Category Archives: Finance

I’ve been watching the stock market with a bit of trepidation lately.  (Roughly half of our retirement/long-term-care money is in stock market mutual funds, the rest is in less risky bond funds and CDs.)  The current “Reddit Revolt” led by a self-assembled group of online trader-warriors against Wall Street hedge funds has turned the popular notion of stock-market-as-casino into something that feels more like the Running of the Bulls.

These self-styled Davids (you know, of Goliath fame), spurred along by everyday Joes and Josies tempted by quick profits, have led to wild gyrations — and absurd valuations — of the stocks of GameStop, AMC Theaters, Blackberry and whatever meme company that the Redditors will decide to target next.

I don’t think this will end well for those companies, for the speculators in those companies, nor inevitably for the whole idea of normal people like you and me using mutual funds as a means to secure one’s retirement.  Something has broken, and I am wary of the machine falling apart.

This Gamestop stock-market ploy smells a lot like the January 6th US Capitol rampage: a loosely-coordinated anarchical uprising of people wanting to take something back (but not sure exactly what) and who discovered their sudden and surprising power to create havoc.  As Sen. Susan Collins (no relation) of Maine would put it, this is all very troubling. Luckily, there have been no casualties so far in GameStopGate, as it is already called.

Yes, fellow lefties, I realize that hedge funds and the big investment banks like JPMorgan, Goldman Sachs, Barclays and others, have been screwing ordinary saver-investors forever to enrich themselves and their high-net-worth clients.  But financial anarchy would portend something far worse.  Reddit speculators are not going to topple the powers-that-be and usher in a new era of capitalism-as-a-positive-force in our lives.  Rather, financial anarchy a la Reddit would be more like a forest fire, burning down anything in its path.  My fear is that government regulators would respond like forest firefighters, i.e., trying to contain things only after much damage is done and lives are ruined.

Have I painted a too fatalistic scenario?  I’m not sure.  The embers of the fire are there for all to see.

• • • • • 

With that sad taste-in-the-mouth, I offer an update on The Trend.  The U.S. stock market as of January 2021 is at a level well above what The Trend (its performance between 1950 and 2012) suggests is reasonable.  Below is an updated chart of how the S&P 500 Index has fared relative to The Trend since 1950.  As of this writing, the S&P 500 Index — which mainly reflects the stock prices of the big U.S. tech companies Apple, Amazon, Facebook, Google and Netflix — is almost 24% above The Trend.

This excess performance represents three-years-worth of normal stock market returns.  This is not sustainable, I repeat, not sustainable.  The party could go on for quite a while longer, or it could end tomorrow.

I take The Trend seriously — I lighten up on our family’s stock-market allocation when the Trend suggests we are 25-30% above historical price levels, as we are now.

• • • • • 

If you’re not a fan of The Trend, then may I offer this from Yale economist Robert Shiller.  Shiller created a metric (let’s just call it the Shiller P/E) that captures what investors are willing to pay for a dollar of corporate profits.  One would think that, after taking inflation and interest rates into account, the amount that an investor is willing to pay for a dollar of profits would be relatively stable.  But here’s the real story, a la Shiller:

The white line in the graph above is Shiller’s P/E Ratio, plotted from 2006 to the present.  Note how the P/E ratio (how much an investor is willing to pay for a dollar of earnings) has risen steadily since the Great Recession — then less than 15, now approaching 30.  Why?  Why are investors willing to pay so much more for the same return on stocks?

It’s not just about our ultra-low interest rates since the Great Recession.  Rather, it has much to do with the tons of money that have been pumped into the economy and where that money has gone.  The green line in the graph shows how the U.S. “M2” money supply (which includes checking, savings, and money-market funds) has grown over the same time period.  See any parallels between this and the prices being paid for stocks?

The Great Recession (Bush) tax cuts and Trump tax cuts, on top of the easy-money policies dictated by the Federal Reserve, have clearly benefited corporations, and those who hold corporate stocks, and those who receive corporate dividends, more than they did middle-income families.*   The haves who benefited the most from financial stimulus have been using the money to bid up the prices of the assets of greatest interest to them: stocks and real estate.  There’s only so much food rich people can eat, and only so much gas they can pump into their BMWs.  The rest of their money has to slosh somewhere.  That is why we have asset inflation (which the Fed mostly ignores) instead of food/energy inflation.

