Thursday, June 5, 2014

Recommended Reading

Andrew Smithers is blogging some very good material on stock market valuation at the website of the Financial Times.

(There is no charge to read the Smithers FT blog, but you do have to register. It is well worth it.)

Sunday, April 13, 2014

Must-See TV: "Silicon Valley"

The first episode of Mike Judge's new show, "Silicon Valley," is freely available on YouTube. Really sharp satire. This may be the funniest thing I have seen since "Curb Your Enthusiasm."

Thursday, April 3, 2014

Son of "Why Money has Value"

Last month I posted on why paper money, like the U.S. dollar, has value.

The basic idea is that even though our fiat currency is not backed by gold or silver, we need it to stay out of prison. If we earn anything, we owe taxes, and taxes have to be paid in dollars. So, dollars are a "get-out-of-jail-free" card, as in the game of Monopoly.

I have written an expanded version of this piece for the PBS NewsHour, at Paul Solman's Making Sen$e page. They have just published it today. It goes into a bit more depth.

Friday, March 14, 2014

Why Money has Value

Here's a question I can answer for you: why does a paper-backed currency, like the U.S. dollar, have value?

Because it's a get-out-of-jail-free card. Kind of like in Monopoly.

The U.S. dollar is not backed by gold or silver, but you can use it to keep from getting jailed for failure to pay federal taxes.

It has value is because our courts say it does. And what good is the opinion of a court, which is, after all, just words on paper? Well, if you are condemned to years in jail by a court decision, you will, in fact, spend years in jail. So, yes, court opinions are words on paper, but they mean a lot more than greeting cards.

In the U.S., your income is taxed, and you need to pay the tax in dollars. Even if you earned your income through barter. For example, if you started the year with an old baseball worth $1.00 and, through clever trading, ended the year with a speedboat worth $25,000, you would need to pay income tax, in dollars, on the gain you enjoyed, $24,999. You would need to barter your boat for some dollars in order to pay it.

This is what distinguishes the U.S. dollar from Bitcoin. No one needs bitcoins. They are elegant and, in their way, beautiful, like a work of art. But you do not need them for anything. But Americans need dollars, if they want to stay out of jail. (Yes, I know, we need beauty to be happy. True, but not important here.)

This way of thinking about fiat currency is not a new argument. I do not remember where I encountered it first. It does not get as much "circulation" as it should.

UPDATE 3/14/14: Modern Monetary Theory emphasizes the role of tax obligations in the value of a fiat currency.

Wednesday, February 12, 2014

Trendline S&P 500 EPS

Chris Brightman has a new piece out that is worth reading. He is with Robert Arnott's firm, Research Affiliates, in Newport Beach, CA.

Brightman's point is that reported earnings per share for the S&P 500 composite are markedly above trend. He is likely to prove too pessimistic, at least if he means to suggest a "multi-decade period of zero or negative growth in real earnings per share," which he mentions at one point. However, the underlying logic of his piece is good.

What I love about the piece most, though, is the bonus feature. Brightman compares current EPS to a trend line that goes back to the start of 1871. But he then provides a widget that lets you set your own time frame for the comparison. In other words, we may all agree that we're over trend, but whether we are 30% or so above, or almost 60%, varies with the start date. The widget lets you see how the slope and position of the trend line differs depending on the dates through which you draw it.

Will earnings revert back to some version of the trend lines we can draw with the widget? That seems like a fairly good bet, in the long run at least. This is, in part, because the politics of the situation will ultimately demand it, as Brightman argues.

But when will reversion happen? No one knows.

Keep in mind that the measurement of inflation and the rules of accounting have changed over time, which can distort things a little and make the tool less precise than it looks. Increasing use, over time, of stock option compensation and share buybacks are also factors. Having dug into such issues from time to time, I do not think any of them is big enough to distort the basic picture. Sometimes they offset each other, as in the case of previously-unexpensed options and buybacks. Anyway, a degree of approximation goes with the territory.

As you use the widget, please note that: (1) it's the dotted line, not the solid line, that moves when you change the start and end dates, and (2) the "Distance to Long-Term Trend" always compares current EPS to the 1871-2013 trend, rather than to the shorter period you may pick. Just keep your eye on the dotted line you are drawing.

By the way, I have written before about profits being high as a share of GDP.

HT for the Brightman piece: Michael Brakebill.

POSTSCRIPT (2/28/14): If the real (inflation-adjusted) trend line growth in earnings per share of the S&P 500 is around 2%, as it is in the Cowles Commission data series, then Brightman is correct that it should take more than a decade for the trend line to catch up to where earnings are now. A catch up in nominal terms, however, would be a lot easier to achieve and would happen sooner.

Thursday, February 6, 2014

The Economist's Greg Ip on Obamacare

Greg Ip, of The Economist, does a very good job here of trying to keep the Obama administration realistic in their statements about the effect of the Affordable Care Act on employment.

Sounds as if there really are some disincentives to work built into the program. Which is true of many other programs, too, but we need to be realistic about it. Perhaps these can be addressed as the plan evolves, as it surely will, over time.

Friday, January 17, 2014

Quote of the Day

“When you’re one step ahead of the crowd, you’re a genius. When you’re two steps ahead, you’re a crackpot.” -- Rabbi Shlomo Riskin

From the 3rd quarter newsletter for FPA Crescent Fund, which recently won a big award from Morningstar. The FPA managers are skilled, honest, and always worth listening to, whether quoting rabbis, or talking about investments.