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In "Dow 36,000" (September Atlantic), James K. Glassman and Kevin A. Hassett proclaim a new theory of the stock market that would support a tripling of the Dow from its current levels. Their method -- deriving a stock's value from its projected cash flows -- has been thoroughly presented in textbooks for the past thirty or forty years. Data indicating that stocks have significantly outperformed bonds over long periods have also been available and regularly updated over the past thirty or forty years. The only new thing in the authors' theory is the unsupported assertion that the risk premium demanded by investors in stock was historically "irrationally" large and is becoming "rationally" smaller.
Readers who want a more coherent explanation of the historical equity risk premium should refer to "Myopic Loss Aversion and the Equity Premium Puzzle" (Working Paper No. 4369, National Bureau of Economic Research, May, 1993). The authors, Shlomo Benartzi and Richard Thaler, work with the same data but with a more robust theory of rational investment decision-making. They argue that the historical equity risk premium results from two factors: investors are more dissatisfied by a loss of 20 percent than satisfied by a gain of 20 percent; and for all practical purposes investment results are evaluated and acted on at least annually.
This is true whether an individual or an institution is doing the investing. Academics can look back at twenty-year periods and ignore intervening fluctuations. Managers of actual wealth are evaluated or evaluate themselves in the short run. As Keynes said, "The long run is a misleading guide to current affairs. In the long run we are all dead." The large equity risk premium is therefore not irrational but rather the result of rational human decision-making behavior designed to cope with real uncertainty.
The positive U.S. stock market experience over the past twenty years may lead some to conclude that real uncertainty no longer exists. However, the Glassman and Hassett story fails to explain the recent Japanese stock-market experience. Edward Chancellor writes in his recent book, Devil Take the Hindmost, "As 1989 drew to a close, the Nikkei index was approaching the 40,000 mark, up 27 percent on the year, and nearly 500 percent on the decade. The price-earnings ratio of the stock market was at 80 times historic earnings.... Shares yielded a measly 0.38 percent in dividends.... Nomura Securities was forecasting that the Nikkei would reach 80,000 by 1995." As we know, ten years later the Nikkei is at less than half its peak value after having fallen to about a third of its peak value. Such is the nature of stock-market risk even over relatively long periods. Decision-makers ignore this kind of risk (perhaps better called "uncertainty") at their peril.
Irwin E. Jones
As an investor, I was interested to read James Glassman and Kevin Hassett's assessment that equity prices will triple to attain their "perfectly reasonable price." If the value of my portfolio triples, I will spend more. Who wouldn't? Higher consumption is a corollary of the authors' premise that we are richer than we think.
The effect of a tripling of the Dow Jones Industrial Average would increase the wealth of investors by $30 trillion. This is a huge sum, equal to three times the worth, accumulated over 200 years, of all U.S. equities in 1997. Economists believe that for every $100 increase in wealth, spending on consumption increases by $3.00 each year. If owners of stock who are now feeling wealthy experienced a tripling of the value of their portfolios, spending might increase by more than three percent of the new wealth created. However, if we assume that spending on consumption would rise by only three percent, a $30 trillion increase in wealth would cause consumption to rise by $900 billion each year.
Since we cannot pay for groceries or BMWs with shares of stock, investors would need that $900 billion in cash. As Glassman and Hassett point out, the dividend yield on equities at Dow Jones 36,000 would be minuscule; similarly, corporate stock buy-backs would become insignificant as a percentage of total market valuation. To finance this enormous increase in consumption investors would need to liquidate $900 billion worth of stock each year; other investors would need to buy $900 billion worth of additional stock each year. This would amount to an increase in money invested in the stock market of $270 per month for every man, woman, and child in the United States.
Before we can take Glassman and Hassett seriously, they need to explain how a tripling of stock prices will be financed and accommodated by the rest of the economy.
Jonathan P. Schwartz
James Glassman and Kevin Hassett have provided an interesting analysis of stock valuations. However, they have overlooked several critical factors, including purchasing power. The "perfectly reasonable price" of any asset is limited by the buying power of available investors. Dow 36,000 is reasonable only if investors are able to triple their after-tax, after-living-expenses pool of cash to pay the higher prices. This could be hard to achieve without sparking significant inflation in wages and disposable income (which the Federal Reserve would oppose with higher interest rates, to the detriment of corporate earnings).
