2018-06-17

The Fairy Tale of Capitalism: The Old Ones and the 50 Percent

Each person judges for themselves the truth and meaning of FTC.


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David Ricardo
by Thomas Phillips (1821)
The grandest characters of FTC, the Fairy Tale of Capitalism, are the four Old Ones Adam Smith, David Ricardo, Karl Marx, and Friedrich Engels, Marx’s collaborator. The Old Ones wrote the most significant early Tales, in immense volumes of unintelligible prose.

The capitalists of political view often call Smith the originator of capitalism, but they exaggerate. Smith sketched out profound economic components and dynamics. Ricardo, Marx and Engels cited Smith’s works, disputed some minor points, refined and elaborated others, and used Smith’s terms, and all four agreed on the nature of the economic system, which Marx and Engels named "capitalism" in their book “Capital” in 1867. Marx and Engels articulated the political ideology of “Communism” in their book “Manifesto of the Communist Party” in 1858.

Smith describes how the wages of Labor merely suffice for the Worker to subsist. Under stable conditions, he writes, a man and his wife, both employed, have just enough income to maintain themselves and four children, two of whom die before adulthood. Employers choose among Workers bidding against one another for employment, and competition among Workers keeps their wages to a “scanty subsistence”, he wrote.

Friedrich Engels
by William Hall (1879)
Adam Smith
by John Kay (1790)

When employers expand production rapidly, their need for Workers increases, writes Smith. Wages may rise a little, a comfort encouraging some Workers to marry and have children. If Labor becomes abundant, due to expanded population, introduction of improved machines or a decline in production, then employers dismiss Workers, and wages decline. Smith describes prevalent beggary, crime, starvation, and death among the unemployed until the population declines sufficiently that revenue from production can maintain it.

Smith writes “The liberal reward of labour, therefore, as it is the necessary effect, ... is the natural symptom of increasing national wealth. The scanty maintenance of the labouring poor, on the other hand, is the natural symptom that things are at a stand, and their starving condition, that they are going fast backwards.” 

Ricardo echoes Smith. “The natural price of labour is that price which is necessary to enable the labourers, one with another, to subsist and to perpetuate their race, without either increase or diminution.” The prices of food and necessities determine the natural wage level. And “When the market price of labour is below its natural price, the condition of the labourers is most wretched: then poverty deprives them of those comforts which custom renders absolute necessaries.”


Marx and Engels echo Smith. “The value of labour-power is determined by the value of the necessaries of life habitually required by the average labourer.”

The Tales of Marx and Engels are consistent with the concepts articulated by Smith and Ricardo. The capitalist advances Capital (which Smith calls “stock”) for equipment, for materials and for employment of Labor, they write. Labor transforms the means of production into product sold in the market. The product fetches a price sufficient to reimburse expenditures on Labor and equipment and materials, plus a little more, because otherwise production stops. For Marx and Engels the “plus a little more” is “surplus value”, the residuum, after replacing production expenditures. The capitalist claims the surplus value, increasing the Capital. Smith and Ricardo would have agreed fully and called surplus value the capitalist’s profit. Marx and Engels say the capitalist should share surplus value, which is Capital and Labor transformed, with the Worker. Marx and Engels write that capitalism requires many Workers to live in conditions so desperate that some of them die, while the capitalist lives in comfort.

Karl Marx
by John Jabez Edwin Mayall (1870)
Marx and Engels fully agreed with Ricardo and Smith on the functioning of the existing general economic system, which they described in great detail and named "capitalism" in their book "Capital". In their book "Manifesto", they called for abolition of private property. That call immediately aroused a political movement opposing communism, Engels, Marx, and everything associated with them, including, alas, people who wrote about them. Engels and Marx became the high villains of FTC. The political movement opposed to communism adopted the name "capitalism", instantly conflating the movement with the economic system, and the members called themselves "capitalists", whether they personally owned significant capital or not.

In their Tale of the Yeoman, Marx and Engels write that the Crown granted nobles authority to clear their domains of families that had cultivated small inherited plots since antiquity. The Land clearing coincided with invention of new machines, such as automated looms, centralized in urban factories where the displaced country people sought employment. Marx and Engels suggest there was no poverty in England before capitalism introduced modern employment in the factories.

Marx and Engels romanticize the good old days. Poverty long predated capitalism. In Seville, at the time Christopher Columbus landed in America, the predawn of capitalism, about 50 Percent of the people weren’t wealthy enough to tax. In our enlightened era, the 50 Percent are the least wealthy half of Society. In 2012, Mitt Romney, the unsuccessful Republican candidate for U.S. President, said 47 percent of the people don’t pay income taxes. Most of the 50 Percent don’t have enough income to tax, because taxing the 50 Percent could raise political problems by starving many constituents and their children. Indeed, some are starving without taxation. In the United States, 1/8th (12%) of households were food-insecure in 2016. 1/20th (5%) had “very low food security”, meaning they didn’t have enough food at times during the year for lack of money or other resources.

