Posted at 1:04 pm by John Waggoner, on September 30, 2019
“October: This is one of the peculiarly dangerous
months to speculate in stocks. The others are July, January, September, April,
November, May, March, June, December, August and February.”
― Mark
Twain, Pudd’nhead Wilson
October has a fearsome reputation because it had so many truly
awful events, such as the October 19, 1987 crash, which peeled 20.47% from the Dow;
the modern equivalent would be 5,49.11 Dow points today, based on Friday’s
close of 26,820.25. October also saw a crash on Oct. 29, 1929 (-10.16%) and
Oct. 28, 1929 (-12.34%).
Crowd outside NYSE the day after the 1929 crash.
Surprisingly, September is historically the worst month to
invest, averaging a 0.99% loss since 1928, but unless something untoward
happens today, the Standard & Poor’s 500 stock index will score a decent September
gain. One day before the end of the month, the blue-chip index is up 1.21%, and
1.35% including dividends, according to Howard Silverblatt, senior index
analyst at S&P Dow Jones Indices.
Why October is so dangerous is a bit of a mystery. In the days before the Federal Reserve regulated the money supply, demand for cash rose in the Midwest as farmers harvested their fields and sold their crops. Western banks would call in loans to raise cash, or borrow from Eastern banks, both of which causedinterest rates to spike, making stocks less attractive.
One of the Fed’s jobs is to manage the money flow for
seasonal spikes, and it seems to do that pretty well (although the recent
mini-spike in short-term rates remains a mystery). One reason may be psychological:
Days are getting noticeably shorter, and those whose moods improve with exposure
t sunlight start getting gloomier. Just as stocks tend to trade lower on
Mondays and higher on Fridays, bearishness seems to rise in the fall.
In the realm of genuine worries, about 70% of the S&P 500
will report earnings in October, Silverblatt says, and companies will also be
issuing forward guidance. And in the meantime, there are impeachment hearings,
trade wars and tariffs — which will result in higher prices as the holiday
season begins.
If you’re looking for possible treats this season, Companies with
the most upward revisions for the quarter include Best Buy Co. Inc. with 19
upward revisions, Seagate Technology (STX) with 17 upward revisions, and
Hewlett Packard Enterprise Co. with 15 upward revisions. All seem pleasingly
cheap: Best Buy (BBY) has a forward PE ratio of 11.38, Seagate has a forward PE
of 10.70 and Hewlett Packard Enterprise has a forward PE of 8.38.
As you gaze at the market’s year-to-date returns – up 19.94%,
including dividends – bear October’s tricky reputation in mind as well as the
market’s current high valuations. It’s probably a better time to be rebalancing
and diversifying your portfolio, rather than concentrating it. October is,
after all, a peculiarly dangerous month.
Posted at 12:57 pm by John Waggoner, on September 27, 2019
Back in 1720, the English made a remarkable discovery: You
could raise money by selling stock and never have to pay it back.
The English were fighting in the War of Spanish Succession,
and needed money to finance the war. To do so, they created the South Seas
Company, which gave the company a monopoly on trade with South America. Visions
of Inca gold danced in English heads, and the shares immediately rose to 10
times their value.
What was particularly interesting was the flurry of stock offerings that followed in its wake. One company promised to make square cannon balls. My favorite offering was “For carrying-on an undertaking of great advantage but no-one to know what it is!!” It raised £2,000 pounds, an extremely large sum for the day.
One problem with the South Seas Company was the English had
very little trade with South America, and even smaller odds of getting much. Daniel
Defoe, known mainly now for writing Robinson Crusoe, commented:
“Unless the Spaniards are to be divested of common sense,
infatuate, and given up, abandoning their own commerce, throwing away the only
valuable stake they have left in the world, and in short, bent on their own
ruin, we cannot suggest that they will ever, on any consideration, or for any
equivalent, part with so valuable, indeed so inestimable a jewel, as the
exclusive trade to their own plantations.”
