The Hazards of the Stock Market
An investment counselor who was formerly on the editorial staff of theWALL STREET JOURNAL, THOMAS W. PHELPSobserved the market of the 1920s as closely as he observes the market of today. Mr. Phelps is a partner of Scudder, Stevens & Clark.
THIRTY years ago. anyone who thought the stock market would rise again to its 1929 peak in thirty years would not have dared to say so. Everyone knew we had seen the end of an era. Only thirteen years ago, anyone who thought the stock market would go up that far was a lonely optimist. Today, anyone who thinks the stock market will go down that far is a lonely pessimist. A decline to the 1929 peak would cut the Dow-Jones industrial stock average almost in half.
Congress has ordered a $750,000 investigation of our securities markets. How safe will it find them?
Not absolutely safe, that is sure. Nothing in life can be. All safety is relative — relative to what it used to be, relative to what it might be, relative to the rewards of taking risks and to the penalties of not taking them. Thoughtful observers have likened the stock market to the automobile. Automobiles have killed more Americans than all our wars, yet have contributed so much to our well-being that no one dreams of legislating a return to horses and buggies, or of putting a tenmile-an-hour speed limit on all motoring. Carrying this comparison further may help us to get some perspective on our securities markets.
As everyone knows, a motorist is vulnerable to three risks: the risk of mechanical failure; the risk of the road — fog, ice, washouts, unmarked curves, and crossroads; and the risk of human fallibility. Any one of them can be fatal.
Every investor runs risks which are analogous to these, and the purpose of this article is to examine these hazards and show how they compare with those of the past. One of the most traditional risks is that of being cheated. Though still present, as attested by the current investigations of the American Stock Exchange, this risk seems smaller today than ever before. Attitudes in finance have changed, as well as laws and regulations. It is no longer a laughing matter to be caught out.
A second risk for the investor is inherent in the economic environment — inflation, taxes, depression, political upheaval, confiscation, war. The investor is no more to blame for these risks than the motorist is for the risks of the road, but, like the motorist, the investor may survive by correctly anticipating the risks. At times, our country’s efforts to reduce risks in the economic environment seem like fleeing disaster through quicksand. Each step forward gives rise to new hazards. On balance, we now have better controls, and this risk seems less destructive than it used to be. Finally, there is always the chance that the investor will make a fool of himself—human failure again. This risk of making bad judgments even when the material facts are clearly known probably is about as high as it ever was. All three hazards were present in pressing degrees in 1929.
NEW SAFEGUARDS
To what extent has the risk of being cheated been reduced since the Crash? Information available to the investor is a great deal better than it was. One need only compare the 1929 annual reports of Allied Chemical and American Tobacco with their latest annual reports to appreciate the revolution that has taken place in corporate thinking about what a shareowner is entitled to know.
Undoubtedly, the necessity of making so much information public in Securities and Exchange Commission registration statements helped to bring about this change. So did the steady pressure of the New York Stock Exchange for fuller disclosure. But, increasingly, corporate managements in America have come to realize the value of being well known to the investing public. Some companies even issue special reports aimed at professional investors. Socony Mobil Oil Company, for instance, supplements its annual report with a companion piece of about the same size entitled “Financial and Operating Statistics,” frankly aimed at anticipating as many reasonable inquiries as possible.
All this more abundant corporate information is not designed to make stocks sell higher than they otherwise would. While stock options and mergers via exchanges of stocks do give corporate management an incentive not to hide the company’s light under a bushel, a prudent management knows how troublesome it is to be saddled with shareowners who paid too much for their stock and hence never can be satisfied with its progress. Such a management seeks to keep the investing public well enough informed to avoid blame for gross fluctuations in the market prices of its securities, both up and down.
INSIDE INFORMATION
Not only is the information available to the investor a great deal better than it was, but restrictions against taking advantage of inside information are tighter — so tight, in fact, that a broker recently was fined by the New York Stock Exchange and then suspended by the Securities and Exchange Commission for selling stock on learning of a dividend cut that had not yet been made public. In the precedent-making opinion in the case, SEC Chairman William L. Cary held: “A significant purpose of the Exchange Act was to eliminate the idea that the use of inside information for personal advantage was a normal emolument of corporate office. . . . Clients may not expect of a broker the benefits of his inside information at the expense of the public generally. ... A breach of duty of disclosure may be viewed as . . . an implied misrepresentation. . . .”
