What happened in the 1980's? Why are valuations still so crazy? Don't neglect money supply. Adjust the S&P 500 returns since 1970 against either gold or M2 money supply, and all the "gains" from the last 50 years disappear. Whether the Barbarians had internalized this yet in the early 80's or not, they were just quicker on the uptake. Get near the money printer, lever up in assets that don't debase as fast as the U.S. Dollar and hold on. See also: home prices, collector art work, etc.. Think of stock buy backs as controlling supply of pseudo scarce assets and they make more sense.
Scarcity vs. the dollar is what is really being sought. Study Bitcoin.
The ‘decade of greed’ is apt in my view as I had a second-hand seat to witness some of it. My father worked for Integon Corp, an insurance company, in Winston-Salem when Nabisco bought RJR. F. Ross Johnson was loathed in that town even before he moved the company headquarters to Atlanta, because Winston-Salem was too ‘bucolic.’ It also reminds me of the Ashland acquisition of Integon in 1981, subsequently selling it in 1984. There were allegations that Ashland's primary interest was accessing Integon's substantial pension fund and my father, a high-ranking exec, was convinced that it was a pension raid. He and other key employees lost their jobs after the acquisition. Not good times.
Can't ridiculously high stock prices (by P/E ratio) be explained by:
(1) Money printing (Quantitative Easing), the Fed has $7T on its balance sheet,
(2) Demographics - the median baby boomer is about to retire, so for the past two decades there has been major net inflow to the market,
(3) Permanent US trade deficit means a permanent current account surplus, some of that money comes back to the US as stock purchases, including as
(4) Everyone just buys index funds so while individual stocks have different P/E ratios, the market as a whole moves up or down based on overall supply/demand for stocks
I've said this elsewhere, but things changed when we had a critical mass of people retired and getting ready to retire. All of a sudden, returns had to be goosed to keep a lot of people happy, whether the beneficiaries wanted to admit it or not.
The epithet “Decade of Greed” has to make one smile a bit, given the cultural changes of the last few decades.
When I was an 80s teen, there were, as ever, certain items the girls of my acquaintance were (transiently) passionate about: Guess jeans, Berek sweaters, something called tulip rings which may have been a local or Southern object of desire, LJ Simone flats … these are things I can remember, and I’m sure I was clueless of many others. I had a pair of the flats, though not the (daintily, preppily) rhinestone enhanced ones I coveted, and a pair of the jeans. (Those sweaters were hand knitted in Peru or something, and very expensive.)
I went to public school, and not one of the two or three “right” ones - but word quickly filtered down even to my school when a girl at one of those other nearby schools, was profiled in Life magazine. The reason for the profile was to present a pretty teenager who enjoyed the emblems of 80s wealth: her own Bentley, a Cartier watch.
I never saw this in print, but it was talked of for a few days, and even turned, gossip-fashion, into a negative: how “embarrassed” she must be, how they didn’t know how it was going to be presented, etc. (this also giving the speaker the vicarious cachet of seeming to know her, which one or two girls probably did).
Can you imagine this now? I mean, not the girl, not the emblems - but the fact that she was so utterly singular to us, and even, it would seem, to the nation?
Decade of Greed my foot. Don’t put that on the country as a whole. The LJ Simone shoe doesn’t fit.
These have been the decades of greed, against which we were as babes in the wood.
“We can think of valuing a company in two steps. First, forecast the future earnings of the company. Next, decide how much to pay for those future earnings.” Unless I was an employee of this company, or owned this company, and had worked at or extensively toured all their competitors, I wouldn’t feel comfortable betting on one company using this method. It seems to me, only insiders with information advantages and knowledge gained through extensive market research can know enough to reliably make MORE money betting on one company than through index funds.
Get inside information off the record, have an on-the-record justification prepared (some analyst flunky's report), and trade accordingly. Repeat at scale.
The huge increase in stock valuations is the way the rich and super rich are getting richer (& super richer, some even super duper richer).
What rich folk buy with money, earned or printed & given to them by govt, is stocks. When money is printed, some goes into stock.
Stock, like most folks' bank accounts, are 1s & 0s in an account of how many shares are owned.
Maybe the govt should be taxing companies with over $100 billion capitalization thru required 1% issue of new voting regular shares, which is not exactly money, but the govt will, after 1 year, begin a 100 week 1% a week sale of the shares. This is likely a more effective "wealth tax" than what Warren is asking for in taxing unrealized cap gains. (Tho there are tax dodges in inheritance that should be closed.)
P/E remains the best measure of overpriced shares -- but it's become noisier as a signal.
Uncle Milton was asked about greed -- what decade did NOT have greed? Or what country?
