Tuesday, March 06, 2012

Doug Short Is the Captain's Long Lost Brother!

Mr. Short, I believe must be my long lost twin brother.


More gray haired.

Probably not a salsa dancer.

But my long lost twin brother none the less.

He focuses on Tobin's "Q quotient" whereas I am lazy and just look up a mathematically similar measure over at Dr. Robert Shiller's office, the S&P 500 P/E ratio.

The moral of the stories are the same.

The stock market is overvalued. It always has been since idiotic politicians decided us people were too stupid to know what to do and engaged in the largest and (soon to be) most damaging social engineering project ever - the 401k/IRA/government ordained retirement program.

Let's essentially ordain the stock market as the ONLY means by which you can save for retirement. AND HEY, GUESS WHAT, let's give 300 million Americans a TAX INCENTIVE to throw their money into the stock market regardless of whether or not its a good buy. No, that won't cause a bubble now, will it?

I'm not a conspiracy theorist, but something tells me Wall Street might have had a role in getting this legislation through.

Regardless, it's nice to see somebody older than me (and therefore wiser, because I know how you baby boomers like to dismiss any human without gray hair as a "moron") point out what I've been pointing out since (cripes???) 2006???

But, no, no. You kids go ahead. I'm just an evil, party pooping republican trying to bring everybody's good time down. You throw your money into the S&P 500 when it only has a dividend yield of 1.8% (Herb, point of tax preference duly noted). I'm sure some spectabulous Obama Unicorn will fly over and fart economic fairy dust to overcome all of our economic problems and all of you baby boomers will retire in comfort, as will, of course, all of you Gen X'ers and Gen Y's who believe in social security, medicare and unicorns that fart economic fairy dust.

I shall part, with something that will probably be lost on most of you pinning your hopes on the woefully underfunded 401k plan:

Enjoy the decline!


Joan of Argghh! said...

Back in the day *cough* when mortgages started at 17% with balloon payments to the sky, the 401k loomed like a godsend: put your $$ away tax-deferred. The gamble was that interest rates and taxes will be lower in 30 years, thus "saving" the investor years of compounded tax burden.

It was moderately okay for rich folks who rolled into a private annuity before 2008 and locked in a steady growth rate for their retirement. But for middle American mom and pops, who trusted their stock broker to look after them, the joke is pretty cruel. Gov't bailouts, inflation and injurious broker fees have eroded their nest egg over the years and they were none the wiser. And pretty stupid to not know where their money was.

sisterbrat said...

When the conversation permits I ask people to tell me what is going to happen to the stock market when the boomers try to cash out and retire? Sometimes I get a blink from the other person, sometimes a line scrunches up on the forehead, but there is always a blank look.

I try an explain my point by asking another question. Who pray tell will be the buyer? *blink blink* I break it down a little more and explain that a transaction to be complete requires both a buyer and a seller. No buyers, no sales, no cash out, no moolah. *blink blink* they aborted their retirement.

The smoke that comes out their ears when we start on the housing market...and then I wonder why no one wants to talk to me. hehehehehe.

Pulp Herb said...

@sisterbrat: I first asked that question in a 401k class for those becoming eligible for my employer's plan in 1996. They didn't have an answer then, but I figured they'd have come up with some kind of BS if nothing else by now.

However, I wonder if the baby boomer dip is going to make stocks attractive for today's 20 somethings hitting their peak earning years in 2030 or so.

As for who buyers will be, I wouldn't be surprised with the higher regulatory burden on publicly traded companies to find even major corporations working on going private by 100% buy-back. With the company, and not people, owning all the shares what little check there is on CEOs by boards would disappear as they would hand select the board without any possible (if rare) objections by shareholders.

@The Captain: Thanks for the acknowledgement. Note, I agree the market is still overvalued and that the gov't's retirement programs are a big part of it (although you can put other assets in a properly structured IRA, but that's back to doing your own due diligence, something considered subversive today).

If I was a conspiracy theorist, I'd think the tax disadvantage to dividends was intentional to help mask the bubble. As I've said, Enron couldn't have occurred in an age where investors expect dividends, because unlike inflated stock prices you have to cover checks being sent out.

Pulp Herb said...

One thing I just remembered in reading the article: John Bogle, founder of Vanguard, in his book Common Sense on Mutual Funds argues the market finally got back in line in 2010 by using the Q ratio and P/E (this is the 2010 revision) after being overvalued for a couple of decades.

Sadly, in 2010 he figured we'd have a slow decade and didn't see QE 1 through infinity coming (gee, think the gov't might appeal to BB voters by inflating the stock market for a decade)

The Anti-Gnostic said...

Oh man, I have been saying this for a while too.

All the whole alphabet-soup of tax-deferred plans is just a sluice-gate for Other People's Money. And like others have pointed out, when an entire demographic cohort starts trying to sell AND has to pay taxes on the proceeds...

Biggest scam in human history.

Anonymous said...

Hey, Captain, I wanted to ask you a question as a finance and accounting major. We get the whole 'return on investment comes from both capital gains and dividends' spiel from day 1.

It seems to me that at the end of the day dividends are the ONLY thing that actually matter, and the value in capital gains is only there because it (hopefully) will correspond to larger dividends later on. Maybe you individually realize a return from capital gains because the guy who buys from you wants in on those (hopefully) larger dividends, but when all is said and done, companies that don't currently and never plan to pay dividends are basically worthless from an equity perspective. The shares are just like land on Pluto: kinda cool to own, I guess, but not really inherently good for anything.

Anytime I have asked ANYBODY about this, though, people look at me like I'm crazy. Am I crazy? Is there something I'm missing here? Assuming a bigger fool doesn't stroll around the corner, paying $500 for no future cash flows *coughAAPLcough* just feels to me like throwing away money that could be better spent on alcohol, video games, or dumb college girls.

Captain Capitalism said...

No, you are absolutely right and I have written about the importance of dividends at length and even dedicate a full chapter to it in my online class (which you should take because it is full of my patented Super-awesome Economic Genius."


Here is a link to all the posts I wrote about the importance of dividends, but it merely confirms what you already know:


Chris said...

Um, yeah, D'oh.

The US market has been waay over valued for years. Still is. Will start falling (demographics, them boomers are taking their money and putting it in cash as they are retiring).

Other places... less so. Ironically, europe will be good buying in about six months or so, after the euro collapses.