Eventually, most of these companies, including the South
Seas Company, collapsed, taking investors’ money with them. All of which is a
long way to talk about the recent spate of initial public offerings and, to a
lesser extent, junk bonds. For an investor, the thing to remember about both is
that Wall Street is selling, and Wall Street rarely gives away bargains.
Consider WeWork, purveyor of flexible workspaces. The
company filed for its initial public offering, which they valued at $47
billion. Briefly. A month later, the company was valued at $10 billion, and then
delayed its IPO immediately.
WeWork had a plenitude of problems, including an erratic CEO
who charged the company $6 million for the “We” trademark. (He later paid it
back). More importantly, WeWork was a massively money-losing proposition.
Although revenue grew impressively, so did losses. Even Wall Street couldn’t sell
that one.
In the junk-bond market, Bloomberg
reports that four companies have pulled their junk offerings this month,
and that a number have been forced to accept higher rates or dangle other
sweeteners to get the deals done. In an era when the 10-year Treasury note
yields 1.72%, selling bonds at an average 4.59 percentage points higher yield
shouldn’t be that tough.
If you’re tempted by an initial public offering, remember the rule of thumb: Don’t. Most times, the stock price will sink after about six months, and you can get the stock at a better price. (This excludes the lucky devils who owned the stock before the IPO; they usually get a tremendous profit, thanks to fine folks like you.) Junk-bond yields aren’t particularly low or high at the moment. Just remember that the junkiest ones disappear when the economy falters.
Posted at 12:48 pm by John Waggoner, on September 26, 2019
When you’re growing up, being president sounds neat: You get a fancy house, a helicopter, and a button that lets you end the world. But if you’re looking for adoring investors, your best bet would be selling expensive phones or delivering packages. Wall Street is remarkably unsentimental about presidents.
The start of impeachment proceedings against President Donald Trump was greeted with a 162.94-point rise, or a 0.61% increase, in the Dow Jones industrial average. As Sam Stovall, chief investment strategist for CFRA notes, impeachment proceedings aren’t a terribly good data point. Only three presidents have been impeached, and the market implications of Andrew Johnson are probably not relevant. That leaves is with two: Richard Nixon and William Clinton.
Richard Nixon
The stock market was already in deep bear market territory
during both impeachments, As Stovall notes, “President Nixon resigned on August
9, 1974, in advance of a near-certain impeachment. Yet the U.S. stock market
was already in a bear market, triggered by the OPEC oil embargo. In 1998, the
S&P 500 fell 19.4% from 7/17 through 8/31, the blame for which market
historians give to the global debt crisis and the near collapse of the Long
Term Capital Management hedge fund.”
Nevertheless, impeachment does add instability to the
market. In the case of the Nixon resignation, the Dow fell 7.59 points that day,
or 1%. The Dow would fall another 23% before the bear market ended later that
year.
The House voted to start articles of impeachment for President Clinton on Oct. 8, 1998, and he was impeached in the House on December 19, 1998. The Senate acquitted him on Feb. 9 of 1999. The round trip from Oct. 8, 1998 to Feb. 9 produced a 6.2% gain. The rest of 1999, of course, was a frenetic bull market that ended a bit more than a year later, on March 9, 2000.
President Dwight Eisenhower
Impeachments have the advantage of being telegraphed well in advance. More shocking Presidential events tend to hit the market harder. When president Dwight David Eisenhower had a heart attack on September 25, 1955, the Dow plunged 6.5% on September 26 — at the time, the worst single day for the markets since World War II. Similarly, when president John Kennedy was shot, the Dow tumbled 2.9%. When Ronald Reagan was shot on March 30, 1981, the market dropped just 0.3% and rallied 1.2% the following day.
John Kennedy.
Presidential actions, on the other hand, can have big
effects. On April 10, 1962, President Kennedy said, “My father always told me
that all businessmen were sons of bitches, but I never believed it till now,” when
U.S. steel hiked prices after vowing to keep inflation low. The Dow feel 16%
the next three months, as Wall Street fretted about the new president’s
anti-business attitude.
