not terribly intelligent friend, how is that little slam not a sneer? Or is this yet another example of your sort saying, "_You're_ being insulting; _I'm_ just tellin' like it is?"
"You know, innovations that make the poorest person in America today far better off than the richest in the late 1800's - early 1900's. I believe that the rate of these innovations IS tied to the absolute growth rate and hence in 50 (or 100+) years the higher growth system will lead to a society (including the poor) that is immensely better off (at least technologically) than the slow growth society."
It is the inability to accurately account for the reasons this is true that lead people to libertarianism.
Almost every real luxury we have today are by products of bringing things to the masses and not focusing on the top 1%.
Mick;
Yet many of the things we take for granted now (air conditioning, the automobile, color TV, home computers, cell phones) were products of bringing luxuries to the rich. The rich bought them when they were expensive, funding the increase in efficiency to produce them at costs making them available to the masses.
Thank you rich people, you subsidized my $500 laptops, central air being standard in new homes, and cell phones being so common, discussions now center on making them LESS ubiquitous.
And you did this willingly and happily without politicians calling you names.
What kind of silly, sloppy-assed pseudointellectual reasoning attempts to hold a chief executive responsible for asset prices?
That's just retarded. Especially when corporate earnings data are available.
Second, you compound the error by trying to limit your analysis to equities. When we know full well that equities do not represent the sum total of wealth in the United States, and is only one of several reasonably definable asset classes.
If the largest asset in most families' portfolio is the home, and home prices have undergone an immense rise in the last seven years, well, that's relevant, too. It's ridiculous to exclude real estate from the calculation.*
At any rate, there's no rational reason to assume that equity PRICES ought to be representative of overall economic performance under a given president. It is far better for asset prices to be rational, rather than high.
Further, there's no rational reason to peg the starting point of the Wilshire 5000 or Dow or S&P or any other index to its value as of January 21, 2001. Why? Because with the benefit of hindsight, it is clear that the earnings multiples of 2000 were not sustainable. And this is true no matter what policies Bush or any other president could possibly have enacted, other than to index the f***ing dollar to the Nasdaq 100. Geez.
Moreover, there's no rational reason to hold Bush liable for the performance of any index throughout the first year of his term, before he had a real chance to put through a budget and enact serious policy. The first few months to a year of any presidential term are really a continuation of the policies of the prior administration. It takes that long to push policy through congress, and then longer than that for the real-world (as opposed to speculative) effects of the policies enacted to take hold.
A time frame of January 2002 to the present would be far more reasonable -- and because of the economic and stock market cycles, would certainly benefit the Bush administration.
This kind of crap economic reasoning is shoddiness of the first order. It's political point scoring masquerading as economic analysis, and it's riddled with holes.
*(Except that it also eventually accrues to housing cost inflation, so it's a double-edged sword. The more significant real estate becomes, the more it correlates to inflation overall. So as real estate approaches 100% of the economy, the real growth of asset prices must approach zero. Paradoxically, the faster the real cost of housing rises, then, the faster it will approach zero!)
Anon E. Mouse: The term "dumbfuck" is an insult for a reason, too... and it doesn't have anything to do with the difficulty of obtaining a G.E.D.
"The idea that one should buy things that other people aren't willing to pay very much for, and this will somehow lead to wealth, is incoherent."
--brooksfoe
Where do you think the 'buy low' in 'buy low and sell high' comes from ?
and, with this: "As a friend of mine at Columbia Business School once said, "The thing is, in the markets, it basically pays to think pretty much like everyone else."
did you really pay U$D~50K/ yr. to learn: "the trend is your friend" ?
brooksfoe,
with the SAT score-dropping, and, now, the school name-dropping, what's happened to you?
"Prices are driven by demand. Demand is simply how much people are willing to pay for things. The idea that one should buy things that other people aren't willing to pay very much for, and this will somehow lead to wealth, is incoherent."
That's a remarkably obtuse interpretation of my previous comment. The point isn't to buy things just because people (at the moment) aren't willing to pay a lot for them; that's only half of the strategy. The other half is to buy things which you believe are intrinsically worth more than their current price in the market. If you are right, others will eventually realize the discrepancy and the market price will approach the thing's intrinsic value. The difference between that price and your purchase price is your potential profit.
"did you really pay U$D~50K/ yr. to learn: "the trend is your friend"?
He may have gone to Columbia before 2002, when the school re-embraced value investing, which had originally been pioneered by Columbia alumnus (and later professor) Benjamin Graham.
I'm more shocked by Megan McArdle's economic illiteracy than I am by anything in Kleiman's brief post.
They [foreigners] hold almost no stocks--about $200 billion on a total market capitalization of 17.75 trillion.
That's a little more than 1% of the U.S. stock market. Does Megan really believe that foreign ownership of the U.S. stock market is so slight? Foreigners own at least 10% of the U.S. stock market, 25% of U.S. corporate debt, and half of all federal government debt. How is it possible for anyone with a glancing familiarity with economics (or even just current events) to think that foreigners own a mere $200 billion of the U.S. stock market? Foreigners probably spent that much on U.S. equities just over the last quarter alone.
Where do you think the 'buy low' in 'buy low and sell high' comes from ?
