This one really dates itself . . . from 2002
For most of my adult and near adult life, I’ve thought of myself as a reasonably bright person. When I was in fifth grade I was put in an accelerated program because I had maxed out some IQ test. I skipped my senior year of high school (not that hard to do) and went to college when I was 16. I graduated four years later (from a different school) with honors. Whatever insecurities I’ve had over the years, feeling stupid wasn’t one of them. Until recently.
I pat myself on the back in this way and at this time, because I find myself at what is supposed to be the height of my intellectual, social, and economic prime feeling increasingly confused and out of sorts about the events that swirl around me, both in my day to day dealings, and in the world at large. It reassures me to think that at one point I felt like I knew everything (ah, youth!).
These days, I read the local paper, I habituate the online homes of CNN, The New York Times, Google News, and a host of others, and I watch CNN, MSNBC, and CNBC with reasonable regularity. I deal daily with a pretty smart grade of person. I can discuss current events without making a fool of myself. And still, I find to my increasing consternation, that I’m having a harder and harder time making sense of things.
I wonder about this creeping sense of overwhelm. I suppose I could pass it off as my age, but that leaves me a bit out of breath. If I at 47 struggle to understand what’s going on in Iraq, just to pick one example, what does that say about the folks making all the big decisions in their undisclosed locations who are much older than I? No, that one seems way too simple, ageist, and unbecoming.
Another possible explanation is that the world has just gotten a lot more complex. Nobody can understand all of it, or even a lot of it. I like that idea because it accounts for everything without meaning anything. I can assert it with great confidence because I know I’m not wrong about this. At any time in the last thousand years or so, any two people could be sitting around talking about the puzzling nature of current events . . . “did you hear that some guy named Hannibal just crossed the Alps with elephants”, or “Og just told me that Ugh just discovered fire” . . . and the other could respond with some version of, “the world sure is getting more complex.” But just because it’s true, doesn’t mean this is a salve to my middle-aged confusion. Why? The complexity and resulting anxiety and confusion aren’t going to go down; they’re going up, so where does that leave me?
Another possibility is that there are dark and nefarious forces at work in the world conspiring to fog the intellect and reason of all but the sharpest amongst us so that they may work their evil schemes in relative freedom. In other words, the confusion I feel is not the fault of “the system” or of the march of modernity, but of someone else’s skillful intent.
Normally I’m not a conspiracy theory guy, but the implosion of corporate governance in the U.S. last year, along with the now evident manipulation of the California energy markets, just to pick a couple of examples, has caused me to reconsider my previous conviction. So this notion has some limited appeal, but not enough to act as an overarching explanation for what I’m feeling. Too “victimy” if you know what I mean.
A third possibility, and one I would normally favor, is that the things I find confusing are the things I don’t follow closely. The “ignorance is bliss” defense has an inherent appeal. It absolves me while excusing me in the sense that I can still pretend that if I had paid attention, I would have understood. The fact that I don’t is simply a function of the fact that I was too busy thinking about something else. In other words, I really could understand almost anything if I just thought more about it.
The problem with this last explanation is that even if it’s valid, it doesn’t matter. I simply can’t keep up. My capacity to spot, follow, and understand all the things that might have a huge impact on my life is simply no match for all the things that do have a huge impact on my life. In the old days, back before the Internet, we were largely spared this problem, relying on the editors of our local papers, the nice folks at Time, Newsweek, Match, The Economist, etc., and the icons of broadcast journalism, typified by the avuncular Walter Cronkite, to cull it, sort it, and explain it to us in nice bite sized chucks. If they weren’t talking about it, we didn’t need to worry about it. Not anymore.
So what’s got me spun up? Lots of things. Here are the recent few, examples of the kind of things that no matter how much I think about them, I just can’t figure them out. The kind of things that leave me feeling stupid. (I’m purposefully leaving the whole Iraq business off of this list, because it’s not just me who doesn’t understand that one.)
Why Does Anybody Own Stocks?
For the last nearly thirty years, I took it as an article of faith that smart people buy stocks. In fact, all you really had to do is buy a bunch of them, picking from a variety of categories and maybe even countries in the name of balance, and some years later, you’d be rich. “Buy and Hold” it was called, and it was as close to a sure thing as the New York Yankees appearing in the playoffs.
If you felt especially clever, you could learn about “fundamentals” or perhaps learn how to chart stocks and make even more money. If that felt like too much work, you could buy a mutual fund, 100% of which, like the children of Lake Woebegone, were somehow above average. Or, if you were really conservative, you could buy an index fund, saving a bunch of fees in the process, and sit back and watch as your portfolio increased in value at the same rate as the ever escalating S&P 500.