I believe he means in a general sense as opposed to wealth in material objects (gold, or a car, tools, etc.), and more specifically in the sense that stocks are priced at the last price someone paid for one unit of the stock, houses are priced at what the last house kind of like it sold for, etc.. That last one can be a real doozy, as just because someone paid 100$ a share for XYZ company's stock doesn't mean you can find a buyer for your 10,000 shares at 100$, but the value on paper is calculated at 10,000x100$. Because of that accounting fiction of saying each stock is worth what the last one sold for you can see wealth just disappear over night without anything apparently relevant happening. In this case, if the last unit of the stock traded for 50$, just one unit on the exchange, half your wealth can disappear over night. (Obviously that implies a very low level of transactions, but I am using an extreme case to make a point, although not that extreme as I understand that only ~10% of stock gets traded, the other 90% sitting in basically vaults of the owners. Most liquidity is the same few points of ownership being bounced around.)
Thank you for this review of the before and after of the deal that brought private equity to life for me in my early teens. As I near 50 I can neither remember nor imagine any other economic strategy than maximizing shareholder wealth.
"I am sympathetic to the case that the financial manipulations of the 1980s were beneficial for the economy. Corporate America needed a shakeup. If you want to see what stakeholder capitalism looks like, you can go back to the 1970s: lazy managers, inefficiency, and economic stagnation."
No doubt LBOs contributed to a change in corporate behavior. I've also heard claims that Milken's work creating/expanding the junk bond market was the greatest wealth expanding development. But let's not forget that whether the 70s was a time of lazy managers and inefficiency or not, the US was increasingly getting out-competed by Japan. Something had to change for that reason alone.
Labor efficiency vs job stability is an interesting question. Surely France and some other European countries lean too far toward the workers. Does the US lean too far toward efficiency? IDK but maybe this is the biggest shift since before the 80s.
"What was more efficient to the economists meant layoffs, insecurity, and instability."
Is the bonanza of arbitraging labor, from America to overseas, considered to be a major part of the value created, and was it a one-off? Or is the hope that there will always be people to take jobs from and others to give jobs to? Or - to take a page from this blog - a hope that there will be places that don't wish to pollute and others that readily accept pollution? Is Africa the only hope for this model? Or is the idea that America should rejoin the queue, by being impoverished enough or altered away from its past ideals or expectations, so that one day, it becomes a place to plunk down factories?
What happened in the 1980's? Why are valuations still so crazy? Don't neglect money supply. Adjust the S&P 500 returns since 1970 against either gold or M2 money supply, and all the "gains" from the last 50 years disappear. Whether the Barbarians had internalized this yet in the early 80's or not, they were just quicker on the uptake. Get near the money printer, lever up in assets that don't debase as fast as the U.S. Dollar and hold on. See also: home prices, collector art work, etc.. Think of stock buy backs as controlling supply of pseudo scarce assets and they make more sense.
Scarcity vs. the dollar is what is really being sought. Study Bitcoin.
The ‘decade of greed’ is apt in my view as I had a second-hand seat to witness some of it. My father worked for Integon Corp, an insurance company, in Winston-Salem when Nabisco bought RJR. F. Ross Johnson was loathed in that town even before he moved the company headquarters to Atlanta, because Winston-Salem was too ‘bucolic.’ It also reminds me of the Ashland acquisition of Integon in 1981, subsequently selling it in 1984. There were allegations that Ashland's primary interest was accessing Integon's substantial pension fund and my father, a high-ranking exec, was convinced that it was a pension raid. He and other key employees lost their jobs after the acquisition. Not good times.
Yeah, IDK what happened, but pension money went away somehow....There was some sort of government bailout... maybe?
Can't ridiculously high stock prices (by P/E ratio) be explained by:
(1) Money printing (Quantitative Easing), the Fed has $7T on its balance sheet,
(2) Demographics - the median baby boomer is about to retire, so for the past two decades there has been major net inflow to the market,
(3) Permanent US trade deficit means a permanent current account surplus, some of that money comes back to the US as stock purchases, including as
(4) Everyone just buys index funds so while individual stocks have different P/E ratios, the market as a whole moves up or down based on overall supply/demand for stocks
No mention of Milken and Drexel? Junk bond financing made it all possible
I've said this elsewhere, but things changed when we had a critical mass of people retired and getting ready to retire. All of a sudden, returns had to be goosed to keep a lot of people happy, whether the beneficiaries wanted to admit it or not.
"But unless he was a better manager than the book portrays, it would have meant that RJR Nabisco would have produced sub-optimal earnings results."
In what way were the earnings sub-optimal? I don't see any indication of that in your piece. If anything, they seemed really good.
The epithet “Decade of Greed” has to make one smile a bit, given the cultural changes of the last few decades.
When I was an 80s teen, there were, as ever, certain items the girls of my acquaintance were (transiently) passionate about: Guess jeans, Berek sweaters, something called tulip rings which may have been a local or Southern object of desire, LJ Simone flats … these are things I can remember, and I’m sure I was clueless of many others. I had a pair of the flats, though not the (daintily, preppily) rhinestone enhanced ones I coveted, and a pair of the jeans. (Those sweaters were hand knitted in Peru or something, and very expensive.)