Alternatively, investors could liquidate homes or other assets to bid stocks up to their "perfectly reasonable price." But as a practical matter, few people would be willing to trade a nice home for a shack just to help create a "rational" stock market. There are, as always, other factors to consider.
John R. Wooden
The theories advanced in "Dow 36,000" are interesting but not very instructive. The discounted cash-flow analysis is a valuable tool for evaluating individual undertakings when projected expenses, revenues, and economic life can be estimated with some degree of precision. Securities markets, on the other hand, are fraught with uncertainties that make such an assessment highly dubious. For example, during 1998 the Standard and Poor's 500 Index rose by more than 30 percent despite an actual decline in reported earnings of more than eight percent. Which price was closer to the right one?
Yes, in the long run stocks have been less risky than bonds. But in the long run we will all be dead. As the authors note, someone who invested on the eve of the 1929 crash had to wait more than fifteen years to recover the cost -- a period that could well exceed an investor's life expectancy. This is an extreme case, but other recovery periods have spanned several years.
In the final analysis the right price for any security is what people are willing to pay, and as in many other human activities moods can swing between ebullience and despair. Experience demonstrates that investors would do well to approach with extreme caution any appraisal that exceeds current values by 200 percent. Even if the appraisal is hypothetically sound, a more prudent course would be to use conventional yardsticks.
Gordon W. Neal
James K. Glassman and Kevin A. Hassett reply:
Irwin Jones rightly points out that the calculation of a present value of dividends has been done often before and the data on the relatively low risk of stocks is well known. We do not claim otherwise, and cite the relevant work extensively. What is new in our theory is an explanation for higher stock prices that draws on the two. People are learning about the true modest riskiness of stocks and are bidding prices up accordingly. Mr. Jones adds that our claims about the decline in the risk premium are unsubstantiated. We disagree. Our article contains a lengthy discussion of the risk premium's history that draws on our own calculations, which use stock-market data going back to the 1800s.
Jonathan Schwartz and John Wooden argue that a tripling of the Dow would require enormous inflows of cash, and they wonder where the money could possibly come from. Mr. Schwartz adds that the consumption stimulated by a big stock-market increase might strain economic resources. We disagree. If one night everyone read our article and believed it, the first trades the next morning would bring the Dow up to 36,000. No inflow of cash would be required. We agree that consumers might try to spend more if they suddenly felt wealthier, but resources would not be strained, because prices for the goods they wanted to consume would rise in response.
Gordon Neal makes the excellent point that the market's price today is a great measure of what a share should be worth, and that one should be suspicious of claims that the market has so dramatically mispriced any asset. We have a great deal of faith in markets, and discuss the apparent contradiction at length in Chapter 7 of our book, Dow 36,000. The chapter begins with a Warren Buffett quotation that summarizes our views quite well: "Observing correctly that the market was frequently efficient, they went on to conclude incorrectly that it was always efficient. The difference between these propositions is night and day. "There are undoubtedly times when recognizing what is going on ahead of everyone else is very profitable. Today is such a time.
I read with great interest "The False Promise of Slave Redemption," by Richard Miniter (July Atlantic). Though the article properly highlights the existence of slavery in my country (a practice still denied, despite extensive documentation, by the regime's apologists), it focuses on the propriety of slave redemption. I am saddened that a respected journal such as The Atlantic Monthly has chosen to address the greatest human-rights tragedy since the Holocaust by questioning the efforts of the very few people -- such as Christian Solidarity International and the Colorado schoolchildren -- who are responding to it at all.
Miniter states in his article, "A number of Dinka leaders, along with Macram Gassis, one of Sudan's eleven Catholic bishops, strongly support slave redemption." He implies that I am the only bishop who does so. That is mistaken. Cesare Mazzolari, the bishop of Rumbek, for instance, has also redeemed slaves.
The Dinka are not the sole ethnic group being enslaved. The Nuba, the Shilluk, and the Fur tribes -- that is, all those that border the northern Arab tribes -- are enslaved as well. My diocese, in Darfur and Kordofan, is on the front line between the Arabs and the Africans, and slave taking is most common there. The slave markets are located in various centers in this region. The "peace camps" established by the regime -- where the slaves are kept and forcible Arabization and Islamization occurs -- are also located in this region. It is painfully naive to expect that if the redeemers went away, the peace camps and slave markets would also disappear. The regime is committed to the destruction of my people.