And on Sunday, Aug. 15, 1971, in a nationally televised
address, Nixon announced a step that would be regarded as a Socialist coup
today. “I am today ordering a freeze on all prices and wages throughout the
United States,” he told the nation in a televised address. The Dow rallied
3.8%.
In short, whatever you feel about the current president, impeachment
is unlikely to move the market’s needle too far. Other powers that he has – to initiate
war, raise and lower tariffs and generally affect the country’s mood – are much
more likely to affect your portfolio. But quite honestly, how can you predict
that?
Posted at 12:58 pm by John Waggoner, on September 25, 2019
Autumn began at 3:50 in the morning on September 23 this
year, when the sun crossed the celestial equator going south. As a practical
matter, this means that days will become shorter, leaves will start falling,
and all will be covered with pumpkin spice.
Awash in squash.
For investors, the date to watch is October 16, 2019, when Alcoa
(AA) reports earnings. Most companies report earnings a few weeks after the
close of the third quarter on September 30, and Alcoa is traditionally the
first major company to report.
Expectations are not high for Alcoa: Standard & Poor’s
Capital IQ expects the aluminum maker’s earnings to fall 18 cents per share
from the second quarter to the third, and 78 cents per share for 2019.
While earnings season traditionally starts with Alcoa, a few
other companies in the Standard & Poor’s 500 have already reported
third-quarter earnings, most notably Federal Express. The delivery company
reported earnings of $3.05 per share, missing Wall Street’s consensus of $3.15.
The stock fell as flat as a Christmas present delivered on December 29th,
falling 14.1% since earnings were announced Sept. 17th.
Overall, the 2019 earnings season looks as cheerful as a
rainy Halloween, with S&P 500 earnings falling 3.6% from a year earlier.
Worst sectors: Real estate, down 16.5%, materials, down 20%, and energy, down
28.7%.
It’s not all gloom. The top three sectors, according to
estimates, are financials, up 3% year over year. If you’re looking for a
beaten-down sector with an encouraging earnings outlook, consider health care.
The funds are down 4.9% the past 12 months, compared with a 5.5% for the
average large-company core fund. S&P estimates health-care earnings will
rise 1.9% year over year – not great, but better than a 3.6% decline. And everyone
needs health care, particularly after ingesting several gallons of pumpkin
spice-infused beverages.
Posted at 2:18 pm by John Waggoner, on September 24, 2019
If you’re wondering if your stock portfolio cab succeed without a 5% to 10% position in an emerging markets fund, the answer is yes, you can.
Interesting! Dangerous!
For the last five years, emerging markets have been a fine
way to add volatility and reduce returns. Let’s start with volatility. One way
to measure volatility is through standard deviation, an open-ended measure of
how much an investment can be expected to move above or below its average. The
higher the standard deviation, the more volatile the investment.
The Vanguard 500 Index fund (VFINX), for example, has a five-year
standard deviation of 11.96. The Vanguard Emerging Markets Index (VEIEX) fund? 15.39.
Normally, investors get rewarded for taking on more risk, but this hasn’t been the
case the past five years. The Vanguard 500 Index fund has cruised along at a 10.56%
average annual clip, while the Vanguard Emerging Markets Index has gained, um,
0.08% a year.
Very smart people have argued that emerging markets are now
a screaming bargain, in part because they have lagged so badly. One such person
is Rob Arnott, billionaire investor and founder of Research Affiliates. The
company expects emerging markets to have a 7.7% average annual return after
inflation, albeit at a fairly high level of volatility. The same model
forecasts a 0.7% real return the next decade. You can check out the forecasts
for dozens of different asset classes here.
GMO, a Boston-based asset manager, has a similar seven-year
forecast, which is simultaneously gloomier about U.S. large-company stocks and
more optimistic about emerging markets. The company forecasts a -3.3% inflation-adjusted
average annual loss for U.S. large-company stocks and a 10.1% average annual
gain from emerging markets value stocks.
(It expects a 5.5% real return from emerging markets stocks in general).