I went to public school, and not one of the two or three “right” ones - but word quickly filtered down even to my school when a girl at one of those other nearby schools, was profiled in Life magazine. The reason for the profile was to present a pretty teenager who enjoyed the emblems of 80s wealth: her own Bentley, a Cartier watch.
I never saw this in print, but it was talked of for a few days, and even turned, gossip-fashion, into a negative: how “embarrassed” she must be, how they didn’t know how it was going to be presented, etc. (this also giving the speaker the vicarious cachet of seeming to know her, which one or two girls probably did).
Can you imagine this now? I mean, not the girl, not the emblems - but the fact that she was so utterly singular to us, and even, it would seem, to the nation?
Decade of Greed my foot. Don’t put that on the country as a whole. The LJ Simone shoe doesn’t fit.
These have been the decades of greed, against which we were as babes in the wood.
“We can think of valuing a company in two steps. First, forecast the future earnings of the company. Next, decide how much to pay for those future earnings.” Unless I was an employee of this company, or owned this company, and had worked at or extensively toured all their competitors, I wouldn’t feel comfortable betting on one company using this method. It seems to me, only insiders with information advantages and knowledge gained through extensive market research can know enough to reliably make MORE money betting on one company than through index funds.
Agree or disagree?
Buffett does it. Repeatedly. But generally speaking you are correct.
Get inside information off the record, have an on-the-record justification prepared (some analyst flunky's report), and trade accordingly. Repeat at scale.
Yes, Scott said that too.
The huge increase in stock valuations is the way the rich and super rich are getting richer (& super richer, some even super duper richer).
What rich folk buy with money, earned or printed & given to them by govt, is stocks. When money is printed, some goes into stock.
Stock, like most folks' bank accounts, are 1s & 0s in an account of how many shares are owned.
Maybe the govt should be taxing companies with over $100 billion capitalization thru required 1% issue of new voting regular shares, which is not exactly money, but the govt will, after 1 year, begin a 100 week 1% a week sale of the shares. This is likely a more effective "wealth tax" than what Warren is asking for in taxing unrealized cap gains. (Tho there are tax dodges in inheritance that should be closed.)
P/E remains the best measure of overpriced shares -- but it's become noisier as a signal.
Uncle Milton was asked about greed -- what decade did NOT have greed? Or what country?
“On paper” as opposed to . . . what? One’s wealth “on paper” is just one’s wealth.
I believe he means in a general sense as opposed to wealth in material objects (gold, or a car, tools, etc.), and more specifically in the sense that stocks are priced at the last price someone paid for one unit of the stock, houses are priced at what the last house kind of like it sold for, etc.. That last one can be a real doozy, as just because someone paid 100$ a share for XYZ company's stock doesn't mean you can find a buyer for your 10,000 shares at 100$, but the value on paper is calculated at 10,000x100$. Because of that accounting fiction of saying each stock is worth what the last one sold for you can see wealth just disappear over night without anything apparently relevant happening. In this case, if the last unit of the stock traded for 50$, just one unit on the exchange, half your wealth can disappear over night. (Obviously that implies a very low level of transactions, but I am using an extreme case to make a point, although not that extreme as I understand that only ~10% of stock gets traded, the other 90% sitting in basically vaults of the owners. Most liquidity is the same few points of ownership being bounced around.)
Thank you for this review of the before and after of the deal that brought private equity to life for me in my early teens. As I near 50 I can neither remember nor imagine any other economic strategy than maximizing shareholder wealth.
"I am sympathetic to the case that the financial manipulations of the 1980s were beneficial for the economy. Corporate America needed a shakeup. If you want to see what stakeholder capitalism looks like, you can go back to the 1970s: lazy managers, inefficiency, and economic stagnation."
No doubt LBOs contributed to a change in corporate behavior. I've also heard claims that Milken's work creating/expanding the junk bond market was the greatest wealth expanding development. But let's not forget that whether the 70s was a time of lazy managers and inefficiency or not, the US was increasingly getting out-competed by Japan. Something had to change for that reason alone.
Labor efficiency vs job stability is an interesting question. Surely France and some other European countries lean too far toward the workers. Does the US lean too far toward efficiency? IDK but maybe this is the biggest shift since before the 80s.
Bid ‘em up Bruce Wasserstein!
"What was more efficient to the economists meant layoffs, insecurity, and instability."
Is the bonanza of arbitraging labor, from America to overseas, considered to be a major part of the value created, and was it a one-off? Or is the hope that there will always be people to take jobs from and others to give jobs to? Or - to take a page from this blog - a hope that there will be places that don't wish to pollute and others that readily accept pollution? Is Africa the only hope for this model? Or is the idea that America should rejoin the queue, by being impoverished enough or altered away from its past ideals or expectations, so that one day, it becomes a place to plunk down factories?
I read Barbarians at the Gate a few months ago--fascinating story. Johnson comes off looking bad because of his greed, callousness, and misjudgment.