And that is why stocks are so expensive now, far beyond what The Trend and Shiller would deem that they are intrinsically worth.  And now, internet desperadoes have arrived on the scene to stir up this already-boiling pot.  Oh, did I forget to mention that we remain in the grips of a worldwide pandemic?  What (more) could possibly go haywire?  Stay tuned.

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* As Lino Zeddies said on positivemoney.org, “…money being created as bank credit systemically results in a multitude of direct and indirect factors that concentrate the distribution of power, wealth and income in the hands of fewer and fewer people.”
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Trump 30,000

The Dow Jones Industrial Average (hereafter simply called the Dow) is a weighted average of the stock prices of 30 U.S. corporations, including the likes of Apple, Goldman Sachs, Merck, Verizon and Walmart.  The Dow index, which originated in 1896, is calculated and reported every second of every business day, and it is often used as a proxy for the value of the entire U.S. stock market.  The companies comprising the Dow have changed over the years, whenever those companies were absorbed, or went into decline, or went bankrupt.  (Eastman Kodak was a component of the Dow from 1930 to 2004.)  This means that the Dow is at best a proxy for successful U.S. businesses, not your average U.S. business.

Stock traders and financial writers like to talk about the Dow’s milestones, i.e., the dates when the Dow reached various values that end in multiple zeroes.  For instance, the Dow first hit 100 in 1906; 200 in 1927; 500 in 1956; 1000 in 1972; 2000 in 1987; 5000 in 1995; 10,000 in 1999; and 20,000 in 2017.  The index doubles, on average, every 13 to 14 years, reflecting ever-increasing corporate profits and U.S. dollar inflation.

Today, the Dow stands at 29,398, just 602 points (2%) shy of 30,000, another oft-cited milestone among financial finaglers.  One of the most infamous calls for “Dow 30,000” was made in a 2001 book by Robert Zuccaro, CFA.  Had Zuccaro’s prediction come true, the Dow would have reached 30,000 in 2008.  Needless to say, that did not take place — but only because Donald Trump was not president then.  It is safe to say that, thanks to Trump’s business tax cuts and his various money-ass-kissing executive actions, the Dow will now breach that magic 30,000 mark very soon, maybe within days.

You will be sure to hear about it the moment it happens.  The news will eclipse reports of the 80,000th coronavirus victim and the 50,000th square mile of Australia lost to flames, Fox News will make sure of that.  One can already buy Trump-red baseball caps embossed with Dow 30,000, along with Dow 30,000 Trump T-Shirts in children’s sizes.  Even I did not expect such pre-marketing of the event by right-wing business interests.

Trump boasts about record-high stock prices, equating them with robust economic health, and he naturally wants us to make the same reckoning.  He hypes the value of our 401k’s as if they embody America’s lifeblood, when in fact “almost half of working-age families have nothing saved in retirement accounts.” But what if you do have retirement savings?  Shouldn’t you be crowing along with Trump?

I have several points to make in this regard, starting with the irony of Trump citing the Dow Jones Industrial Average as a measure of Americans’ well-being, when only a third of the companies in the Dow provide U.S. manufacturing jobs.*  Be that as it may, corporate and individual investors alike should be pleased if stock prices rise at a sustainable rate, because that means that their risk has been duly rewarded.  But when the stock market gets juiced for political purposes, as Trump has done, savers should be wary.

Right now, U.S. stock prices are about 20% higher (see the sidebar for the current figure) than the long-term trend would suggest.  Eventually, the market will regress to the mean and that 20% premium will evaporate.  It could happen this year, or next year, or in 2025. But it is sure to happen, and the current Trump Blip will be seen for what it was.

Adding to my wariness is the fact that stock market investors are now paying $25 a share for every $1 of company profits.  This 25:1 ratio is near historic levels — in modern times, investors have been willing to pay this much only during the 1990’s dot-com bubble and the 2000’s real estate bubble.  (The long-term ratio is 15:1.)  But speculators, like Trump, don’t really care about value as long as there is the prospect of short-term gains.