Miniter does not acknowledge that splinter groups and independent groups, however well intentioned, are the main cause of confusion. These groups often go to southern Sudan without coordination with the local authorities. They do not properly work with and coordinate with the Church leadership. (The Church is the only reality that works at the grassroots level. Through its priests and catechists the Church is in a position to verify who is a slave, where and when he or she was abducted, and who the abductor was.) Not one of the people mentioned in Miniter's article contacted our personnel on the ground or even, out of courtesy, any of the bishops who have a base in Nairobi.
Miniter complains, "Some seek to make CSI the sole redeemer." This is because CSI constantly works with Church personnel in the field as well as with local leaders. CSI is dedicated to avoiding the kind of problems Miniter identifies.
Miniter asserts that "slave redemption has spurred raids." I believe this is mistaken. Rather, the regime has shifted its tactics from the terror bombing of civilians to the increased use of such raids in its campaign to destroy the indigenous people. We must not forget that the root cause of slavery is the war that has become a holy war -- "jihad," as declared by the radical Islamic regime of Khartoum.
Are there risks in paying money for the redemption of our children and women? Yes. But after ten years of inaction by the world community despite the extreme suffering of my people, I believe they are risks worth taking.
Macram Max Gassis
Richard Miniter fails to investigate the only program of slave emancipation -- that of Switzerland's Christian Solidarity International -- that has the support of the local population and the army that defends it, and that has been at the center of the international controversy he pretends to explore. He did not speak with even one redeemed slave.
As part of their own efforts to prevent scams, the most senior civil authorities in the region have said that no one but CSI should operate the slave-redemption program. Miniter, however, went to Sudan with Jim Jacobson, of Christian Freedom International (whose behavior, in my view, invites corruption and bids up the price of slaves), and then used this as proof that slave redemption must be a bad idea.
On their stop in Kenya, Miniter watched as Jacobson flashed $4,000 at a group of minor bureaucrats, announcing that he wanted to buy the freedom of slaves. Two corrupt officials then insisted on accompanying the Americans inside south Sudan, where they tried to trick poor Jacobson and part him from his money. This was prevented when the local south Sudanese commissioner, Alev Akechak Jok, told the Americans that there were no slaves in the area to be redeemed. When the men from Kenya tried to go behind Jok's back and sell Jacobson local children who were actually free village kids, Jok begged Jacobson to leave and not partake in a scam.
Miniter paints Jok as a brave opponent of slave redemption. This is not true. Jok is a supporter of CSI's emancipation program and was one of forty-seven local officials, including the Catholic bishop of the area, who signed a statement asking that CSI's emancipation efforts continue.
Miniter argues that buying the freedom of slaves inevitably brings on more slave raids and higher prices. This is clearly not the case. The Southern People's Liberation Army reports that "fewer raids have occurred and many fewer people have been captured and enslaved in the course of this year [1999, when CSI bought the freedom of an extraordinarily high number of slaves] than in 1998." This is owing to the increasing success of the villagers and the SPLA in defending the villages. Miniter's model is wrong: the ability of the Africans to defend themselves overrides any other factor in slaving statistics. This is not a peacetime market where cash bids up price; the slave raiders are not entrepreneurs -- they are holy warriors.
The Atlantic has done a terrible thing. The only hope that many in southern Sudan have for the return of their women and children is CSI's program, which my organization supports. You have damaged that hope. In addition, The Atlantic has demonstrated that the American media care little for the real tragedy in Sudan: slavery and genocide propagated by a fundamentalist regime. Surely the primary concern here should be not the possibility of flaws in slave-redemption efforts but rather the West's failure to address modern-day black slavery and genocide in Sudan.
Richard Miniter replies:
I share the goal of the letter writers -- ending modern-day slavery and religious persecution. But buying people out of slavery, a process called "redemption," has unintended consequences, because redeemers buy back slaves for as much as $100 per person, whereas the market price is $15. Western donations seem to be fueling the slave trade, not ending it.