A fair trade, as between a buyer and a seller, produces benefits for both parties. Smith and Ricardo saw the deaths of some Workers as the natural, necessary and useful result of a complex system of production and distribution which benefits the entire Society by increasing the wealth of the nation. Marx and Engels wrote, with outrage, that the customary trade of Labor for wages was unfair to the Worker; systematically unfair, because no trade could be fair when the death of one of the parties so frequently results.



Note: In 2016, the U.S. Census Bureau poverty level for a household of 4 people was about $24k, which is, coincidentally, approximately the highest household income in the 20th percentile of incomes, and also, $24K is about the 2018 level of the U.S. Department of Health & Human Services poverty guideline (determining eligibility for various government programs) for a 4-person household. The U.S. Department of Agriculture estimates, based on census data, state proportions of people in poverty, ranging from 8% in New Hampshire to 21% in Mississippi, and of children in poverty, from 9% in New Hampshire to 30% in Mississippi, as of 2016.



My gratitude goes to my friends who encouraged me and helped me clarify the text to better convey the meaning.



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Images

William Hall, “Friedrich Engels” (1879, Brighton, Public Domain, Wikimedia, https://commons.wikimedia.org/wiki/File:Friedrich_Engels_portrait_(cropped).jpg)

John Kay, “Adam Smith” (1790, Library of Congress, Public Domain, Wikimedia, https://commons.wikimedia.org/wiki/File:AdamSmith1790b.jpg)

John Jabez Edwin Mayall, “Karl Marx” (circa 1870, UK National Portrait Gallery, http://www.npg.org.uk/collections/search/portrait/mw75680/Karl-Marx, Public Domain in USA, https://commons.wikimedia.org/wiki/File:Karl_Marx_by_Mayall_c1870.jpg)

Thomas Phillips, “David Ricardo” (1821, National Portrait Gallery, Public Domain, Wikipedia, https://en.wikipedia.org/wiki/David_Ricardo#/media/File:Portrait_of_David_Ricardo_by_Thomas_Phillips.jpg)

United States Census Bureau, Current Population Survey (2016 and 2017 Annual Social and Economic Supplements, https://www2.census.gov/programs-surveys/demo/tables/p60/259/table2.xls

U.S. Department of Agriculture, “U.S. households by food security status, 2016” (https://www.ers.usda.gov/topics/food-nutrition-assistance/food-security-in-the-us/key-statistics-graphics.aspx)



Sources

Gerald Auten & Geoffrey Gee, “Income Mobility in the United States: New Evidence from Income Tax Data” (June 2009, National Tax Journal, https://www.ntanet.org/NTJ/62/2/ntj-v62n02p301-28-income-mobility-united-states.pdf)

Gerald Auten & David Splinter, “Income Inequality in the United States: Using Tax Data to Measure Long-term Trends” (2018, New York University, http://www.law.nyu.edu/sites/default/files/upload_documents/Income%20Inequality%20in%20the%20United%20States%20-%20Auten_1.pdf)

Daniel Brockman, “Demonstrating Disparity” (April 2018, https://daniel-brockman.blogspot.com/2018/04/demonstrating-disparity.html)

Daniel Brockman, “The Fairy Tale of Capitalism: The 90 Percent" (November 2016, https://daniel-brockman.blogspot.com/2016/11/the-fairy-tale-of-capitalism-90-percent.html)

Daniel Brockman, “The Fairy Tale of Capitalism: The Buyer of Labor and the Nine Percent” (March 2017, https://daniel-brockman.blogspot.com/2017/03/the-fairy-tale-of-capitalism-buyer-of.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Land and Ricardo” (April 2017, https://daniel-brockman.blogspot.com/2017/04/FTC-Land-and-Ricardo.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Managers, Professors and Engels” (June 2017, https://daniel-brockman.blogspot.com/2017/06/ftc-managers-professors-engels.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Rand, Marx and the Downward Trickle” (November 2017, https://daniel-brockman.blogspot.com/2017/11/FTC-rand-marx-downward-trickle.html)

Friedrich Engels, “The Condition of the Working Class in England” (1845, Penguin, http://a.co/6DAD9JW)

Robert Farley, “Dependency and Romney’s 47 Percenters” (September 2012, FactCheck.org, https://www.factcheck.org/2012/09/dependency-and-romneys-47-percenters/)

Felipe Fernandez-Armesto, “Amerigo: The Man Who Gave His Name to America” (2007, Random House, http://a.co/cI3Q6mw

Jacob Goldstein & Lam Thuy Vo, “The 47 Percent, In One Graphic” (September 2012, National Public Radio, https://www.npr.org/sections/money/2012/09/18/161337343/the-47-percent-in-one-graphic)

Thomas Piketty, Emmanuel Saez, Gabriel Zucman, "Distributional National Accounts: Methods and Estimates for the United States" (May 2018, Quarterly Journal of Economics, https://eml.berkeley.edu/~saez/PSZ2018QJE.pdf)

Karl Marx & Friedrich Engels, “Capital” (1867, http://a.co/fdu68Kb)

Karl Marx and Friedrich Engels, "Manifesto of the Communist Party" (1858, 1908 New York Labor News Edition, http://amzn.to/2hl0LCS)