Few would argue today against the restrictions which prevent insiders from taking personal advantage of their inside information. But it is still hotly debated whether the recipient of information should be responsible for ascertaining whether that information is public before he acts on it. Some interpret Chairman Cary’s opinion as approving only the use of “knowledge arrived at as a result of perceptive analysis of generally known facts.” The phrase quoted is his. But does the mind have such watertight compartments? So strict an interpretation might suggest ultimate divorcement of money managers from industrial companies’ boards of directors. Sidney J. Weinberg, director of a dozen of America’s largest corporations, promptly ordered a legal review of his relationships with his own investment banking firm of Goldman, Sachs & Company, Paul C. Cabot, treasurer of Harvard University and chairman of the State Street Investment Corporation, firmly defends his duty as a director to make the best decisions he can on behalf of all the shareholders, whether or not his clients own shares; his duty as a manager of other people’s money not to serve as a director of a company if serving means that the funds under his supervision will be precluded from use in buying and selling shares of that company; and his duty not to divulge to his investment committee confidential information received as a director before it is available to the public — for example, the Ford stock split. There is a precedent of sorts in the British House of Commons. A member with a financial interest in pending legislation must declare it, but need not disqualify himself from voting on the measure.
THE RELIANCE ON SECURITY ANALYSTS
The great increase in the number of competent, competitive security analysts at the service of the investing public has contributed to making our financial markets safer than they otherwise would be. Few companies anywhere have equaled the growth rate of the New York Society of Security Analysts. When founded a quarter century ago, the society had only twenty members. Its membership now is approximately 2700. Total enrollment in the twenty-five regional security analysts’ societies banded together in the National Federation of Financial Analysts is about 7200.
In the early days, it was not easy to persuade corporate executives to take the time to address security analysts’ meetings. Today the tables have turned so completely that corporate publicrelations men vie to get such invitations for their bosses. Presentations are followed by questionand-answer periods, with no holds barred. Most leading companies supplement their published reports and presentations to security analysts by seeing analysts individually.
In respect to both adequacy of information published and willingness to cooperate with security analysts, American corporations are far ahead of most foreign companies, though there are outstanding exceptions, of course. Many big foreign corporations today are in this respect about where their American counterparts were in the 1920s.
Laws against fraud have helped to make investing safer too. These laws, and Securities and Exchange Commission regulations issued under them, are directed both at misstatement or omission of material facts and at manipulation of market prices of securities. The laws on information make it much more difficult than it used to be for anyone to mislead the public without becoming liable to criminal prosecution, the more so since such a person must operate with our present large body of professional security analysts looking over his shoulder.
Some of the most effective policing against manipulative practices is provided by the New York Stock Exchange itself. An electronic device scrutinizing every transaction calls attention to any unusual activity or price fluctuation. Governors who know every trick start asking questions before anyone has had time to forget what happened. Thirty years ago, the Exchange may have been slow to accept the fact that what was once a private club had become a public institution, but no one challenges that now. If there has been any lag or letdown, according to Mr. Weinberg, it has been on what used to be known as the Curb (from the days when it was conducted outdoors, in the street) and is now the American Stock Exchange. About 80 percent of the members of the American Stock Exchange also are member firms of the New York Stock Exchange, but service on the American Exchange’s governing committees has not been the Wall Street status symbol that corresponding roles on the Big Board have been.
THE EFFECT OF THE SEC
Big market operators of bygone years unhesitatingly cite the Securities and Exchange Commission ban on selling stock short except at rising prices as the greatest single market safeguard introduced since 1929. But for that ban, one fabulously successful retired veteran trader told me, he could make fifty million dollars in this market in short order. Specifically, the rule is that no one may sell shares he does not own except on an uptick — that is, at a price an eighth of a dollar or more above the immediately preceding sale.
If people bought stocks the way they buy meat, taking home an extra roast for the deepfreeze when the price is cut, short selling would not be a market problem. But some people seem to buy stocks because they are going up and to sell them because they are going down. Such people used to be lambs to the short-selling wolves. All a big operator had to do was to sell stock until the price declined enough to change the minds of those who had bought it because it was going up. Then, as they dumped their shares, the short seller bought his back.