What could go
wrong? Well, plenty. First of all, the Vanguard Emerging Markets Index fund has
a 34.5% China weighting, followed by 12.9% in Taiwan and 10.75% in India. China
is facing an economic slowdown and a trade war with the United States. The fund
also has a 28.77% stake in financial services stocks and 17.02% weighting in
technology.
And, while emerging
markets are cheap, relative to earnings, that’s in part because of the higher volatility.
The price-to-earnings ratio of the MSCI is 13.2, compared with 18 times
earnings for the Standard & Poor’s 500. But investors often demand lower
prices in return for a higher chance of stroking out while holding volatile
stocks.
Emerging markets are increasingly correlated with developed market
stocks, particularly in bear markets. If you’re not convinced, watch how
emerging markets funds perform during a bad day in U.S. markets. They fall just
as badly, if not more so, when the U.S. markets tumble. But they don’t
necessarily rise when U.S. markets do.
Finally, when you buy emerging markets stocks, you’re also adding
currency risk. When the dollar falls, you’ll get a boost from your overseas
holdings. A rising dollar, however, detracts from your overseas profits.
To be honest, putting 5% of your holdings in emerging markets
won’t really do that much to your overall portfolio, either good or bad. If you
rebalance periodically, and can stomach your fund’s volatility, then it
certainly won’t hurt. Adding more than 10% of emerging markets to your portfolio
is making a fairly large bet. Will it work? Some smart people think so. But you
might get a better entrance point after a downturn in world stocks generally.
Posted at 12:59 pm by John Waggoner, on September 23, 2019
“Academics in higher education are so vicious because the stakes are so small.” – Lawrence J. Peter
No one actually knows who first said this – you can trace it back in some form to 18th century wit Samuel Johnson – but if you’ve ever spent time in a college English department, it certainly has the ring of truth.
Ben Graham
The debate between value and growth managers has been going on ever since Ben Graham, co-author of The Intelligent Investor, first put pen to paper. Value investing, which has the simple argument that it’s best to buy stocks cheap and sell them when they are less so, has the backing of most academic research.
Growth investors argue that it’s best to buy stocks with
rising earnings, with valuation as a secondary concern: Stock prices follow
earnings, in Peter Lynch’s famous formulation. Lynch was the manager of
Fidelity’s Magellan Fund in its glory days, and drove it to a 29.2% average
annual gain during his tenure.
Despite the backing of academic research, growth stocks have
clobbered value stocks the past decade. As of the end of August, the Russell
1000 Value index has gained an average 11.49% a year, while the Russell 1000
Growth Index has jumped 16.28% a year. Thanks to this large period of overperformance,
growth has outperformed value the past 30 years, too.
In the past month, value funds have started to outperform
growth funds, much to the delight of value managers, who have been wearily
answering variations of “Why
does value stink?” for a decade. Does this mean you should start to overweight
value funds?
Not really. One cynical way of looking at the argument
between growth and value managers is that they pass the same stocks between
them. Growth managers buy value stocks when value managers think they are too
expensive; value managers snap them up after the inevitable earnings
disappointment.
This is a bit simplistic, of course. Growth managers tend to
be overweight technology stocks, and Americans are good at technology. Value
managers tend to overweight bank stocks, which tend to be steady earners for
about 10 years, until they do something stupid, like creating mortgage loans
that require no documentation.
Investment styles remain in style for a long time on Wall
Street, and they generally don’t go out of favor until something awful happens.
Value became immensely popular after the tech wreck; growth was all the rage
after the banking system nearly collapsed in 2008. Phil Segner of the Leuthold
Group doesn’t think that the current trade war “doesn’t have the gravitas to be
listed among past catalysts.”
If you go all in on one style or another, you’re risking
missing out a further rally – stock trends nearly always go to greater extremes
than you’d think – or jumping into impending doom. A generally smarter approach
is to use a broadly diversified fund, such as the Vanguard Total Stock Index
Fund (VTSAX) and add a smaller amount of a value or growth index fund that
suits your investment temperament. If you tend towards the aggressive, add a growth
fund. If you like dividends and dislike big shifts in your portfolio, add a
value fund. If you can’t decide, then don’t, and stick with the broadly
diversified fund.
