Just Give the People Their Money

It seems like just about every day I read an article about Apple’s cash hoard and what they should do with it. Yesterday they announced that they would be executing a stock buyback, or, put another way, require that just about everyone buy some AAPL stock at $400 or so. Seriously – when one considers mutual funds owning Apple stock, I would bet that just about everyone in the U.S. who owns any kind of company equity owns some.

http://finance.yahoo.com/blogs/breakout/apple-good-bad-rotten-115009507.html?vp=1

And how have the results been with Apple’s existing stock buyback?

Apple’s existing buyback program was launched October 1st of last year. Since then, the company has spent $1.95B buying shares at an average cost of $478. The stock has fallen more than 40% since the buyback went live and shares purchased have lost 15% of their value.

Wouldn’t it be nice if Apple would just give us our money in dividends, instead of “investing” it for us in Apple stock? I understand there are tax implications, etc, etc but when we buy Apple stock we fundamentally want the company to produce earnings for us. We shouldn’t be forced to re-invest those earnings in the company.

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A New Long-Term Unemployed Entitlement?

The Atlantic published an article about the problem of long-term unemployed. Apparently there is something magical about being 6 months unemployed such that a person becomes almost unemployable from that point on.

http://m.theatlantic.com/business/archive/2013/04/the-terrifying-reality-of-long-term-unemployment/274957/

The author concludes with a policy prescription:

It’s time for the government to start hiring the long-term unemployed. Or, at the least, start giving employers tax incentives to hire the long-term unemployed. The worst possible outcome for all of us is if the long-term unemployed become unemployable. That would permanently reduce our productive capacity.

The government should start hiring the long-term unemployed – I’m trying to figure out if that is a serious proposal? The author leaves the implementation details up to the reader to imagine, so let’s imagine them:

What work will they do? Will these be fulfilling jobs? If not, why not? If so, who in the world would ever take an unfulfilling job in the private sector if all you have to do is wait 6 months and become entitled to a fulfilling job working for the government?

How long will the job last? Will it be short term or long term? If short term, it’s hard to see how that is going to “trick” private sector employers into looking at the participants’ resume again. Hiring manager thought process: “I see you were unemployed for 6 months, then employed by the government for 6 months, and now you’re unemployed again. Remind me: why am I more likely to hire you now?” If long term then how will we ever afford this, and why would anyone, once hired, ever look for work in the private sector or anywhere else?

How will the participants be selected? I can envision a couple of options:

1) Everyone gets hired – so this is a true, new entitlement. Anyone and everyone who is unemployed for more than 6 months gets hired by the government.

2) Political process – people unemployed greater than 6 months get hired according to who has a friend or family member working for the “Department of Long-Term Unemployed”. Although, if you had a friend working for such a department wouldn’t you have an in for one of our existing government jobs?

3) Merit-based process – the government will review the resumes and hire only the best and brightest of the long-term unemployed. Because I’m sure the government is better at picking out those diamonds in the rough than 6 months worth of private sector resume reviewers.

4) Lottery – random draw for government jobs! Woo hoo!

Note that (2), (3), and (4) don’t solve the problem which this program was initially designed to solve, which is “the long-term unemployed become unemployable [and] permanently reduce our productive capacity” – it just reduces the number by a few.

How will these new employees be organized? Will we set up a new organization in the government, with some hired as managers, and others worker bees? Will we hire one executive long term unemployed per one hundred worker bees? Or are we going to just randomly plug these people into existing government organizations? If there were a match with their skills to the mission of the organization they probably would have already been hired. The point was that we are hiring them as an entitlement so it doesn’t matter what their skills are at all.

I’m not questioning that employers discriminate against long-term unemployed, and agree that it is a problem for the macro economy, and especially for the individuals who cannot find work. However, starting a government program to hire the long-term unemployed is a not a solution.

Debt Won’t Save You If The Inflation Hits

One of the issues that people seem to bring up to me the most is inflation, particularly hyperinflation. When people see charts like this one that show a vastly increasing money supply they are rightly concerned. One possible course of action I hear a lot is something along the lines of “hey that’s why I’m going to take out a bunch of loans so I can pay them back with cheap dollars and I’ll be protected.” Not a bad concept, and indeed it will work for a few, but based on this story about inflation in Iran (from Greg Mankiw’s blog) it’s not something I would give a very good chance of actually working if/when the time comes:

http://m.theatlantic.com/magazine/archive/2013/04/my-hyperinflation-vacation/309263

As in all cases of runaway inflation, there are winners among the losers. Iranians with foresight and the ability to borrow have profited enormously from the past year’s inflation. Many Iranians complain, Salehi-Isfahani of Virginia Tech told me later, that only the most politically connected people get significant loans from banks, so there is an inherent iniquity in the ability to profit off severe inflation. It’s easy to see why credit is rationed in Iran: the interest rate facing borrowers is fixed at 21 percent, so an inflation rate of about 30 percent means an automatic real rate of return of nearly 10 percent, just for borrowing.

This dynamic, in which savvy borrowers win big while people on fixed incomes, like the old and the retired, lose their savings, reproduces exactly what we’ve seen in previous inflation episodes elsewhere. “Hyperinflation is among the most cruel forms of government expropriation,” William Masters says. “If the government says it’s going to take your farm away, at least there’s a kind of visible honesty to that.” If you bought a large farm in Zimbabwe in 2000 and had a 30-year fixed-rate mortgage, in 2008 you could have paid that mortgage off with the 10-million-Zimbabwean-dollar note framed in Masters’s office, and expected change back in the transaction. But if you’d been in the more common situation of eking out some small savings, over many years, you’d find that your industry and foresight had been nullified, your thin cushion of savings yanked from under you.

So if you’re hoping to employ a “take out big loans to win” strategy – good luck with that. You’re likely much better off with stable money.

Apple Stock Growth = U.S. Dollar Inflation?

I had an interesting conversation with a young man out on the campaign trail yesterday about stocks and the economy. He started out trying to convince me that Apple was an amazing investment prospect. He made points such as:

A) Excluding cash on hand Apple’s P.E. ratio is 5
B) At Apple’s current cash accumulation rate they will have more cash than the company’s worth in 4 years (can’t remember what the actual number was, but it was something really low)

As the conversation continued I asked him about his thoughts about inflation of the U.S. dollar, to which he summarily dismissed the prospect pointing out:

C) Long term mortgage rates are at 3.0% – obviously the market is not concerned about inflation so neither am I

So he was perfectly happy to accept that the market was right on inflation, but refused to see the 5 P.E. ratio assigned to Apple stock as the market being right on its long term growth prospects (which it clearly thinks are not good).

Can anyone give me a good theory explaining why the free market is right about inflation, but wrong about Apple? It seems to me that buying Apple stock expecting growth is the same as taking out a big loan expecting inflation.