Molly Moorhead, “Mitt Romney says 47 percent of Americans pay no income tax” (September 2012, Politifact, http://www.politifact.com/truth-o-meter/statements/2012/sep/18/mitt-romney/romney-says-47-percent-americans-pay-no-income-tax/)

David Ricardo, “On the Principles of Political Economy and Taxation” (1823, http://a.co/9BOWay8)

Adam Smith, “An Inquiry into the Nature and Causes of the Wealth of Nations” (1776, http://a.co/e3KmVXG

Adam Smith, “The Theory of Moral Sentiments” (1759, 2010 republication by Digireads, http://amzn.to/2ADCAYL)



U.S. Census Bureau, “Number in Poverty and Poverty Rate: 1959 to 2016” (1960 to 2017, Current Population Survey, https://census.gov/content/dam/Census/library/visualizations/2017/demo/p60-259/figure4.pdf)


United States Department of Agriculture, Economic Research Service, “Key Statistics & Graphics, Food Security Status of U.S. Households in 2016” (https://www.ers.usda.gov/topics/food-nutrition-assistance/food-security-in-the-us/key-statistics-graphics.aspx)

United States Department of Agriculture, Economic Research Service, “Poverty, Percent of total population in poverty, 2016” (retrieved Jun 11, 2018,

United States Department of Health & Human Services, “U.S. FEDERAL POVERTY GUIDELINES USED TO DETERMINE FINANCIAL ELIGIBILITY FOR CERTAIN FEDERAL PROGRAMS” (retrieved Jun 11, 2018, https://aspe.hhs.gov/poverty-guidelines)


2018-04-21

Demonstrating Disparity



Increasing disparity of incomes has occurred in the United States during the last 50 years, and we can show it.

Some of us suffer little from the gain of national income share by the One Percent. We feel that our income is good and stable. We may see our own fortunes and comfort increasing, which we attribute to our own efforts, talents and deserved rewards.

But some of us do suffer. Our fortunes are crushed. We go to bed hungry. We suppose we made serious mistakes, or didn’t have the knowledge, or the necessary personal connections, or the lucky breaks.

While you might not feel the One Percent absorbing the income, it does happen. You can’t observe it by looking at one person or one example, such as yourself, because idiosyncratic events with multiple explanations interweave with less obvious societal evolutions to shape individual circumstances. And each of us imagines most of the people live much as we do. We have little natural awareness of people who live in economic circumstances different from our own.

One must consider people in groups. One must take a macro view. For this purpose, consider three graphs. They come from different researchers. Let's look at the period 1970-2014, which appears on all 3 graphs on the horizontal axis. For all 3 graphs, the vertical scale shows percent-points of aggregate national income.

In the first graph, we see the aggregate income of the less wealthy 50 Percent of incomes, as a share of national income, declined by about 9 percent-points pretax and 6 percent-points posttax from 1970 to 2014. Share given up by the less wealthy 50 Percent is share gained by the wealthier 50 Percent.

The second graph shows, on the the line studded with black triangles, the share of the One Percent (incomes in the 100th percentile) increased about 13 percent-points of national income between 1970 and 2014. The Nine Percent (incomes in the 91st through 99th percentiles) gained about 4 percent-points pretax. So, these Ten Percent gained about 17 percent-points. Percent-points gained by the Ten Percent are percent-points given up by the 90 Percent (1st through 90th percentiles).

Now, the first graph showed us the less wealthy 50 Percent gave up 9 percent-points, and the second graph shows the Ten Percent gained 17 percent-points.

Since the total of all income shares is always 100 percent, a increase in share by one subgroup compensates for the net decreases in share by other groups, and the increases and decreases must add to zero. 9 percent-points given up by the less wealthy 50 Percent and 17 percent-points acquired by the Ten Percent means the remaining 40 Percent (51st through 90th percentiles) gave up 8 percent-points of national income share (-9 + 17 - 8 = 0).

The 3rd graph shows the top Ten Percent acquired 13 Percent-Points, and the Next Ten percent (81st to 90th percentiles) gave up 4 percent-points.

Though prepared by different researchers, if we allow a percent-point or two of minor and technical differences, the three graphs don't conflict with each other or contradict each other. We can understand a consistent story.

Summary:
From 1970 to 2014...
1st to 50th percentiles of income: ​gave up 6 percent points of aggregate national income share.
51st to 80th percentiles of income: gave up 7 percent points of aggregate national income share.
81st to 90th percentiles of income: gave up 4 percent points of aggregate national income share.
91st to 99th Percentiles of income: gained 4 percent points of aggregate national income share.
One Percent: gained 13 percent points of aggregate national income share.
(Figures approximate.)

The Ten Percent took what the 90 Percent gave up.
The One Percent took what the 80 Percent gave up.

This analysis doesn’t imply that the One Percent are malevolent, generally speaking. There are a few criminals among them, as with any group of thousands of people. If their behavior is legal and conventional, that doesn’t contradict this analysis. If they seek to increase their personal incomes and wealth, as any humans might do in similar circumstances, then they behave as humans do. This analysis doesn’t explain why the shifting of income shares has occurred among societal subgroups, but it shows the shifting has occurred.