Fact is, the Dow (and all the other stock averages) have been inflated by wealth inequality. Whereas ordinary price and wage inflation have largely been contained, thanks to cheap imported goods made by exploited overseas labor (and with special thanks to automation and outsourcing), stock prices have been bid up by the million one-percenter households who need some place to park all those tax-cut windfalls sloshing their way.  After all, there are only so many estates one can buy and private jets one can fly, and the rich folks know that low-interest-rate bonds are what winners sell to losers.

Don’t get me wrong, I don’t want stock markets to crash or workers’ retirement savings to be crushed.  Just pointing out that when Trump tweets about Dow 30,000 (and he will) and how he made it happen (which he probably did), the most you can credit him with is blowing bubbles.

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* Of the 30 DJIA companies, those with U.S. manufacturing sites are 3M, Boeing, Caterpillar, Dow, Merck, Pfizer, Johnson & Johnson, Proctor & Gamble and United Technologies.  If one were to include fossil fuel producers, then one can add ExxonMobil and Chevron to the list.  The only Apple product assembled in the U.S. (Texas) is the Mac Pro.  Nike has no U.S. manufacturing.  McDonalds manufactures hamburgers.  Coca-Cola manufactures the syrup that washes them down.  The rest of the DJIA comprises finance, retail, health services, information tech and communications.
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Medicare Manifesto

Most if not all of the current Democratic presidential candidates have voiced support for “Medicare for All” or a similar public health insurance option.  Ten years ago, when the Affordable Care Act was being debated (and I had high-deductible private insurance), I too was on the bandwagon.  My main interests were the elimination of pre-existing conditions as a basis for denying or cancelling coverage and ending the use of medical underwriting to set individual premiums.  I also hoped that decisive steps would be taken to reduce the obscene sums of money charged by hospitals, specialists and drug makers.  A single-payer system a la Medicare was not axiomatic for me, provided the other aims were met.

I was half-pleased when the ACA became law.  As we all know, decisive cost-containment steps were not taken and, consequently, premiums for private health insurance were only affordable with a government subsidy.  Health care costs continued to rise at a rate of over 5% a year.  The Republicans in power were less interested in addressing these issues than urging the system to implode.  I waited it all out for several years, with my grandfathered high-deductible policy in hand, until I was finally old enough to enroll in Medicare.

Medicare is a great deal if you worked and paid Medicare taxes for 10 years.  My monthly premium (for Medicare Advantage with an out-of-pocket maximum) is about half of what I used to pay for my $10,000-deductible policy and probably one-sixth of what I would be paying for a sans-subsidy ACA policy.  Medicare is far more affordable, at least from the standpoint of the insured, than private pre-retirement health insurance.  And Medicare doesn’t care about your age or health status with respect to coverage and premiums.[1]

So why shouldn’t every U.S. citizen enjoy the benefits of Medicare?  That seems to be the mantra of the Democratic candidates, most of whom (exception: Bernie Sanders) sidestep the particulars of how to pay for it.[2]  Which is sort of an important detail.  Since most of the candidates are busy now, raising money and trying not to be old white men, I thought I would step in and shed some light on the math of Medicare in an easily digested way.

The Current Picture

And what could be more digestible than a delicious pie chart?  The chart below captures the essence of where Medicare funds come from and where they go as of 2017:

Let’s take a moment to review the current situation.  In round numbers, the total cost of Medicare in 2017 was $700 billion — $300 billion for hospital care (Part A), another $300 billion for doctors and outpatient care (Part B), and $100 billion for prescription drugs (Part D).  There were 59 million Medicare participants at year-end 2017, so the cost per enrollee was about $993 per month.

But my monthly premium is nowhere near $993 — I pay $189.10 to be exact, which covers just a fraction (the blue slice of the pie) of my expected doctor and pharmacy expenses.[3]  My hospital expenses are funded primarily by payroll taxes on current wage-earners (which I once paid) and by income taxes on Social Security benefits (which I now pay).  The balance of my expenses — 46% of the total — is paid from the general revenue of federal and state governments, with Uncle Sam picking up most of that tab.