And then I read the other day a piece by Gary Shilling called “The Great Stock Fallacy” that got me all spun around. Now I wouldn’t know Mr. Shilling from the man in the moon, but I have to assume he’s not stupid as he’s managed to get himself a regular column in Forbes Magazine. In the article in question he asserts that . . .
The speculative binge of the 1990s, like any other, produced a cornucopia of investment fallacies. In retrospect the absurdities of some of them are obvious, such as the idea that we could all quit our jobs and make a living day trading. But other wrongheaded concepts are still widely accepted.
Stocks are best. The theory is that, over a long enough period of time (say, a decade or two), stocks are guaranteed to beat bonds and cash. That is supposed to happen because corporate earnings are all but certain to grow faster than the economy, and P/E multiples will rise forever.
This theory won’t work in the sober investment years ahead, any more than it did in the last three. Long run, profits on average can’t grow faster than the economy. In a democracy, capital’s share of the economic pie can’t keep growing while labor’s shrinks.
Wow. I think I understand that, but it sure doesn’t sound like what I thought was the truth about stocks. It sounds like he said that the whole “buy stocks and get rich, it just takes time” notion might not be right after all. He goes on to quote a lot of numbers and figures and such, sprinkling in words like deflation, nominal growth, and total return. After bashing bonds around he lays out the corker . . .
Treasurys are for losers. Really? Over the past three calendar years the Lehman Brothers Long-Term Treasury index has averaged a positive 14% annual return; stocks, a negative 14%. The spread in returns is also stunning over longer periods. If you bought a 25-year zero coupon U.S. Treasury bond in October 1981, then switched at the end of every calendar year to another 25-year zero, you’d have a compound annual return of 23.9%, before taxes or transaction costs.
I’ve been a Treasury bond bull since I started talking about the bond rally of a lifetime two decades ago. There’s more appreciation if mild deflation unfolds and pushes Treasury bond yields to 3%. A contraction in the long Treasury yield from 5% to 3% over the next two years would give you a compound annual total return of 23%. That’s lots more than you can expect from stocks.
Maybe it’s just me, but if Shilling is right, why does anyone own stocks? And more to the point, why didn’t I know the secret of Treasurys before now? A total annual return of 23%? Even if I still don’t get the concept of yields, I do get 23%. So why didn’t I call my broker yesterday?
As if this wasn’t enough, the man who knows more about all things economic than even Alan Greenspan, the man known as the greatest stock picker of all time, the Wizard or Wall Street, non other than Warren Buffet himself, has just disclosed in his most recent Berkshire Hathaway Annual Report that he thinks the stock market is a terrible place to put his, your, or anybody’s money. In it, he says . . .
We continue to do little in equities. Charlie and I are increasingly comfortable with our holdings in Berkshire’s major investees because most of them have increased their earnings while their valuations have decreased. But we are not inclined to add to them. Though these enterprises have good prospects, we don’t yet believe their shares are undervalued.
In our view, the same conclusion fits stocks generally. Despite three years of falling prices, which have significantly improved the attractiveness of common stocks, we still find very few that even mildly interest us. That dismal fact is testimony to the insanity of valuations reached during The Great Bubble. Unfortunately, the hangover may prove to be proportional to the binge.
The aversion to equities that Charlie and I exhibit today is far from congenital. We love owning common stocks – if they can be purchased at attractive prices. In my 61 years of investing, 50 or so years have offered that kind of opportunity. There will be years like that again. Unless, however, we see a very high probability of at least 10% pre-tax returns (which translate to 6-7% after corporate tax), we will sit on the sidelines. With short-term money returning less than 1% after-tax, sitting it out is no fun. But occasionally successful investing requires inactivity.
Gary Shilling, as smart as he may be, is one thing. Warren Buffet is another. Differences of opinion, of course, are what make the world go round. They’re the life blood of financial markets. After all, if we all thought the same about some particular stock, we’d either all be selling and nobody would be buying, or we’d all be buying and nobody would be selling. But that’s not how it works. But even with that caveat, I find myself feeling incredibly confused if not stupid. Confused why I ever thought stocks were a good idea (although they sure seemed that way during the late 1990’s). Confused why I own a single equity today. Confused about what I should be doing with my daily dwindling portfolio. Like I said, I’m feeling stupid.
Why Does Gas Cost So Much?