Another way in which our financial markets have been made much safer than formerly is by restrictions on how much of the price of securities can be borrowed. While there are laws and stock exchange rules against manipulation of securities prices, any great international market has some people operating in it who are beyond reach of the authorities; hence the importance of making manipulation not only a crime, but one as difficult as possible to commit. Margin requirements help to do that. Undeniably paternalistic, they limit borrowing, and thus reduce the risk that people may be forced to sell on a small fall in price.
Significantly, yearly price swings in the stock market since World War II have averaged about half what they were from 1900 to 1940.
CAN WE BALANCE OUR ECONOMY?
Now, what of the second risk, that of the economic environment?
Curiously enough, among all the governmental measures aimed at making the stock market safer, we find one which threatens to rock the boat. The capital gains tax is a built-in destabilizer. It operates to deter sales of a stock that is on its way up. A man buying a stock at 10 and seeing it rise to 90 must pay $20 a share capital gains tax if he sells. Naturally, he postpones that tax liability as long as seems reasonable — often until he escapes it by dying. If and when he does decide to sell, however, someone else must put $$90 a share into the stock, but the seller gets only $70, less commissions and transfer taxes. In other words, should the seller change his mind and want to buy back, he could not do so with the proceeds of his sale until the stock had declined more than $20 a share.
So long as investors believe the long-term trend of stock prices will continue upward, this capital gains tax factor strengthens the market by restraining sales — that is, by reducing the supply of stocks offered for sale below what it otherwise would be. Once sentiment changes, however, and investors hasten to sell their common stocks or exchange them for others, the capital gains tax takes from the market a substantial portion of the funds available for investment in equities. Thus, the pool of risk capital is reduced at the very time when more rather than less such funds are needed. If a major decline comes, this factor may be expected to be more important than ever before because the capital gains tax is higher than it was in 1929 and the percentage advance in average stock prices is greater.
Inflation and taxes have tended to aggravate each other’s impact on the stock market since the 1930s. Had it not been for the long-continued decline in the purchasing power of the dollar, investors in the higher income brackets might have relied much more heavily on tax-exempt state and municipal bonds. Anyone who bought them at the end of the war, however, and saved all the interest has less total purchasing power today than when he began.
There are two big reasons why stocks have been attractive to people in the $50,000 and higher income bracket. (These people are estimated to have owned more than a third of all stocks outstanding in this country in 1958.) First, generally rising prices tend to give a competitive edge to established businesses. Second, the best-managed companies in the industries with the most promising growth prospects have afforded about the only chance to preserve purchasing power against the inroads of both inflation and taxes without sacrificing liquidity. For the individual who did not need current income, ownership of shares in a company increasing its earnings at the rate olf 5 percent a year, compounded annually, has been better than owning municipal bonds, even if the tax collector did take most of the dividends on the stock.
Today’s practical question, though, is not what inflation and taxes have done but what they are going to do. That, in turn, depends on our national needs, our national purpose, and our national will.
Fortunately, our internal economy seems safer than ever before. No less an authority than Dr. Arthur F. Burns, head of the National Bureau of Economic Research and former chairman of the Council of Economic Advisers under President Eisenhower, believes there has been a permanent change in the character of the business cycle. The link between production of goods and services and the flow of personal income has been broken, he holds, by unemployment insurance, pensions, income taxes (which drop when earnings drop), and the increased number of people on annual salaries as opposed to those drawing hourly wages. Bank deposit insurance has practically eliminated the danger of bank runs and the resultant necessity of selling securities and calling loans. The general use of self-amortizing residential mortgage loans is another stabilizing factor.
Most important of the stabilizing measures is the Employment Act of 1946. Albert J. Hettinger, Wall Street investment banker and mutual fund president, says we have displaced the gold standard with the unemployment standard. In 1929 gold movements determined public policy. Now unemployment does. But once again we have a balance-of-payments problem. Have we robbed Peter (the American dollar) in order to pay Paul (the American full-employment economy)?
In the long run, the answer to that question must depend on our self-discipline. A man who keeps his word does not need a bag of gold to make his credit good. But he must not only intend to pay, he must be able to pay. To be able to pay, he must avoid undertaking to do more than he can. It is the same with nations. Right now, foreigners hold short-term claims against us exceeding our entire gold supply. Though longer-term, our investments abroad are much larger than these claims, so our position need not disturb us any more than it disturbs the head of any sound bank to realize that he cannot pay off all of his depositors at once. He knows that as long as he runs a sound bank, they will not all present their withdrawal slips at the same time. So it is with us as a nation. But, like the depositors in a bank, the countries holding these claims on our gold are in a position now to make us feel any dissatisfaction they may have with the way we manage our fiscal affairs.