In 2017, the U.S. budget deficit was $665 billion.  By my calculations, Medicare’s share of that was $59.8 billion (the deficit cannot be blamed on any one line item).  This means the Feds had to borrow $84 per month to fully cover my medical expenses.

Medicare for More

If we were to expand Medicare coverage, we would have to decide what kind of deal to offer to the newer, younger enrollees, as well as whether to maintain the status quo for existing participants.  Options include:

  • Full Ride — new enrollees pay the same premiums as older participants do
  • Pay-As-You-Go — new enrollees pick up the full cost of insuring their cohort
  • Pay-Plus — Pay-As-You-Go plus eliminate the annual Medicare deficit

Of course, there are many possible variations of the above, but it will be instructive enough to look at these few.

To make the analysis (as well as the politics) simpler, I propose that Medicare coverage be expanded to one age group at a time.  I would start with the 55-64 age cohort, and then a few years later extend it to the 45-54 cohort.  This would give us some experience before taking the much bigger leap of offering Medicare to all citizens.[4]

I use the word offer because younger people should be able to defer enrolling in Medicare until they reach 65 (as the law now provides).  Newly-minted 55-year-olds would be given a six-month window to decide whether to enroll now or wait another ten years.

So, my facts and figures below pertain to Phase I of Medicare for More, where benefits are extended to the 55-64 cohort.[5]  In 2017, 42 million Americans belonged to this group, and their per capita health care spending (not including dental) was roughly 65 percent of what current participants spent.  Merging these cohorts into one (the Full Ride option) would mean $1,030 billion in benefits would be paid out on behalf of 101 million enrollees, a total monthly cost of $848 per enrollee.  If monthly premiums for Parts B and D were to remain at their current level (14% of total program cost), every participant would pay $119 a month, lower than today’s premium.  Hey look, manna from heaven!

However, without an accompanying payroll and/or income tax hike, the general revenue burden would climb from $324 billion to $604 billion a year.  And the amount the Feds would have to borrow to cover Medicare’s share of the deficit would rise from $84 to $121 per enrollee per month.  That’s the math of the Full Ride.

We might instead offer early enrollees a Pay-As-You-Go plan, in which the 55-64 cohort would pay all the Part A, Part B and Part D costs incurred by its age group (an estimated $325 billion in 2017).  Taxes would not rise, deficits would not fall, and premiums for traditional Medicare would remain the same.  However, the average monthly premium for early enrollees would be much higher — $645.  It would only revert to the lower amount when the enrollee reaches 65.

$645 a month sounds like a lot (and it is).  But it is $50 less than the average premium for non-subsidized ACA plans purchased by eHealth shoppers in that age group.  Now, those ACA plans may have offered better coverage, but I’m sure many people would have opted for a lower-premium Medicare plan.  So Pay-As-You-Go is not an unreasonable option.

What if the politics of the situation demand a fix to original Medicare as well?  This brings us to the Pay-Plus option, where the early enrollees pay-as-you-go and all enrollees pay a $49 premium surcharge to offset Medicare-related deficit spending.  With this surcharge, most 65-plus participants would pay $184 per month (a 36% increase) and 55-64 enrollees would pay $694, erasing any advantage of Medicare for More over ACA.  So the Pay-Plus option would have limited appeal to new enrollees — and current participants would howl at the premium hike.  Unless, that is, some rich people helped pay for it.

Because That’s Where the Money Is

One progressive cause that is gaining traction is reducing U.S. wealth inequality.  In 2017, 40% of the nation’s wealth was owned by the top one-percent, and the figure keeps rising.  Elizabeth Warren is among those who suggest an annual tax on idle wealth.  I’m not much in favor of that, as it would likely lead the rich to hide their wealth using complex financial instruments and/or move it offshore.

But there are other ways to reach into their silk-lined pockets.  One, which I wrote about over seven years ago (Making Wall Street Pay), involves increasing the SEC fee on stock and bond transactions.  The actual dollar volume of U.S. stock trading is hard to pin down (NYSE considers it proprietary information) but my best estimate is that the value of NYSE and NASDAQ trades is $500 billion a day.  Levying a fee of 1/100th of one percent on the dollar value of U.S. stock transactions would generate about $12.6 billion per year.  Most of this cost would be borne by hedge funds and heavy traders.

