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.


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.

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:


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.

Property Rights in Singapore

The Wall Street Journal reports on causes of increasing wealth in Singapore:


“Singapore has long been a magnet for rich expatriates and multinational corporate executives. They are attracted to the city-state’s low taxes, virtually crime-free streets, pro-business policies and predictable government”

Note that every one of those policies are facets of property rights. Well, assuming “pro-business policies” means that their property is protected and not that the government uses its coercive power to aid them.

“Unlike the West or even places like the Middle East, though, much of the new wealth being created in Asia is emerging in countries where rich people see their assets at risk, either because of unreliable governments or unloved ones. The Chinese alone are reportedly exporting billions of dollars, saying they no longer trust their government and want to put their money elsewhere. Indians and Indonesians have likewise been looking for a place where they can stash cash to avoid high taxes or work with international-class wealth managers, while steering clear of the unpredictable policy shifts in their rambunctious—and some say, corrupt—democracies.”

Again – property rights are the number one consideration. If you can develop a society that protects them strongly, you have a gold mine. We’ve watched that for the last two hundred years in America and we see it now in Singapore. It’s hard to overestimate how much value you possess when you have a super strong right to that value.

“But what really checks all the right boxes for many of the world’s ultra-rich is Singapore’s obsession with order, predictability and control, all of which give comfort to individuals whose fortunes have recently gone down the drain in many parts of the world.”

That is what seems to be lost on the whole Cypress/EU ordeal. The short-run win is stability. But, long-term, all that matters is how secure your property is. Capital is super liquid and slippery. You steal it and it can run away in a hurry. If government makes decisions based on a 20-year horizon, these things are a no-brainer. Eventually, even if it takes a decade (but almost always shorter), financial stability will return. Those with a rock solid right to their property will go to work growing and exchanging that value, but those that don’t have a strong right will continually scramble to protect it from theft. You tell me which society will be more successful a decade hence.

Baby Boomers Lower Their Taxes, And Look To Pass the Buck?

Here’s a chart showing declining tax rates in the United States.


Source: http://www.ritholtz.com/blog/wp-content/uploads/2013/01/Tax_Rates_All.png

This chart got me thinking about democracy and generational conflict in America, specifically as it pertains to public debt. It seems that the Baby Boomers are trying to coax the Millennials into their camp by offering them help with student-loan debt. The problem is that always and everywhere when property rights aren’t equally protected, the politically vulnerable are the ones that suffer. So, in a democracy, who are the politically vulnerable? Those not in the majority. Who is the majority in the USA circa 2013? The Baby Boomers. So, who is going to benefit from the weak property rights? Baby Boomers. Who is going to suffer? Everyone else.

So, the Millennial are not part of the Baby boomers and thus have a giant target on their back. But, they are a fairly large cohort so they represent a threat to the Baby Boomers. So, the BBs effectively tell the Millennials, “Join our gang and we will loot ‘The Other Guys'” The problem is that “The Other Guys” are people not in BB (including the Millennials). So, the BBs set up a smoke screen and claim that all the money that they demand is going to come from “The Rich”. Ri-i-i-ght. We’ve seen the tax rates drop like a rock for BBs while they have been in their peak earning years (see the chart above!) including for the rich Boomers. The money is going to come from the Millennials. So, the Baby Boomers are bribing the Millennials with their own money and they seem to be taking the bait. The BBs are going to coax the Millennials into the “no property rights allowed” camp and then once the locks are broken on the safes, turn around and loot them.
Brilliant. It’s not “The Rich” that get looted when property rights get destroyed. In every regime it’s the politically weak – or in a democracy, those not in the majority.