I'm grateful to Dr. Stetson for his communications that inspired this article, and to other friends for their helpful comments in preparation of this article.



Images and Sources

Images may be freely used in reproduction of this article. They are used here in compliance with fair use doctrines of copyright law.

Alisha Coleman-Jensen, Matthew P. Rabbitt, Christian A. Gregory and Anita Singh, "Household Food Security in the United States in 2015" (Sep 2016, United States Department of Agriculture, https://www.ers.usda.gov/webdocs/publications/79761/err-215.pdf?v=42636)




2018-04-13

Pay Ratio

Michael Milken (image: US Congress, 2006)
Having thought it over for seven years, government took a step. On September 21, 2017, the SEC Securities and Exchange Commission announced that, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed into law in 2010, publicly traded corporations must disclose publicly the “median employee” compensation along with the pay of the “principal executive officer”, and the ratio of the highly paid officer’s pay to the median employee pay, every year beginning with the company’s fiscal year that began in 2017.

Economist Piketty wrote in 2014 the supercompensation of senior corporate executives, exacerbated by rent seeking, contributed importantly to the disparity of incomes in advanced economies, especially in the United States. The Occupy Wall Street movement, chanting “We are the 99 Percent!” protested the disparity in 2011. Nobel economists Akerlof and Shiller in 2015 attributed to Michael Milken the beginning of supercompensation in the 1980s as the indirect effect of his pioneering corporate acquisitions financed by junk bonds. Nobel economist Stiglitz in 2013 wrote of corporate CEOs Chief Executive Officers taking a disproportionately large share of the wealth of the companies over which they presided. And now, the US government has acted to measure supercompensation.

Early reports are in. I’ve looked at 24 of them. (You can find them yourself by searching up the company website, finding the link to “Investor Relations” or “Investors”, then the link to “SEC Filings”, and then the link to the 2018 “DEF 14A” or “Proxy”. (Or you can just apply your search engine to all those keywords plus the name of the company.) Here I present some highlights of what I found.

The regulation requires companies to report the CEO’s total compensation, the median employee compensation, and the ratio. For example, for AXP American Express, in 2017, the CEO got $19m, the median employee got $57k, and the reported ratio was 327.

We suppose a company would prefer to report a low ratio, because the executives wouldn’t want to appear overly avaricious. A company can report a lower ratio than you might expect if the CEO isn’t the most highly paid employee. The most highly paid employee must be disclosed in what most companies call the “Summary Compensation Table” in the proxy statement. For WHR Whirlpool, the CEO Marc Bitzer’s pay was $7m, but the most highly paid employee was Jeff Fettig who got $16m. The SEC regulation calls for calculating the ratio of the CEO’s pay to the median employee pay, so WHR calculated a ratio of 356 ($7m/$20k), not 800 ($16m/$20k). Another example was OSTK Overstock.com, where CEO Patrick Byrne got $445k, and the most highly paid employee was Saum Noursalehi who got $968k.

Companies need not consider contractors, leased workers and similar “gig economy” workers to be employees. Thus it’s possible for a company to obtain a lower ratio by hiring a contracting firm which then hires all the employees paid less than, say, $150k. I found no clear evidence of an occurrence. Companies can also decline to count some workers outside the US, up to 5% of the employees. Some companies have done so.

The company with the highest ratio was LEA Lear, which makes car seats. The highly paid employee got $15m in 2017, and the median employee got $10k, and the reported ratio was 1,452.

The company with the lowest ratio was perennial startup OSTK Overstock.com. The highly paid employee got $1m, and the median employee got $52k, and the reported ratio was 8.

I found no significant correlation between pay ratio and market capitalization (size), but there was significant positive correlation between highest pay and market capitalization.

Graph: Daniel Brockman, 2018
I found very mild negative correlation between highest employee pay and the increase in stock price during the last 10 years. I found mild positive correlation between ratio and 10 year price increase, but with the small sample size, the extraordinary case of LEA Lear, with a ratio of 1,500 and a price increase of 16 times, strongly influences the correlation measure. Remove LEA and the data are uncorrelated.

Why does this matter? In the US, we have a narrative that if a person works diligently and loyally and energetically, works pleasantly with others, does work of highest quality, and deals honestly and fairly with others, then she or he can expect to prosper and to rise to even the highest office. But the disclosed pay ratios tell us a different story. What kind of annual raise in pay could such a good worker expect, with consistent performance year after year? 10%? 15%? With that kind of annual raise, after how many years will the good worker have pay equal to the most highly paid executive? This formula gives us the answer, assuming the good worker starts at the median employee pay:

Years = log( pay ratio ) / log( 1 + annual raise fraction )

At ALGN Align, for example, we calculate using an annual raise of 10%:

72 years = log(923) / log(1 + .10)

At OSTK Overstock.com, the good worker could attain the high pay after 22 years, a lifetime of work. At no other company in my set of 24 is such a short time possible. At INTC Intel, the figure is 56 years. At T AT&T, it’s 62 years. This exceeds what a person can do in a lifetime, meaning a person must do something more than or different from good work to reach the highest levels of monetary reward. Put differently, the CEOs get paid for something other than good work.