Many companies used the windfall from the Trump corporate tax cut to buy back shares of their own stock instead of building their businesses or paying workers more.  Over the past decade, the dollar value of big-company stock buybacks has averaged $450 billion a year.  We could raise $4.5 billion for Medicare with a 1% federal sales tax on stock repurchases. What to name it?  The One-Percenters Tax, naturally.

While we are at it, let’s restore some sanity to the corporate income tax.  In 2018, the U.S. collected only $205 billion in corporate income tax, down from an average of $307 billion a year over the previous five years.  A 10% corporate tax surcharge would bring in another $20.5 billion — and perhaps quell some of their enthusiasm for stock buybacks.

Yet another source of big money is Big Pharma.  In 2017, drug makers spent $6.1 billion on consumer advertising and reaped $453 billion in sales.  You don’t need to ask your doctor whether their profit margins were healthy, because they are — from 15 to 45%.  A non-deductible, 100% sales tax on television/radio/social-media ad sales for prescription drugs would net at least $3 billion — and even more if drug makers don’t cut their ad budgets.

One last idea for funding Medicare for More is a reasonable and broadly-based estate tax.  Under current law, the only portion of an estate subject to tax is the amount in excess of $11.4 million, so fewer than 2,000 estates a year pay any tax.  Today, a $15 million estate would pay 40% of $3.6 million = $1.44 million, for an effective tax rate of only 9.6%. 

A fairer estate tax would be based not on total value but unrealized (hence untaxed) gains and untaxed IRA balances, and would apply to all estates valued $3.75 million or more.[6]  According to the Center on Budget and Policy Priorities, “Unrealized capital gains account for a significant proportion of the assets held by large estates — ranging from 32 percent for estates worth $5-10 million to as much as about 55 percent for estates worth more than $100 million.”  The tax would also apply to dynasty trusts and other stratagems used by rich people to pass along their wealth tax-free.  (Check out the link — I find it disgusting.)

Today’s estate tax nets about $15 billion a year.  I estimate that my version would raise at least $23 billion without closing loopholes and probably $10 billion more if it does.

All told, my proposals would haul away about $59 billion a year from the golden vaults of the wealthy and hand it over to Medicare — who in turn would complete the ironical circle by giving it back to hospitals, doctors, device makers and drug companies, on your behalf.  Meanwhile, that $59 billion would pay off Medicare’s share of the federal deficit, and so that pesky $49 premium surcharge in the Pay-Plus Plan would vanish!

So the next time someone says to you, “Surely our nation can’t afford Medicare for More!” you will have an answer: “Yes we can.”  (Then you can add, “And don’t call me Shirley.”)  Feel free to send this article to your congressperson and favorite presidential candidates, so that they will have an answer too.

Now it would be even better if Congress found the backbone to take on Big Pharma and groups like AMA, AHA and Americans for Prosperity (the anti-Medicaid lobby funded by the Koch Brothers) and took action to significantly cut health care costs.  But this, I fear, will take more than one election cycle — and one obscure blog post — to accomplish.

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[1] Medicare does care somewhat about how much money you make: about 6% of enrollees pay an income-based premium surcharge, according to the Kaiser Family Foundation.

[2] According to feelthebern.org, Sanders would impose a healthcare income tax (whatever that means), an employer payroll tax, a surcharge on high-income individuals and a tax on securities transactions.

[3] My Part B premium is only $135.50 but I elected to pay extra for a lower drug deductible and copays this year.

[4] Sen. Sherrod Brown of Ohio is among those who oppose Medicare for All but support offering it to those 55-64.

[5] Before I delve into the numbers, allow me to say that I see no problem with Blue Cross/Blue Shield and other private insurers participating in Medicare as they do today, via Advantage and Supplement Plans, as long as the public option (i.e., regular Medicare) remains available in its current form.

[6] The $3.75 million threshold would mean 27% of the largest estates would be subject to tax.  I would allow the value of the deceased’s principal residence to be excluded from the estate tax calculations.  Unless that residence happens to be a tower in Midtown Manhattan.

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