On such matters as whether redemptions have spurred raids and whether problems with redemptions would be curtailed if only one group were involved, surely reasonable people can differ. During my extensive reporting across southern Sudan many villagers (including escaped slaves) told me that the raids had worsened every year and that the raiders were motivated by money. As for the role of "splinter groups," I have no desire to wade into disputes between rival nonprofits. The problem of perverse incentives is a function not of the people or groups involved but of the practice itself.
Regarding Charles Jacobs's claim that I did not investigate CSI's program: I went to great lengths to interview defenders of redemption, including CSI's representatives, and to include their points of view. I also sought the views of representatives of the Sudanese bishops in Nairobi, but was unable to secure an interview.
My article does not portray Alev Akechak Jok as a "bold opponent" of slave buy-backs but describes an incident I witnessed in which Jok was clearly uncomfortable with a transaction he feared was fraudulent. I never saw the document bearing Jok's signature to which Mr. Jacobs refers.
Mr. Jacobs is also mistaken in declaring that I did not interview redeemed slaves. I did, though the point of my piece was not to document their experience but to examine the efficacy of buy-backs and to propose alternative solutions.
Messrs. Gassis and Jacobs both decry the world's inaction. But tens of thousands of Americans have donated money for slave buy-backs. The question is: Are their dollars making things better or worse in Sudan?
As a Generation Xer (a term I hate) and also a teacher, I'd like to comment on Ted Halstead's article "A Politics for Generation X" (August Atlantic), particularly Halstead's notion that the problems of education in this country stem from, among other things, Democrats who have "refused to challenge the teachers' unions." This is one of the most common and most erroneous perceptions of the problems of public education.
Although Halstead is right that the Republicans' support of voucher programs is tantamount to abandoning the nation's public schools, he is far from the mark when he says that giving in to teachers' unions causes public education's woes. Surely Halstead has in mind the idea that universities have weak education programs and that often the word "tenure" translates for teachers into "lifetime employment." However, neither problem is the fault of teachers' unions. On the contrary, unions support a strengthening of standards in education programs on university campuses. Why wouldn't they? A rise in standards would lead to higher-quality teachers to whom membership in unions could be extended.
Furthermore, tenure is merely due process, and although many poor teachers benefit from the misapplication of tenure, the fault lies not with teachers' unions that support tenure but with administrators who are lax in challenging individual teachers who are not meeting standards. Any school administration has the right to supervise any teacher and, if it deems necessary, to begin a process of evaluation that, if ample evidence exists, leads to the removal of a substandard teacher. The most powerful union in the world could not prevent this under current tenure laws.
Michael H. DeVito
Ted Halstead replies:
Michael DeVito claims that teachers' unions support a strengthening of standards in education programs on university campuses, but he fails to mention that these same unions oppose performance measures to evaluate teachers once they are on the job. For instance, a recent education summit attended by twenty-four governors, thirty-four leading corporate executives, and twenty-one state education superintendents resulted in a call to link pay increases for public school teachers to improvements in the performance of their students. The two leading teachers' unions -- the National Education Association and the American Federation of Teachers -- stood out by virtue of their resistance to the idea.
Although it would be a mistake to lay all the blame for the woes of our public education system at the feet of the teachers' unions, it would be refreshing to see the unions embrace such commonsense reforms.
After reading your article "Winning the War for the West," by Perri Knize (July Atlantic), I think the record needs to be set straight in one area. I was responsible for the management of the Hart Mountain National Antelope Refuge for the period 1989-1994, when livestock grazing was removed from the refuge.
Prior to this decision we were very interested in the livestock grazing and antelope question, and conducted a study to evaluate it. For three years we made monthly flights over the refuge and noted the location of every observed antelope on maps. More than 10,000 locations were noted. We then compared these maps with grazing-utilization maps (maps showing the location and intensity of livestock grazing on the refuge). We found little antelope use of areas grazed by livestock.
We also completed a number of studies on desert trout and songbirds and found that grazing over the past century had devastated habitat for these species, which resulted in dramatic declines in their numbers. Contrary to Knize's assertion that our management change was "misguided," it was in fact exactly what was needed to manage the refuge for its intended purpose: as a home for the beasts of the land and the birds of the sky.