Posted at 1:15 pm by John Waggoner, on September 20, 2019
Sometimes, purely by accident, we look much smarter than we really are. Did you accidentally buy your spouse the exact thing she’d been hoping for all year? Time to get under the mistletoe. Did you sell your stock fund just before the 2018 downturn to pay a tuition bill? Just nod sagely and say, “I knew it was coming.”
Investors will most likely open their Sept. 30 statements and give a low whistle at their year-to-date returns. The average large-company blend fund – which encompasses most funds that track the Standard & Poor’s 500 – has gained 20.07%, according to Morningstar. When they turn to their 12-month returns, however, they will shake their fists in rage – the average large-cap blend fund is up 4.58%, less than most bond funds. (Intermediate core bond funds are up 8.47% for the same period.)
In a few short months, however, mutual fund managers may well
start to look a lot smarter than they are. The fun starts October 3. On that date in 2018,
the Dow Jones industrial average closed at 26828.39, then spent the rest of the
year merrily plunging. By Christmas Eve, the Dow had plunged to 21792.20,
an 18.8% loss.
After October 3, that jolly mini-meltdown will evaporate faster
than the Greenland ice sheet, and mutual funds’ year-to-date records will start
to look pretty darn good. If the Vanguard 500 Stock Index scored no gain
whatsoever the rest of the year, it could finish with a 21.57% gain, more than
double the 10.14% average return from the blue-chip index since 1926.
For some funds, this will be a very merry time indeed. Oakmark
Select Investor, down 6.75% the past 12 months, could see its 12-month return
rise to 18.47% if the market stayed put the rest of the year. Archer Stock fund,
which has missed badly the past 12 months with a 4.9% loss, could hit the bulls-eye
with a 15.92% 2019 gain, assuming the market went nowhere this year.
Of course, betting the market will stay in one place is a lousy
bet, and most managers wouldn’t cash in their chips for an entire quarter just to
ensure a great 12-month gain. (Although many would be tempted…) Nevertheless,
investors would be wise to revisit their fund’s fourth-quarter 2018 results –
just to remind themselves that Mr. Market is not always the jolly old elf he
appears to be now.
Posted at 1:19 pm by John Waggoner, on September 19, 2019
Every so often, most people wake up with a feeling of
impending doom. Presumably, this comes from unremembered dreams of being
trapped in a Frontier Airlines waiting room filled with clowns. In my case, it
could also come from covering economics and markets for a long time.
Most financial sites aren’t quite this alarmist, but Google
searches on the word “recession” made an enormous spike in August, and the
stock market reflected this interest. The S&P 500 made 11 moves of more
than 1% in August and three drops of more than 2.5% — including a 3% drop, the
worst of the year. The moves were prompted by worries about trade, as well as a
yield-curve
inversion, which is a rare and worrisome time when short-term rates are
higher than long-term rates. Nearly every recession has been preceded by a yield
curve inversion.
The stock market has predicted nine of the past five
recessions, as economist Paul Samuelson noted. The bond market’s record is similar,
albeit somewhat better. But here’s the thing: The economy is not the stock
market, and knowing the start of a recession is fairly useless. In part, that’s
because it takes so long to figure out when a recession starts. A recession is two
consecutive quarters of economic contraction, and data is typically delayed at
least one additional quarter.
The most recent recession, for example, stretched from December
2007 to June 2009. But the U.S. Bureau of Economic Research, which sets the
official recession dates, didn’t announce the start of the recession until December 1, 2008. Unfortunately,
the Dow Jones industrial average peaked at 14,164.53 on October 9, 2007. By
December 1, 2008, the blue-chip index was already down 6,015 points, or 42%.
The bear market would end four months later, in March 2009.
In fact, the official announcement of a recession is a
better buy signal than a sell signal. The average recession since World War II
has lasted 11.1 months, about as much time as it takes to figure out that there’s
actually a recession. The average expansion lasts 73 months. (Note to
economists: The odds are in your favor if you never predict a recession.)