Disclosing the median employee pay alongside the highest employee pay is an important development. Some European governments require disclosure of corporate officers’ pay, though none publish typical employee pay to my knowledge. Asian companies don’t disclose these numbers. The US SEC requires the most detail and provides an example to other regulators. It will be interesting to see what diligent future researchers find in the pay ratios.

My data set of 24 companies is available at https://docs.google.com/spreadsheets/d/1M9OYJuBHkVdnFKAXq8oDDd0Neqq0-DvPE-VwoIRlr6c/edit?usp=sharing






Images

U.S. Congress, "Michael Milken" (2006, Public Domain, Wikipedia)

Daniel Brockman, Graph (2018, freely use with attribution)


Sources


From the SEC Securities and Exchange Commission …

“Press Release: SEC Adopts Interpretive Guidance on Pay Ratio Rule” (Sep 21, 2017, https://www.sec.gov/news/press-release/2017-172)

“Commission Guidance on Pay Ratio Disclosure” (https://www.sec.gov/rules/interp/2017/33-10415.pdf, retrieved Apr 12, 2018)

“Inflation Adjustments and Other Technical Amendments” (https://www.sec.gov/rules/final/2017/33-10332.pdf, retrieved Apr 12, 2017)

“Division of Corporation Finance Guidance on Calculation of Pay Ratio Disclosure” (Sep 21, 2017 https://www.sec.gov/corpfin/announcement/guidance-calculation-pay-ratio-disclosure)

“Code of Federal Regulations, Title 17 - Commodity and Security Exchanges, Section 229.402 (Item 402) Executive compensation” (Apr 1, 2017,
https://www.gpo.gov/fdsys/pkg/CFR-2017-title17-vol3/xml/CFR-2017-title17-vol3-sec229-402.xml)

“Commission Guidance on Pay Ratio Disclosure” (Sep 27, 2017,
https://www.federalregister.gov/documents/2017/09/27/2017-20632/commission-guidance-on-pay-ratio-disclosure#footnote-16-p44918)

“Regulation S-K, Questions and Answers of General Applicability” (Sep 21, 2017,
https://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm)

“Public Statement, Additional Dissenting Comments on Pay Ratio Disclosure” (Aug 7, 2015,
https://www.sec.gov/news/statement/additional-dissenting-statement-on-pay-ratio-disclosure.html)

“Item 402 of Regulation S-K -- Executive Compensation, Questions and Answers of General Applicability” (Aug 8, 2007,
https://www.sec.gov/divisions/corpfin/guidance/execcomp402interp.htm)


Other sources ...

George A. Akerlof and Robert J. Shiller, “Phishing for Phools” (2015, Princeton University Press, http://a.co/6uww373)

Carola Frydman and Raven E. Saks, “Executive Compensation: A New View from a
Long-Term Perspective, 1936–2005” (2010, Oxford University Press, http://web.mit.edu/frydman/www/trends_rfs2010.pdf)

Thomas Piketty, “Capital in the Twenty-first Century” (2014, Harvard University Press, http://a.co/fdt8GiZ)

Joseph E. Stiglitz, “The Price of Inequality” (2013, W.W. Norton, https://amazon.com/dp/0393345068)

Wikipedia, "Michael Milken" (retrieved Apr 13, 2018, https://en.wikipedia.org/wiki/Michael_Milken)



2018-04-09

Investing for Growth and Value

Image: Google Books Ngram Viewer, books.google.com/ngrams

Last week, two good friends with whom I discuss investing more or less every week wanted to know: “What is the difference between growth stocks and value stocks?”

With American parochialism, I turned to the products of three grand investment firms that have managed growth and value mutual funds and ETFs for decades:

BlackRock, www.blackrock.com, manager of iShares ETFs.
State Street Global Advisors, us.spdrs.com, manager of SPDR ETFs (pronounced like “spider”).
Vanguard, www.vanguard.com, manager of Vanguard ETFs.

Here are the ticker symbols of 18 ETFs I considered:



iShares
SPDR
Vanguard
Large Cap
Growth
IVW
SPYG
VOOG
Value
IVE
SPYV
VOOV
Mid Cap
Growth
IWP
MDYG
VOT
Value
IWS
MDYV
VOE
Small Cap
Growth
IJT
SLYG
VBK
Value
IJS
SLYV
VBR



Searching the websites of the three firms, one immediately encounters disappointing non-definitions of Growth and Value, such as, in the case of IVW, “INVESTMENT OBJECTIVE. The iShares S&P 500 Growth ETF seeks to track the investment results of an index composed of large-capitalization U.S. equities that exhibit growth characteristics.”

Growth and Value are “style” characteristics of investment strategies. By perusing the prospectuses of the funds, I find that each of the 18 ETFs defers the question of the definition to the index the ETF tracks. All 6 large cap ETFs use the S&P 500 Growth and Value Indexes (us.spindices.com). These indexes don’t define Growth and Value, but they use a process to determine whether a stock is a Growth stock or a Value stock. The Index Construction section of the Methodology document describes giving each company a Growth score and a Value score.

