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Article Artículo

Stock Returns: Between Shiller and DeLong

Robert Shiller had a piece in the Sunday NYT noting that the S&P 500 was unusually high relative to his measure of trailing earnings. He calculated a ratio above 25, far above the historic average of 15. Shiller said that in the past, each time this ratio crossed 25 the market took a plunge shortly thereafter. He concludes his piece by seeing it as a mystery that the market remains as high as it does.

Brad DeLong picks up on Shiller's analysis and points out that in most cases in the past where Shiller's ratio had exceeded 25, people who held onto their stock over the next decade would still have seen a positive real return. He notes the examples in the 1960s when investors would have seen a negative ten-year return, even though Shiller's ratio was below the critical 25 level. He therefore concludes there is no issue.

I would argue there is an issue, although not quite as much as Shiller suggests. To get at the problem, we have to recognize that stock returns, at least over a long period, are not just random numbers. Both Shiller and DeLong treat this as a question of guessing whether an egg will turn into a lizard or chicken based on the distribution of past hatchings that we have witnessed.

That would be a reasonable strategy if that is the only information we have. But if we saw that one of the eggs was laid by a hen, then we may want to up our probability estimate that it will hatch into a chicken.

In the case of stock returns we can generate projections based on projections of GDP growth, profit growth, and future price to earnings ratios. For example, we may note that the ratio of stock prices to after-tax corporate profits for the economy as a whole was 22.3 at the end of 2013. (This takes the value of stock from the Financial Accounts of the United States, Table L.213, lines 2 plus 4 for market valuation. After-tax corporate profits are from the National Income and Product Accounts, Table 1.10, Line 17).

This means that earnings are roughly 4.5 percent of the share price. If companies pay out 70 percent of their earnings as dividends or share buybacks (roughly the average), this translates into a 3.1 percent real return in the current year.

Dean Baker / August 18, 2014

Article Artículo

Health and Social Programs

How Old Will Social Security Be When the Rich Pay the Same Rate as the Rest of Us?

Today is Social Security's 79th birthday, a good time to celebrate the nation's most effective anti-poverty program, which, especially after the housing crash and Great Recession, is crucial to the retirement security of middle- and working-class Americans.

But in about 20 years, Social Security will likely be able to pay only about 3/4 of promised benefits to retirees (if nothing's done to change the program). One way to make sure that this drop doesn't happen is to have our nation's wealthiest folks pay the same Social Security payroll tax rate as the rest of us.

CEPR and Nicole Woo / August 14, 2014

Article Artículo

Argentina

Globalization and Trade

Latin America and the Caribbean

World

Window Dressing for the Vulture Funds

The American Task Force Argentina (ATFA) is Elliott Management’s main public relations and lobbying arm supporting its long-running legal fight against Argentina in U.S. courts to collect on debt purchased in the aftermath of the country’s 2001 default. Although it markets itself as a coalition, ATFA has in the past had to remove several groups from its list of supporters after the Wall Street Journal found that they had never heard of the organization, much less supported it. Over the years, ATFA has gone to creative lengths both to lobby the hedge funds’ case and to generally defame Argentina, by alleging nefarious ties with Iran, for example.

One of ATFA’s main goals has been to divert attention away from the fact that the fight over Argentina’s debt fundamentally hinges on the heavy-handed tactics of large hedge fund owners, like Elliott’s Paul Singer, to collect a lot of money on distressed sovereign debt. These tactics are not pretty, and these hedge funds rightly earned the name “vulture funds” long before the Argentina case, as CEPR Co-Director Dean Baker has pointed out. So one of ATFA’s strategies has been to highlight how Argentina’s actions have supposedly hurt the “little guys” and how the vulture funds’ case somehow represents a fight for these underdogs.

ATFA has not been great at coalition building, however. To date, perhaps their most successful lobbying push was their attempt to portray Argentina as cheating retired educators. Before 2010’s bond restructuring, one of the holdout creditors was TIAA-CREF, which had a relatively small stake in the defaulted bonds. Jumping on this fact, ATFA alleged that Argentina seriously harmed the pensions of retired academics, hosting an event [PDF] on the default’s effect on teachers, coordinating [PDF] letters [PDF] to members of Congress, and launching an ad campaign  [PDF]. ATFA’s ad lists the members of the “American Task Force Argentina Educator Coalition” who support the vulture fund’s case: the Alabama, Georgia, and Colorado conferences of the American Association of University Professors (AAUP), the Nebraska Community College Association, and lastly, the Nebraska Retired Teacher Association. That’s it. There was no participation from the national AAUP or TIAA-CREF in this campaign; in the case of the Georgia conference of the AAUP, it’s unclear if the collaboration with ATFA involved the participation of anyone but the group’s then-executive secretary. When Congressman Eric Massa later pushed ATFA-backed legislation to punish Argentina over the debt issue, ATFA’s efforts may have helped the bill to garner some extra co-sponsors. But Massa’s ATFA legislation died, just like all of its later versions.

CEPR and Peter Hayakawa / August 14, 2014

Article Artículo

Argentina

Globalization and Trade

Latin America and the Caribbean

World

Do the Holdout Hedge Funds Hold Argentine Credit Default Swaps?

The International Swaps and Derivatives Association (ISDA), the body that governs credit derivatives, recently declared a “failure to pay” credit event that triggers payment of credit default swaps (CDS) on Argentina’s debt. Bloomberg and others have raised the question of whether Paul Singer’s Elliott Associates or other hedge funds involved in the case against Argentina hold any of these CDS—and may be forcing a default and profiting from their CDS positions.

Elliott’s lawyers have denied that the firm owns CDS on Argentina’s debt, and a December, 2012 Reuters report cites an anonymous source saying the firm did have some, but no longer does. When asked by Judge Rosemary Pooler in a February 27th hearing in the Second Circuit Court of Appeals if Elliott’s NML owned any of the CDS, Elliott’s lawyer, Ted Olson, gave an evasive answer:

“I don’t know that that’s true,” Olson said. “I’m informed it isn’t true. But if it was true, it would be utterly irrelevant.”

Bloomberg pointed out that it was unclear if the denial applied to just NML Capital the Elliott subsidiary represented in the case, or to all of Paul Singer’s firms.

ISDA Decision

On June 20th, the law firm Schulte Roth & Zaber (SRZ) sent a memo on behalf of an anonymous holder of Argentine CDS to the ISDA Credit Derivatives Determination Committee (DC) asking them to decide whether Argentina had defaulted on its debt, and also arguing that Argentina’s public statements were tantamount to a repudiation of its restructured bond payments, urging them to rule that Argentina had triggered a “repudiation/moratorium” credit event.

SRZ wrote that their client’s CDS were set to expire on the 20th of June, and that if the ISDA DC ruled that “repudiation/moratorium” had occurred, this would extend the life of the CDS.

The ISDA DC did rule that Argentina had defaulted through a “failure to pay” credit event, which is different than a “repudiation/moratorium” credit event in that it apparently doesn’t extend the life of expired CDS, though it does trigger payment of non-expired CDS. ISDA DC later confirmed that Argentina’s public statements did not constitute a “repudiation” credit event. The ‘no’ vote was unanimous among the DC’s 15 members, including Elliott Management, which is a non-dealer voting member.

CEPR and Peter Hayakawa / August 13, 2014