As I mentioned, I keep an eye on the latest doings via the Internet . . . I’d hate to think that there was another reality TV show disclosure that I didn’t know about. While writing this piece, I flipped over to Google News and found this little morsel . . .
March 9 — The average price for self-service regular unleaded gas around the country rose 5.31 cents to $1.72 a gallon in the two weeks ended March 7, according to a nationwide survey of 8,000 gas stations.
$1.72? Over here on the left coast, we haven’t seen $1.72 since Clinton was President. No, here in the largest single market in the world for cars and the fuel they burn, the “average” price is over $2.00 per gallon, and the price we reprobates pay for premium gas is somewhere closer to $2.25 (all you readers from outside the big PX can start laughing now). Not to put too fine a point on it, but I thought the whole point of a $300 billion dollar defense budget was to make sure we had unfettered access to all the reasonably priced oil we wanted . . . but I digress.
So what’s the deal here? Why is the price of gas going up so rapidly, and more to the point, why is it so out of whack in California in general, in and here in the San Francisco Bay Area in particular? We consume more of the golden nectar than most countries and still we Californians pay like we’re in some third rate economy like Iowa, except the people there pay a lot less. Rick Jurgens, in an article called “World events not only cause for gas prices” offers this explanation . . .
In California’s unusual gasoline business, automobile-dependent residents drive demand, air rules limit imports, and supply comes almost exclusively from 12 refineries owned by seven companies. The result, according to Mike Burdette, a senior analyst for the U.S. Energy Information Administration, is “a very finely balanced market.”
Things went out of whack over the past two weeks as spot market, or wholesale, gasoline prices jumped 20 cents a gallon to about $1.49 in Los Angeles and $1.45 in the Bay Area, according to Mahoney.
That pushed California’s retail prices over the $2 benchmark during the week that ended March 3. Of the $2.01 collected on average for a gallon, 85 cents covered the cost of crude oil, the raw material for gasoline, according to the Energy Commission. That was 35 cents more than the 50 cents per gallon that crude cost a year ago. But the retail gas price, which was $1.33 in 2002, jumped even more: 68 cents a gallon.
Where did the other 33 cents go? According to the Energy Commission, the refiners’ cut — used to pay operating costs, with the balance pocketed as profit — jumped 14 cents, to 51 cents a gallon from 37 cents a year ago. Service station operators’ take also rose by 14 cents, from break-even a year ago.
As I’ve already said, I’m generally uncomfortable with the idea of conspiracy theories, and I’m even less comfortable with the idea of regulated markets, but there’s something about this whole thing that has a bad odor. I get that the world oil markets are in turmoil . . . we’ve got all the financial disadvantages of having a war in Iraq with none of the supposed benefits. I also get that the oil business as a whole is pretty risky, and the nice folks drilling in far off and hostile lands need to make some money. So why is it that I feel like we’re being had?
Being “had” doesn’t make me feel good. In fact, it leaves me feeling pretty cranky. The alternative is that there’s nothing going on here and that this is just the way that markets work which is the way the oil company and their public shills describe it. I really want to believe that. It’s not as simple as market manipulation and profiteering. It’s much more complex and arcane than that. Much too difficult to explain to normal people and even harder to understand.
The problem I’m having is that while it walks like a duck, looks like a duck, and quacks like a duck, it apparently isn’t a duck. If that’s true I’m back to where I started, which is feeling just a bit stupid. And had.
What’s The Story With SUVs?
Sport Utility Vehicles are all the rage here in the big PX. As of 2002, SUVS, Pickups, and minivans outsell cars, and SUVs alone account for 25% of all vehicles sold here (against a total of a bit more than 17 million units). Thumbing through a recent issue of Automobile Magazine, I counted something like 70 different versions, ranging from relatively cheap, light, and “socially responsible” choices like the original Jeep, the Suzuki Vitara, and the Saturn Vue, to the monstrous and preposterous Hummer H1 (“I want what Arnold drives”), and a collection of 300 plus horsepower, 150 mph, uber sleds like the Cadillac Escalade, Infinity FX45, Porsche Cayenne, Mercedes M, and BMW X5.
I don’t own any one of these beasts, though in years past we did own a soccer mommy van and presently own the fashion forward, retro PT Cruiser. But at least in our town, we seem to be the only ones who don’t own an SUV. In fact, you can’t go to the food store or a Starbucks around here without being run over by a Chevy Suburban, a Lincoln Navigator, or a Lexus LX470. So knowing that my household isn’t doing much for the whole average thing, I have to assume that somewhere in the US there are people driving car-cars. It’s just that I don’t know very many of them.