Had you bought on December 1, with the Dow at 8149.01, you’d
still have had some pain: The index bottomed at 6547.05 on March 9, 2009 – a 19.7%
loss. Nevertheless, by Sept. 1, 2009, you’d be showing a 14% gain. Those who
bought at the top of the market in 2007 had to wait 49 months to get even.
Your best advice as an investor, then, is to ignore premonitions
of doom. Wait until those fears are confirmed before you act – at least if
those fears are about recession.
Posted at 1:34 pm by John Waggoner, on September 18, 2019
“To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in – or more precisely not in – the country’s business and banks. This inventory – it should perhaps be called the bezzle – amounts at any moment to many millions of dollars.” — John Kenneth Galbraith, The Great Crash 1929
The bezzle is a wonderful concept: That moment when both the criminal and the victim are perfectly happy. Here in the 11th year of the Great Bull Market, we can only assume that the bezzle has reached enormous proportions. Unfortunately – because this is the nature of the bezzle – we have no idea where the bezzle is, exactly. But there are many happy investors these days, and as investors grow happier, skepticism declines and the bezzle grows.
An obvious candidate for the bezzle is in cryptocurrency, the Florida real estate mania of our day. Bitcoin, still the largest cryptocurrency, currently trades at $10,204.44 per bitcoin, down miserably from its high of $19345.49 in December 2017, but still up remarkably from May 2010, when Laszlo Hanyecz paid 10,000 bitcoins for two large Papa John’s pizzas. In today’s Bitcoin, that would be about $103 million.
There are now more than 1,000 cryptocurrencies, and they have a plethora of obvious problems. They are not backed by any government, which means that any government could ban them. Although relatively few countries have banned cryptocurrencies, a rather large number of countries, including China and India, have place fairly onerous restrictions on them.
Aside from that, bitcoin and other currency are as subject to manipulation as the tiniest of penny stocks. And, on a more practical level, any currency that fluctuates widely is a terrible medium exchange. What you want from a currency is something that stays fairly stable. Had you agreed to pay five bitcoins a month in rent five years ago, your cost of shelter would have varied between $1,093 a month and $69,252 a month, with the current rent being $51,206 a month.
But bitcoin, like baseball cards and Beanie Babies before it, seems unlikely to bring down the stock market. Typically, problems begin in the banking system (often spurred by the Federal Reserve), spreading outwards to the rest of the economy. This happened most famously in 2007, as bankers learned that collateralized mortgage obligations (CMOs) could be far more dangerous than they appeared, if engineered properly. Massive bank and S&L failures in the 1980s were at least one cause of the 1987 stock market crash..
What could be going on that we don’t know about? Just as European banks were a source of worry earlier in the decade, Asian insurers could be stepping up to the plate, snapping up large amounts of U.S. bonds and making them increasingly sensitive to changes in U.S. rates. When rates are low, financial institutions often make the fatal mistake of reaching for yield – taking on higher risk than they should in order to increase profits.
And, while U.S. banks seem well capitalized, you never know what they have been doing until one of them collapses. One worry: Banks are currently making fixed-rate mortgages at 3.56%, according to Freddie Mac, the mortgage giant. This is fine at the moment, as the current borrowing rate for most banks is 2% or less. Banks borrow short and lend long, and profit from the difference. What could go wrong?
A spike in short-term interest rates, for one thing. Apparently, that has been happening the past few days, prompting the Fed to take extraordinary measures. You can find a nice explainer here.
The core inflation rate — the consumer price index minus food and energy – is 2.4%, rather firmly above the Federal Reserve’s target inflation rate of 2%. The Fed’s favorite inflation measure, core personal consumption expenditures, has risen at a more moderate 1.6%. But the trend isn’t the Fed’s friend at this point: Both core CPI and core PCE have been rising. The Fed typically doesn’t raise rates when inflation is rising, and doing so – particularly following the 2017 tax cut – risks fueling further inflation.