We are no longer rich enough to do as we please no matter what our neighbors think, but neither are we poor enough to discharge our responsibilities in the world by saying we are broke. Basically, the magnitude of the cycle risk has been diminished because both at home and abroad we are acting increasingly on the principle that no one’s title to any property is worth any more than the ability and willingness of his fellowmen to defend it.
President Kennedy seems forced into the balancing act of the century. A sustained high level of growth, some foreign aid, a reasonably stable currency and price level, and socially and politically acceptable minimums of unemployment are needed. Cynics say we are trying to have our cake and eat it too. Optimists maintain that with the cooperation of the other nineteen nations of the Atlantic community we can bring about such an increase in free world economic output and trade as will solve all problems. The vision is an inspiring one. Given cooperation and self-discipline all around, it may be possible of achievement.
AND WHAT ABOUT OUR JUDGMENT?
Two of the three investor risks seem under better control than they used to be. How about the third? Are we driving more sensibly on Wall Street?
The stock market has many speedometers. One is what professionals call the price-earnings ratio. That is simply the price of a stock divided by its earnings: for example, price, thirty dollars; earnings, two dollars; price-earnings ratio, fifteen. Sometimes people will pay only seven dollars, or even less, for a good stock earning a dollar a year. Sometimes they will pay twenty dollars, or even a great deal more, for the same stock. Neither time are they necessarily right or wrong. If you wanted to buy an apartment house that was only half rented, believing that someday it would be fully occupied, you would be willing to pay a higher price for each dollar of its earnings than you would if it were full.
Suppose, however, that when the apartment house was half empty you decided that it was unlikely to get more tenants, and probably would lose some of those it already had. The price you then would be willing to pay would be low in relation to earnings, because you would be expecting even worse results. Conversely, suppose the apartment house was full but you felt sure so many people wanted to live there that it would have no vacancies even if rents were raised. The price you then would be willing to pay would be high in relation to earnings, because you would be expecting even better results.
Something like that seems to happen in the stock market. Four times in the last forty-one years, a representative list of good stocks (Barron’s) has sold at about seven times earnings. And four times in the same period the list has sold at more than twenty times earnings (twice at more than twenty-five times). It sold at more than twenty times 1961 earnings late last year. How much of the post-war stock market advance has been due to increased earnings and how much to higher price-earnings ratios is easily calculated. If the Dow-Jones industrial stock average were selling today in the same relationship to its 1961 earnings as it did in 1946, it would be under 400 instead of over 700.
For belter or worse, prices and investor confidence as expressed in price-earnings ratios have tended to rise and fall together over the last four decades. Usually they have moved in the same direction as earnings. This is another way of saying that we human beings incline to view the future hopefully in good times and glumly in bad times.
Price-earnings ratios gauge how far ahead people think they can see at any given moment, and how badly disappointed they will be if they are wrong. The practical significance of such a gauge rests on the fact that no one ever knows what the future holds. Remember the Irishman who wished he could know where he was going to die because, “Sure and I’ll never go near the place.” Anyone who cherishes the delusion that he can forecast with certainty should read the population estimates made by our government a quarter century ago as the basis for social security legislation. It was estimated the United States would have a population of 150 million by 1980. Already we have 185 million, and the estimate now is that by 1980 we shall have 250 million.
The relationship between stock yields and bond yields is another gauge of how far people think they can see into the future. Historically, we know that stock prices tend to go up and down with the business cycle, while bond prices tend to move contracyclically. Stock prices go up because business is expected to get better. Bond prices go down because better business means more demand for money (business loans), and thus tends to raise interest rates. Hence, stocks may yield the least when bonds yield the most because low stock yields and high bond yields may be expressing the same optimistic opinion about the future of business. Tax-exempt bonds now yield more than stocks. In 1949 they yielded less than a fourth as much.
The relationship between prices of the best corporate bonds and second-grade issues tells a similar story. When people are very sure “It ain’t gonna rain no mo’,” as they were in the late 1920s, second-grade bonds sell almost as high as the best bonds. People seem to be saying, “What difference does it make? They’ll all be good. Why not take the highest yield available?” But when business is bad and people fear it will get worse, secondgrade bonds may sell to yield twice as much as the best bonds, as they did in 1932. In recent years, this difference between second-grade and the best bonds has been smaller than it was at any time in the 1920s.