So I admit it. I think they’re dumb vehicles. Most of the people driving them would be far better suited buying a mini van. But why people choose to buy them isn’t the part that’s confusing me. The problem I’m having is understanding when, where, and how did Jesus and SUVs get linked up? “What would Jesus drive?” It’s comical except people have gotten pretty serious about this, and now I find myself feeling jumped by yet another social phenomenon that in my mind makes no logical sense. It’s a dog that just doesn’t hunt, so why are people so spun up about it?
One minute I was vaguely aware that the chattering class was going on about how environmentally irresponsible and unsafe SUVs are (what with all those unintended roll overs, exploding Firestone Tires, and so on), and the next minute, it seems like everyone is in on the religious significance of SUVs except me. So I surfed around the Internet and found this item by Larry Armstrong and David Welch at Businessweek Online (there are plenty of others).
Seen the most recent volley from the anti-SUV brigade? In TV ads that started airing on Jan. 7, they try to make driving a sport- utility vehicle tantamount to financially supporting Osama bin Laden and his gang of terrorists.
In a parody of Bush Administration anti-drug ads, a parade of talking heads–seemingly ordinary Americans–intone “I helped hijack an airplane.” “I helped blow up a nightclub.” “So what if it gets 11 miles to the gallon?” The logic? SUVs use lots of gas. Gas comes from the Middle East. The Middle East funds terrorism.
This latest campaign is the product of the so-called Detroit Project, an ad hoc Hollywood group headed by conservative political commentator and gadfly Arianna Huffington. She gave up her 13-mpg Lincoln Navigator a year ago for a tiny, hybrid gas-electric Toyota Prius and wants you to do likewise. The Detroit Project is just one of a number of activist groups that have emerged recently with the aim of stamping out SUVs. By torching them at dealerships, tagging them with graffiti or phony parking tickets, or, most absurd, implying that Jesus would never drive an SUV, all hope to vilify the gas guzzlers.
My friends from Europe just don’t get the concept of SUVs. They look at them and see big, heavy, and gas guzzling. Over here, the folks that make them see profitable, profitable, and profitable. The folks buying and driving them see big mobile boxes that hold a lot of stuff, keep the kids as far away from the adults and each other as possible, and safe, safe being defined in purely Newtonian terms. If you’re going to whack into another anything, you want to be in one of these brutes . . . a point that is not lost on the folks who love, drive, and/or advocate for smaller, lighter, and less energy use intensive vehicles.
But linking SUV ownership to sponsorship of terrorists? That seems a bit simple minded. Like somehow if the four million people or so who buy SUVs every year—out of a total of 750 million cars in operation worldwide—bought Honda Civics, all would be right in the world, the oil Sheiks would go poor, and the sources of terrorist funding would dry up. It doesn’t make sense, but maybe it’s just me who doesn’t get it. Like I said, I’m starting to feel stupid.
As to the part about Jesus. Jerry Flint, a contributor to Forbes Magazine has this to say:
And what would Jesus drive? I’ve been to Israel, Judea, Samaria, Sinai and the shores of Galilee. It’s a rocky land and 2,000 years ago there were paths or trails, not concrete highways. Might Christ have needed a big SUV to get into those hills? My friend Jason says, “He was a carpenter. He would have driven a pickup and probably would have had a crew cab version to carry more of His followers.” And four-wheel drive for those hills. A hybrid wouldn’t have made it.
Who Cares About Superpremium Ice Cream?
But of all the things going on in the world today, the one that has me most baffled and confused is this one (as reported in the New York Times)
The Federal Trade Commission voted yesterday to seek a preliminary injunction to block the $2.8 billion merger of Nestle’s United States ice cream business with Dreyer’s Grand Ice Cream. The commission said the proposed deal would eliminate competition and raise prices for superpremium ice cream.
“The merger would combine two of the three incumbent firms in the superpremium ice cream market,” said Michael Cowie, the assistant director of the commission’s merger litigation task force. “When there are two competitors rather than three, we become concerned that there will be less vigorous rivalry, especially in a market where entry is difficult.”
The F.T.C. said antitrust concerns led it to begin investigating the proposed merger shortly after the companies announced their intent to join in June. Nestle, which makes the Haagen-Dazs brand, would have added ice cream brands like Edy’s, Starbucks, Godiva and M&M/Mars in a merger with Dreyer’s.