This time might be different. Worried about global economic weakness – and goaded by the President – most traders on Wall Street think the Fed will cut rates at its next meeting. (The minutes of the meeting will be released at 2:00). The current betting by the futures market is a 61.2% chance of a 0.25 percentage point cut in the fed funds rate, currently 2.00% to 2.25%. Wages have been rising, albeit modestly.
In recent years, owning a position in bonds has helped cushion a stock downfall, because interest rates have fallen as stock prices tumbled. (Bond prices rise when interest rates fall). Most times, this is a good strategy. The worst scenario – although not an unusual one – would be that rising rates sparked by inflation would cause both stocks and bonds to fall.
What to do? One solution is Treasury Inflation-Protected Securities, or TIPs, whose principal value rises with inflation. TIPS yields currently imply a 10-year inflation rate of 1.66%, which seems low. (The implied inflation rate is up from 1.50% since September 3.) TIPS funds have gained a respectable 5.75% the past 12 months. T. Rowe Price Inflation-Protected Bond (PRIPX) has gained 7.03% the past 12 months, and Vanguard Inflation-Protected Secs (VIPSX) has risen 6.44% the same period.
Another option is the less glamorous money market fund, which would benefit if the Fed every raises rates. There’s no rush to invest in money funds as a short-term interest rate play, although they are good ways to protect principal in a downturn.
Galbraith noted an interesting side effect of the bezzle: It is fueled by its own success. “[The bezzle] also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.”
We don’t know where the bezzle is these days, but the odds are good that it’s growing. If you want to protect yourself from the worst-case scenario, it might be time to nibble at TIPS and start adding to your cash reserves. Everybody’s happy now, but that rarely lasts for long.
Posted at 12:57 pm by John Waggoner, on September 17, 2019
(This is an update of an earlier post.)
No man but a blockhead ever wrote, except for money – Samuel Johnson
Charles Dickens supposedly wrote for a penny a word, which my high-school English teacher offered up as a reason why his books were so long. Just how miserable a wage was that? Even worse than it sounds.
Dickens lived in a largely deflationary era. From his birth in 1812 to his death in 1870, the pound dropped in value to £0.59, an average annual decline of 0.8% a year, according to the Bank of England’s inflation calculator. Publishers cut prices relentlessly to get new readers; the first penny newspaper in London appeared in 1855. As publications cut costs, they had to cut their writers’ pay as well. Sound familiar?
Just how poorly Dickens was paid is a somewhat complex calculation. In Dickens’ day, there were 240 pennies to the pound. (Back in Merrie Olde England, 240 silver English pennies equaled one pound of silver.) One pound when The Pickwick Papers was first published in 1836 is the equivalent of £112.20 in 2018. At 240 pennies per pound, Dickens earned the modern equivalent of 47 English pennies a word, or 58 U.S. cents a word at the current conversion rate of $1.23 U.S. per pound.
Depending on your output, still not great money, albeit quite a bit above Dickensian poverty. If you can sell 100 1,000-word pieces a year, you’d have income of about $57.718. And, of course Dickens – writing longhand – had prodigal output.
The Pickwick Papers, published in serial form from March 1836 through November 1837, weighs in at about 396,000 words. Assuming the penny-a-word formulation is correct, and that one pound equaled 240 pennies, that would have been 1,650 pounds, or the equivalent of £185,133.33 today — $228,566 in greenbacks. Pretty good for a 26-year-old first-time author, right?
Not really. As it turns out, Dickens was paid £20 an installment for The Pickwick Papers, or £400 total. He earned no royalties. That’s equal to £44,881 pounds today, or $55,410. It’s still good money for a first-time author, but well less than a penny a word. (It’s probably closer to a farthing a word: A farthing was a quarter of a penny).
Dickens did become quite wealthy, in part because The Pickwick Papers taught him the value of owning his works and the royalties that came with them. Of course, two other factors probably helped, too: He was an incredibly hard worker, often editing and doing other work while writing at a feverish pace. And, of course, he was Charles Dickens.