The Growth score summarizes three measurements:
Three-year change in earnings per share, excluding extraordinary items, divided by price per share.
Three-year sales per share growth rate.
Momentum, 12-month percent price change.
The 500 companies in the S&P 500 are ranked from 1 to 500, the company with the highest score having a rank of 500.

The Value score summarizes three measurements:
Book value to price ratio.
Earnings to price ratio.
Sales to price ratio.
The 500 companies are ranked with the company having the highest Value score having a rank of 500.

The 500 companies are then sorted in ascending order of the ratio of the Growth rank to the Value rank (G/V). The companies in the top third of the list will have the highest G/V values. These are the “pure” Growth companies. Similarly, the companies with the lowest G/V value are the “pure” Value companies near the bottom of the list. And the companies in the middle of the list are hybrids.

The S&P indexes put portions of a hybrid’s market capitalization in both the Growth and Value indexes, which is why you can find some companies among the holdings in both ETFs. This bothers some of us, so the three firms offer “pure” Growth and Value ETFs as well, but I digress from the question of definition, and I want to get back to that.

The iShares mid cap Growth ETF IWP uses the Russell Midcap Growth Index (www.ftse.com/products/downloads/Russell-US-indexes.pdf). Russell combines one ranked Value variable, book to price ratio, and two ranked Growth variables, the I/B/E/S Institutional Broker’s Estimate System (financial.tr.com/ibes) 2-year earnings growth estimate, and 5-year sales per share historical growth, to produce a composite value score (CVS). A stock with high CVS is a Value stock, and a stock with low CVS is a Growth stock. Both the Growth and Value indexes contain proportions of the same stock, weighted according to its CVS.

For VOE and VOT, Vanguard uses the CRSP U.S. Mid Cap Value Index and Growth Index (www.crsp.com/products/investment-products/crsp-us-mid-cap-value-index) which builds a Growth metric from long and short term future earnings growth, 3-year historical earnings growth current investment-to-assets ratio, and return on assets, and a Value metric from ratios of book to price, future earnings to price, historic earnings to price, dividend to price and sales to price.

Each definition of Value seems to include some form of high book value to price ratio. Each definition of Growth seems to include earnings growth (historical or forecast) and historical sales growth. The differing definitions implicit in methodologies continue as one looks at additional ETFs and their indexes.

So there are no standard definitions of Growth and Value stocks. I think that, historically, the terms were invented to appeal to investors’ emotional hopes for their investments. Dr. Dennis Martin points out the term “value stock” was seldom used before World War I, after which people used it most frequently in the 1930s. “Growth stock” emerged in frequent use only after World War II. Marketers, quantitative analysts and lawyers have tortured the definitions ever since.

Take caution, dear reader, of the numerous and diverse hazards of investing.

Disclosure: I own some shares of SLYG.



My thanks to friends who inspired and critiqued early drafts of this article.



Images


Ngram by Google Books Ngram Viewer, used with permission (https://books.google.com/ngrams/info).

2018-03-31

The Fairy Tale of Capitalism: Capital and the Chairman

FTC consists of anecdotes confirming to some people that universal laws of human behavior and circumstance imply their views.




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The Chairman -- and in our enlightened age, nearly all chairpersons are male --  knew that, as representative of the shareholders, he set an example for others even here in the directors’ private dining room.

Annually, the company paid him a modest few tens of thousands of dollars in director’s fees for attending four meetings a year and signing a few reports. As one of the larger owners, he received several millions more in dividends, stock buybacks, and unrealized gains, of course. He put his napkin on the table, placed the napkin ring upon it, and stood up.

The Chairman’s Staff had suggested the man who was CEO, and the man had talent for his role. Despite the recession and declining revenues and dismissing 8,000 employees last quarter, the CEO preserved the company’s rising trend of profit, the return on Capital. He whined unceasingly about the stress of his job. Still, this man’s value to the firm far exceeded the couple of million the directors voted to increase his Supercompensation, as they voted when the CEO whined every year. 

The Chairman moved toward the door, with quick goodbyes to other directors. These were the faces of Capital. Some were wealthy individuals. Others represented investment funds, insurance companies and non-profits. Several were chosen by the CEO, including CEOs of other companies. How predictable the directors! How predictable the meetings! How predictable the decisions, always consistent with the accumulation of Capital!

The Chairman was eager to get to Los Angeles for a swim before sundown and a good sleep before the predictable director’s meeting of another Corporation the next day. The CEO approached him at the door.

“You visit Washington, tomorrow, right?” said the Chairman, hoping to minimize the conversation, it being perfunctory anyway.

“Yes, our industry is vital to the nation and creates so many good jobs for the middle class. I’m optimistic right-minded senators understand the stressful economic environment. I think they’ll consider our indispensable service to the country and accommodate the unique characteristics of our industry by extending the research tax credit or otherwise easing our crushing tax burden. If they want more employment -- and who doesn’t? -- then why tax the innovative job creators?”