That combination would have given Nestle-Dreyer’s about 60 percent of the United States superpremium ice cream market, the commission said. The two companies had sought to merge to better compete with Unilever, which markets the Breyers and Ben & Jerry’s brands, in the $25 billion global ice cream market.
What am I missing here? I get the basic concept that competition is good. After all, I think a fair case could be made for the fact that the dynamics of the California gasoline market have reduced competitive pressure to the point that oil companies enjoy largely unfettered pricing power here in the Golden State. But we’re not talking about gasoline, bread, milk, shoes, beer, or any other of life’s essentials.
We’re talking about something called SUPERPREMIUM ice cream. Something that costs about $4 for a pint (way more than gasoline by the way), which is about double what merely premium ice cream costs. Something that will at least add pounds and may even kill you if you eat too much of it. Something that many of us like, but none of us need. So where’s the problem here?
Is someone at the FTC really suggesting that the new ice cream powerhouse will use its market concentration and distribution might to jack up prices and extort unreasonable profits from us unwitting consumers? Hello?
I like to pretend. I like a good game of “what if?” So let’s say the folks at Nestle decide to start charging $5 for a pint of Ben and Jerry’s. I see three possibilities.
- Us sheep-like consumers will just dig deep and toss another pint of Chunky Monkey in the shopping cart.
- Another player will enter the market under that pricing umbrella and win a lot of business.
- People will roll on down the isle and buy something else.
Four dollars says choices two and three keep the Ice Cream Kings honest. Like I said, I just don’t get this one. Having said that, I say, “Let them compete.” This deal is born out of laziness and greed, two time tested human motivations that when combined, have yet to yield any sort of sustained benefit to anyone.
What the FTC should have said is, “You guys are a bunch of lazy bums. What happened to the thrill of victory and the agony of defeat? What happened to the satisfaction of the hometown boys in Oakland California making life tough for the food colossus from Switzerland? Where is your pride lads? Get your big boy clothes back on and go out there and make us proud!” But that’s just me, and as I’ve now said repeatedly, I may be slipping here.
Stupid Is and Stupid Doesn’t
I’m not sure what to conclude by all this. I look at the things that confuse me, Iraq, Stocks, Gas, SUVs, and Ice Cream, and I struggle to see the theme that ties these all together other than they’re topical and someone wrote about them. Maybe it’s as simple as that and this whole thing was an exercise of writing excess.
It’s also possible that they are symptomatic of the larger themes of modernity that make all of us feel vulnerable . . . a feeling that the organizations that impact our lives have gotten too big, too complex, and too interlocked for any one person to understand yet alone influence. That it is this bigness and impenetrability that leaves otherwise competent and bright people feeling stupid . . . a feeling that leads too easily to frustration and then apathy and pretty soon you have sub 50% voter turn out, a deference to single issue political players, and an all around drop in the kind of active citizenship that keeps a people and a country healthy. I actually think there’s something to that.
There is no doubt in my mind that we have entered a strange new chapter in the relatively brief history of modernity. The US, the most powerful nation in the history of the world, is being led by a President who didn’t receive a majority of the votes cast to a probable war that most people in this country (forget the rest of the world) don’t want. How does that happen?
Our entire financial system balances on the decisions of a surprisingly few actors—think about the Long Term Capital debacle a few years ago, the recent massive manipulation of the California energy market, or the incineration of billions of dollars of shareholder wealth that occurred through the malfeasance of a few corporate executives—people most of us don’t know, doing things that most of us don’t know about, with a potential impact most of us won’t be able to stand.
Third rate countries and non-state actors can leverage the technologies and communications infrastructure that the developed world has created, funded, and built up to attempt to achieve political ends that are completely disproportionate to any measure of power and significance that you or I understand.
So what do we do besides sit around and feel stupid and powerless?
Thomas Jefferson was a big fan of universal public education, rightly believing that ignorance was the breeding ground for tyranny, and education was the first line of defense to freedom and liberty. In the grand scheme of things, none of the issues I’ve mentioned here may matter to you, but there are plenty more like them that should. And while it’s true that there’s too much to know, that doesn’t mean that you or I shouldn’t take responsibility for knowing enough and caring enough to have and voice an opinion about the things that matter to us. It’s not going to work if we leave it to someone else to care.
If you’re not like me, if everything around you makes perfect sense, God bless you. I hope you’re doing something with your wisdom. For the rest of us, that creeping sense of “stupidity” may just be the clarion call to get in the game and take some personal responsibility for being informed and making sure that the people who spend our money and exercise power in the name of flag and country know that we’re watching, that we have a reasonably informed opinion, and that we care.