Wishful thinking.
Megan seems to be responding more to the Bush-bashing than to the analysis when she calls it "silliness." Which seems really silly.
First, let's forget about whether any of this is "Bush's fault." I have no doubt that everything that's not to my liking these days—notably the outrageous bill I got last week from my dog's vet—is his fault. Bastard.
But putting that well-founded certainty aside, does Megan's critique really make sense? Nobody seems to be addressing that here. Does the dollar's decline mean that equity investors are worse off?
Heck yes. (Or as my fourteen-year-old would say, "no duh.") Megan's arguments only say that "it's not that bad." Her ridicule of the currency-adjusted analysis isn't justified.
She points out that most US imports are from "places like Mexico and China [not sure what 'places like M and C' means], whose currencies haven't really altered much against ours. (To be fair, a lot of it is also with Canada and Japan, that have seen higher currency appreciation)."
Okay, maybe the currency basket being used for the calc should be imports-weighted. But the larger point remains.
Next:
"many of those places have dropped the prices of their goods and taken lower profits rather than lose sales volume."
First, note the use of "many." Which means some or many have not, will not.
And Megan knows that this is temporary stuff. In the long run the market will balance this out, and imported goods will be (even) more expensive. Wal-Mart's got leverage, but not infinite, market-defying leverage.
So if:
1. All my wealth and income is from the market,
2. I've had a zero-percent real (inflation-adjusted) return since 2001 (not counting dividends, which are running what, two percent these days?), and
3. A large proportion of goods I buy are, have been, and will be more expensive (increasingly, as the lagging currency effect gets more market teeth),
I'm certainly worse off now than I was then.
And yes, it's all George Bush's fault!
Seriously, Megan: don't diss the analysis (refine it instead) just because you don't like the post-hoc conclusion.
Cross-posted at http://trueconservative.typepad.com
McArdle's civility is a facade, Mark. If she had her way, she have hired goons beat you to death with two-by-fours for opposing Bush's war. And she'd pay them 50 cents an hour to do it.
Remember, she's tall, and therefore takes long strides. Since she clearly has no reciprocity incentive to maintain a civil facade with you, I'd start running now. A good headstart makes all the difference.
Pincher: Care to point us to the stats?
Everything I can find suggests that foreign entities hold a quarter of the public debt; half being held by the government, and the remaining quarter by US entities.
(As of 2006 it looks like 4.7T out of 9.2T or so is non-governmental, if I'm reading and remembering it right.)
Now, if you meant "half of all non-governmentally-held debt", you should have said so, since otherwise you're leaving out half of the total, and that's deeply misleading.
The same Treasury department PDF (second link above) shows 2.4T in foreign "securities" investment (stock and mutual funds, essentially), from their description.
I imagine Megan's 200B number is based on a different calculation than the Treasury one; "securities" and "stock" aren't, after all, identical (which is why the PDF has a note describing what comprises the former).
Alternatively, she might simply have found an incorrect or outdated source.
That's easy to do and often hard to notice (like the confusion between half the public debt and a quarter of it, above).
Steve: How is it all Bush's fault that, for instance, Canada is selling more Albertan oil? Please to provide a causal explanation.
Sigivald,
Pincher: Care to point us to the stats?
Sure. How about this report for Congress entitled, Foreign Ownership of U.S. Financial Assets: Implications of a Withdrawal
In the report, which was published in January 2008, there is this sentence: "To date, the world economy has benefitted from the stimulus provided by the nation’s combination of fiscal and monetary policies and trade deficit. Foreign investors now hold slightly less than 50% of the publicly held and publicly traded U.S. Treasury securities, 25% of corporate bonds, and about 12% of U.S. corporate stocks."
See here: http://www.fas.org/sgp/crs/natsec/RL34319.pdf
Back to you:
That's easy to do and often hard to notice (like the confusion between half the public debt and a quarter of it, above)
Nonsense. An economist should know better. Just over the last few months, there have been several high profile purchases of U.S. corporate stock by sovereign wealth funds that have run into the billions of dollars per company. Citigroup's two biggest stock holders, for example, are both Arabs (one is a Saudi prince and one is the Abu Dhabi Investment Company), and their share of the company runs into the many billions of dollars. China's sovereign wealth fund made multi-billion dollar purchases of Blackstone Group and Morgan Stanley over the last six months.
Even before the rise of the sovereign wealth funds, the foreign ownership of the U.S. stock market was over ten percent. That Ms McArdle didn't have an inkling of this is not surprising, it's shocking.
where is the usual, "It doesn't matter my facts were egregiously wrong, I'm still right!", follow up post? I expected that 3000 word post by now.
where is the usual, "It doesn't matter my facts were egregiously wrong, I'm still right!", follow up post? I expected that 3000 word post by now.
Look, just because you hold that standard for your own masterpieces around here, doesn't mean she has to follow it.
anony-
while there's no doubt that you do yeomen's work as MM's resident henchman, you might want to, on occasion, be amazed at the rudimentary disconnects she often displays..
or, should we be assuming that this: "Department of Economic Illiteracy", was referring to her, MM's, own?
MEH: I didn't go to Columbia Business School. The friend did. Sorry if that was unclear.