“Good,” said the Chairman, shook the CEO’s hand with a false smile, and strode quickly to the car.

8,000 employees dismissed last quarter, mused the Chairman. If sales increased, and the remaining workers couldn’t produce enough product, the company would miss profit opportunities. If sales declined with further recession, then would 8,000 dismissed have been not enough? The CEO made the decision. Any of the faces of Capital would have decided similarly with the same information. The dismissed employees would grumble, but employees always grumble. They’ll be all right. It was unavoidable. If Capital growth slows, then the capitalist must dismiss Labor to preserve the profit which is the growth. Growth is good. Growth means an ever more prosperous society. They’ll soon have new jobs with new employers. Any competitive worker will get snapped up right away.

The capitalist buys Land, buildings and equipment. These were “fixed Capital” in the Business School Professors’ songs. The capitalist also acquires raw materials, parts and small tools, stuff that gets used up within a few months' making the product. The Professors sang of this as “working Capital”.

The capitalist acquires Labor by hiring employees. If a worker can gather the tools and materials at home to make, say, a table, then he can contribute his Labor to build a table for the use of himself and his family and get the full utility and value from his Labor. If, in the same way, he builds a second table, and takes it to the market, then he can sell it in exchange for money which will more or less suffice to replace the materials, compensate for the wear of the tools, and compensate him for his Labor, and perhaps save a little money.

If the worker becomes the employee of the capitalist, and makes a table, then the employer receives the money from the sale in the marketplace. From this money, the capitalist replaces fixed Capital and working Capital, and takes a portion for profit which is his property, and pays the worker the smallest wage that will keep the worker alive and working through the next day. If the capitalist pays the worker more, then he must raise the price of the table, or reduce his own profit. If he raises the price of the table, then he will sell fewer tables than competitors, who will sell similar tables for less by paying their workers less. If he reduces his own profit below normal levels, then he will close the table factory and seek normal rates of profit in other businesses.

Every five or 10 years, manufacturers of tables and other manufacturers will come on hard times. It becomes hard to sell a table. The capitalist can't readily sell the full production of the factory, so he reduces the level of production, say by half. Reducing the working hours of each employee by half won’t reduce Labor costs by half, since he must still pay some costs per employee. So he discharges half the employees. Our society confers authority, derived from government protecting Capital as private property, on the capitalist. He may seek counsel from colleagues and workers, or he can decide on their future income without them. So half the employees join what the Old Ones called the unemployed reserve, or as we modernists know it, the natural level of unemployment.

In a fair trade, each of the parties to the trade give up something they want less in exchange for something they want more. After the trade each party has something they wanted more than what they had. Each party benefits from a fair trade.

The Old Ones described how wages may rise somewhat during periods of high production or for a few years for a few employees with special skills, but in the long run, a worker’s wage barely suffices to keep his family alive. If the worker is discharged, his income stops. How will he and his family eat? Circumstances favor families differently. Some starve. 13m people in Europe and North America hadn’t sufficient food in 2016.

The worker’s wage doesn’t suffice for a fair trade. Not only does the capitalist take all the benefit of the trade, but he also takes a bit of the worker’s portion of the trade. The worker knows there are hungry people at the factory door. The worker knows it is better to eat today and take a chance on starving tomorrow, than to starve today. So the worker agrees to the wage which leaves him yet hungry rather than to no wage at all.

Arrived at his hotel suite, the Chairman changed clothes. Daydreaming, he made his way to the pool. Artificial intelligence couldn’t substitute for employees, yet. Someday, robotic Capital would minimize the wage bargaining nuisance and bring spectacular economic growth.

The capitalist takes money from his vault of Capital to pay the costs for buildings and machinery and tools and materials, and for Labor at Labor's diminished wage. Crucially, Labor transforms Capital into product. The capitalist receives money from the sale of the product, more than enough money to replace the Capital expended on Labor, buildings, machinery and the rest. The additional money is profit added to the property of the capitalist, an excess of transformed Labor beyond that necessary to replace the Capital. The capitalist replaces the Capital in the vault and adds a portion of the profit to the Capital, increasing the accumulation in the vault of Capital.

The Old Ones Marx and Engels told their Tale of the Ever-Repeated Transformative Cycle of Capital, the inexorable iron tendency of Capital to grow by transforming Labor into Capital. With each cycle, a portion of Labor transforms into additional Capital. The possessors of Capital, whoever they are, however bad or good they may be, act consistently. Their faces are the face of Capital.

The face of Capital glanced at the L.A. Times on the poolside table. “Thousands Laid Off” said the headline. He smiled as he sank into the warm oxygenated pool of the Biltmore Hotel. It had been a long day.



I thank my dear friends who read and critiqued the pre-publication draft.
They preserve my relevance.