Perri Knize casts overdue light on the conservationists, ranchers, and land managers who are trying to find ways to fit livestock into western ecosystems.
Grazing's friends and foes include many extremists, and they generally get the ink. Fortunately, the West is a bigger place than the extremists' sandbox, and there are bigger people, too. It was particularly gratifying to see Knize's nod to Dan Dagget, the author of the book Beyond Rangeland Conflict. As the former director of the conservation organization that sponsored and raised the money to publish Dagget's book, and took the resulting guff from the Cattle Free in '93-minded crowd, I saw Dagget's transformation from anti-grazing zealot into open-minded advocate for those few ranchers who had worked out ways to manage livestock so as not to harm, and often to help, the lands they used.
Knize's article, like Dagget's book, spotlights a very inconvenient fact for the hard edge of the environmentalist movement: there are many areas of public lands in the West where livestock fit, or can be managed to fit, just fine as part of a healthy ecosystem. If there's a weakness in Knize's article, it is her understatement of the key inconvenient fact for the sagebrush-rebel crowd: there are many areas of public lands in the West where livestock really don't, and probably can't, fit into a healthy ecosystem. Our grazing policies need to take shape from the land's limits, but they should also make room for those ranchers -- and it's not all of them -- who are genuine stewards of the land.
Thomas C. Jensen
Alan Wolfe ("The Mystique of Betty Friedan," September Atlantic) has totally missed the answer to why The Feminine Mystique had such appeal for educated middle-class housewives of that era. Wolfe attacks Friedan's academic sources, but the sources' many faults are irrelevant to the validity of Friedan's thesis. (Oddly, although she, like Wolfe, was highly critical of Margaret Mead and Sigmund Freud, she gets no praise from Wolfe for her "premature" wisdom.)
If Wolfe wants to understand Friedan's thesis, he should father (or adopt) two to four very young children. His wife should be the sole and full-time breadwinner, just starting out in her career. Wolfe's only source of funds should be the allowance his wife gives him, based on what they can afford as young marrieds.
He will stay with the children all day every day of the year. His wife will leave for work before 7:00 and often get home after 8:00, if not later. They will have only one car, which she needs for work. She will be worn out and in need of lots of soothing when she gets home. She will sometimes have to travel for days or weeks. He will do the child care, shopping, and housework. They will move every few years, as her career requires, so he and the kids, far from all their relatives, will repeatedly lose their familiar surroundings, friends, and acquaintances.
Each morning he'll think to himself, "Being a full-time father to my children and a husband to a good wife who works so hard to support us all, I am the luckiest man in the world. Think of all the unfortunates in this world. Compared with them, how can I complain of anything? I am at my peak of fulfillment right now. I am so glad I went to a Seven Brothers college -- and I know I have done my alma mater proud. Still, what is wrong with me? Why do I feel so miserable? I must be an awful spoiled brat not to be a happy, satisfied person."
When his wife finishes the breakfast he made, he will dress everyone and walk off with the kids, pushing a stroller, to greet the checkout lady at the market. It's the social high point of his day! He'll drag home and store the groceries. He'll change and calm the kids, who are crying from hunger, fatigue, boredom, sibling rivalry, being wet, or whatever. Then he'll start to clean up the apartment.
After years of this will Wolfe feel that his life somehow lacks something important? Let him reread Friedan. Will he know what Friedan is talking about? Yes.
Thank you for the wonderful article by Garry Wills on Abraham Lincoln's Second Inaugural Address ("Lincoln's Greatest Speech?," September Atlantic). Wills placed those familiar words in a historical perspective that made them even more meaningful and powerful. I appreciated the lesson in the art of classical rhetoric and being compelled to look up a few unfamiliar words ("minatory," "anaphora"), but am most grateful for the careful critical analysis of both the art and the history of the address.
I have been trying to think how Mr. Lincoln's plea for "restoring the proper practical relations" might resonate in places like Bosnia, Rwanda, the Middle East, and South Africa today. The process of individual and collective accountability and justice seems necessary for closure before a state or a person can even think of "practical relations." It is true that we will never know how Reconstruction would have gone under Lincoln's leadership, but perhaps if the United States had recognized this human need at the end of the Civil War and taken steps to make reparations, we would not still be suffering the consequences of our "great national sin."
Linda L. Lane