Volume of trading tells us something about ourselves, too. Over the last forty-one years, trading on the stock market has been in small volume when prices were at what later proved to be low levels. Turnover consistently has been five to ten times greater when prices reached what subsequently proved to be high levels. Are we doing any better this time? On the surface it would seem not. In the month of June, 1949, when the current bull market got under way, fewer than 18 million shares changed hands on the New York Stock Exchange. Last year, with average prices more than four times as high, the biggest monthly volume was 118 million shares. But if we are to profit by experience, we must not equate surface similarities with causes and effects. Many an opportunity in life is lost by confusing memory with reasoning.
THE BROADER MARKET
One difference from the 1920s which should temper the conclusions implicit in this picture is the size of the market. The value of shares traded on the New York Stock Exchange last year was nearly six times the 1949 figure, and the rise in the total value of all stocks listed on the Exchange was almost as great. Symptoms of public speculative fever likewise fade when measured in shares traded compared with shares listed, Four times as many shares were traded last year as in 1949, but there were nearly three and a half times as many shares listed. Relating the increase in market activity to the growth of the country helps to keep it in perspective too. The aggregate value of shares traded in 1929 was $125 billion. That was 20 percent more than the 1929 gross national product of $104 billion. Value of shares traded in 1961 was only 10 percent of the 1961 gross national product of $520 billion.
While the number of shareowners in American industry, now estimated at upward of fifteen million, has more than doubled since 1952, broadening of public interest in business and finance has been far greater, as is reflected in the circulation of the Wall Street Journal, which has soared from 29,000 in 1940 to nearly 800,000. Similar trends have been shown by other financial publications and investor information services. If, in evaluating the increase in trading since 1949, allowance is made for the increase in the number of people owning shares, as well as for the increase in the number and value of shares outstanding, it can be argued that the market is actually less active now in relation to the job it has to do than it was thirteen years ago.
Even comparing the price of the stock of an individual company with what it was years ago can be misleading. Many companies still bear the same names as they did in the 1920s and 1930s but are quite different. Heavy expenditures on research, usually not capitalized, have changed some of them so much that their chief executives of those prior years would not be able to identity most of the products they are turning out today. Accelerated depreciation has reduced reported earnings in many cases below what they would have been by the bookkeeping of former years.
INSTITUTIONAL DEMAND FOR STOCKS
Probably the most significant change, however, has been the sharp rise in institutional demand for common stocks, coincident with reduced reliance by corporations on equities for their financing. Institutional demand for common stocks increased tenfold in the post-war period. At the same time, corporations used equities for only a third as much of their external financing as they did in the 19231929 period, when they were relying more on external financing. Taxes provide part of the explanation for the change in corporate fiscal policy. Interest on bank loans or bonds is paid out of earnings before the 52 percent corporate income tax. Dividends must come out of what is left after that tax. Overly simplified, this means that more than half of every million dollars paid out in interest on corporate debt would have gone to the federal tax collector anyway. Another possible explanation is that borrowing avoids dilution of the equity, which is particularly distasteful to shareholders in periods of expanding business and profits. A third factor is that corporations have been relying more on internally generated funds than in the 1923-1929 period. To the extent that shareowners are able and willing to reinvest earnings, there is a saving both in taxes and in financing costs if the company retains the earnings instead of paying them out in dividends and then getting the money back through sale of bonds or stocks. For all these and, no doubt, other reasons, the supply of new common stocks coming to market was sharply curtailed at a time when a great new demand for them was coming into being. And everyone — the insurance companies, state and local retirement funds, savings banks, mutual funds, and corporate pension funds — wanted the same stocks, those highest-grade, growing companies so dear to the heart of the high-tax-bracket individual as well.
Currently, all this institutional buying of common stocks probably is at a net annual rate of about $4 billion. That does not include whatever purchases are being made for trade-union retirement funds and partnership retirement and profit-sharing funds, because the data are not available. In the 1920s, institutions bought almost no stocks, aside from the brief flurry of investmenttrust buying at the end of that period.
By far the most important institutional force in the stock market now is the corporate pension fund. Common-stock purchases by these funds currently are running at an estimated annual rate of about $2 billion net, compared with barely $200 million at the beginning of the 1950s. A Securities and Exchange Commission report put their total assets, as of the end of 1960, at $32 billion, and they are considerably higher now.
In the insurance industry, fire and casualty companies now hold about $9 billion in stocks, and their net purchases in recent years have averaged almost $200 million annually. The fire companies have been steady common-stock buyers since the turn of the century. Life insurance companies have about half as much invested in common stocks now as the other insurance companies but are potentially a larger force, not only because of their great size (their total assets exceed $126 billion) but because of the possibility that they may sell an important volume of variable annuity contracts someday. At the behest of the Prudential Insurance Company, New Jersey already has adopted the necessary permissive legislation. For almost half a century prior to 1951, New York state banned common-stock purchases by life insurance companies. Now they may invest up to 5 percent of their assets or 50 percent of their surplus (whichever is lower) in equities.
Net common-stock purchases by mutual funds last year are estimated at more than $1.2 billion, in contrast with less than $200 million in 1950. Mutual fund assets have grown since the war from $1.3 billion to $22 billion. No one can prove to what extent these investment companies are merely instruments through which individuals buy common stocks they would have bought anyway, but old-timers who remember the effect of World War I Liberty loan drives in making Americans conscious of securities attach much importance to the influence of mutual funds’ sales forces in channeling into the stock market many savings that would not have found their way to it otherwise. Like life insurance in its early days, mutual funds generally have been sold rather than bought.
Compared with the total market value of stocks outstanding, institutional demand is small — barely one percent of the listings on the New York and American stock exchanges. What has made it such a significant market factor, aside from its concentration on prime companies, is that in recent years it is estimated to have equaled all of the new supply of common stock sold for cash by issuing corporations, as well as that liquidated by estates to meet inheritance taxes. Occasional excesses of demand over supply could be met only by bidding up prices to levels at which owners of equities became willing to part with them. The stock market cannot absorb capital by rising. Only the sale of new stock issues can do that. No matter how high a stock goes, when it is sold the seller finds himself w ith about as much idle cash as the buyer has just put to work. The panic of 1873 came because of a glut of new issues. Last year, common-stock sales by issuing corporations exceeded S3 billion for the first time since 1929, when the comparable figure was S4.8 billion. Estate liquidations arc estimated to have contributed close to SI billion additional to the 1961 supply. Even so, that supply does not appear to have equaled the net institutional demand.
The quality of institutional demand may be as important as its quantity in making today’s stock market different from that of the past. Relative values are being scrutinized as never before. Institutional portfolio managers vary in talent just as individuals do, but as professionals they recognize their responsibility to know what they are doing and why. Their measured pace should tend to offset some of the emotional excesses of those speculators who buy too high because the price is rising and end by selling too low because the price is falling. To the extent it does so, the risk of human failure in the stock market will be reduced.
STILL TO BE SOLVED
Like every other business or profession, the securities business has its unsolved problems. The new safeguards of adequate information, competent analysis, and legal bans on misrepresentation and manipulation do not extend equally to the over-the-counter markets, where trading volume at times exceeds that on the stock exchange, nor is institutional demand as much of a factor in them. But, on the whole, notwithstanding recent lapses, standards in America’s financial markets are probably close to the highest they have ever been and compare well with those of other highly respected businesses and professions which, sometimes have their quacks, payola, and shysters.
Where does this leave us? We have seen an enormous increase in the number of people interested in our greatly expanded securities markets, in our vastly bigger and richer country. We have seen how they have been safeguarded against fraud and even against some of their own follies, and what success has attended efforts to stabilize our country’s economy. Far from a glut of new equity issues, we have seen something akin to a chronic shortage of favored stocks. The supplydemand relationship may have changed enough to alter permanently the level of prices of stocks as compared with bonds.
But the risk of human failure is still with us — the failure to remember that the tree does not grow to the sky, that the only certainty in investing is change. No one really buys stocks at sixty times earnings. When people appear to be doing so, they are actually buying them at fifteen or twenty times what they expect future earnings to be. Nor do people really prefer taxable dividends on stocks to even larger tax-free interest on municipal bonds. When they seem to be doing so, they are trading what they see for what they foresee. Thus, the human failure, if it occurs, will be in these earnings estimates. If, perchance, the current era should turn out to be a period of historic overvaluation, it will be because the “beautiful theory” of uninterrupted growth of corporate earning power is done in by a presently masked “gang of brutal facts.”
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