FTC Ring: <Previous | Next>


Images

United States Department of Agriculture, Economic Research Service, “U.S. households by food security status, 2016” (Public Domain, retrieved Mar 27, 2018, https://www.ers.usda.gov/topics/food-nutrition-assistance/food-security-in-the-us/key-statistics-graphics.aspx)



Sources

George A. Akerlof, Robert J. Shiller, “Phishing for Phools: The Economics of Manipulation and Deception” (2015, amazon.com/Phishing-Phools-Economics-Manipulation-Deception/dp/0691168318)

Christopher B. Barrett, “Measuring Food Insecurity” (Feb 12, 2010, Science,
Copyright © 2010, American Association for the Advancement of Science,
http://science.sciencemag.org/content/327/5967/825, downloaded on March 25, 2018)

Daniel Brockman, “The Eric Tetralogy: 1: Rents and Monops” (Aug 11, 2017, https://daniel-brockman.blogspot.com/2017/08/FTC-eric-tetra-1-rents-and-monops.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Land and Ricardo” (Apr 27, 2017, https://daniel-brockman.blogspot.com/2017/04/FTC-Land-and-Ricardo.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Rand, Marx and the Downward Trickle” ( Nov 13, 2017, https://daniel-brockman.blogspot.com/2017/11/FTC-rand-marx-downward-trickle.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Supercompensation, Income and the Exchange” (Apr 6, 2017, https://daniel-brockman.blogspot.com/2017/04/ftc-supercompensation-income-the-exchange.html)

Eric M. Eckert, “Q&A with Texas Hunger Initiative Director Jeremy Everett” (Oct 26, 2016, https://www.baylor.edu/mediacommunications/news.php?action=story&story=174243)

Friedrich Engels, “The Condition of the Working Class in England” (1845, http://amzn.to/2snelK9)

Food and Agriculture Organization of the United Nations, “The State of Food Security and Nutrition in the World 2017” (2017, FAO, IFAD, WFP, UNICEF, WHO, https://docs.wfp.org/api/documents/WFP-0000022419/download/?_ga=2.21619323.1163254190.1522086563-1964562919.1522086563, https://www.wfp.org/content/2017-state-food-security-and-nutrition-world-sofi-report)

Karl Marx and Friedrich Engels, “Capital” (1867, https://smile.amazon.com/Capital-One-Critique-Political-Economy/dp/0486477487)

Karl Marx and Friedrich Engels, “The Communist Manifesto” (1848, http://a.co/9uFRbiw)

Victor Oliveira, “The Food Assistance Landscape: FY 2017 Annual Report”, Report Summary, (Mar 2018, United States Department of Agriculture, Economic Research Service, Public Domain, https://www.ers.usda.gov/publications/pub-details/?pubid=88073)

David Ricardo, “On the Principles of Political Economy and Taxation” (1823 http://amzn.to/2ogjuFs)

Joseph E. Stiglitz, “The Price of Inequality: How Today’s Divided Society Endangers Our Future” (Apr 8, 2013, amazon.com/Price-Inequality-Divided-Society-Endangers/dp/0393345068)

United States Department of Agriculture, Economic Research Service, “Key Statistics & Graphics” (retrieved Mar 27, 2018, https://www.ers.usda.gov/topics/food-nutrition-assistance/food-security-in-the-us/key-statistics-graphics.aspx)



2018-01-29

Fall Creator, a.k.a. Windows 10 v 1709

Franz Kafka (1883-1924)
In May 2017, the WannaCry virus locked hundreds of thousands of vulnerable Windows computers, displaying a ransom demand payable in Bitcoin. Total damages were hundreds of millions of dollars. The government of North Korea seems the prime suspect of security experts, with some blaming US intelligence agencies’ negligence as a secondary cause.

In the autumn of 2017, Microsoft began distributing the “Fall Creator” Windows 10 update, also known as version 1709.


One day in December 2017, on our machine LILY, Windows Update invited me to install updates and shut down. We use 10-year-old LILY to watch Netflix and Amazon movies and Reuters.tv. I clicked the button. I went to bed. On restarting LILY, it ran 1709 normally. LILY continues to run normally.


On or about January 15, 2018, Windows update, running on 3-year-old ORVILLE, asked me did I want to install a new update "tonight" or "now". I use ORVILLE for writing and for big spreadsheets of analytical stuff. ORVILLE’s Nvidia GeForce GT 730 video card provides 4K HD signal to a Sharp TV via HDMI.


I chose to update "now", after which ORVILLE displayed patterns of colored lines even after many reboots. About 2 hours later, after swapping out the HDMI cable (unnecessarily), and installing new Nvidia drivers by using user interface on still-functioning regular HD channel, and rebooting a few times, ORVILLE worked fine in 4K HD.



Daniel Brockman, "Pinstripe" (Jan 2018, using Fall Creator)
On January 24th, as I buckled on my helmet for a bike ride, my heavenly girlfriend said, “Dan, I did the update, and now something’s wrong with my computer. I have two articles to write and a thesis to review and, oh yes, I’ve got to update my website. Will you fix it?”. She gave me a quick kiss, walked out the door, and vanished. I looked at the blue screen of her machine, 5-year-old TULIP. It showed 5 buttons, including one labeled “Power OFF”, which worked perfectly. When I restarted TULIP, it showed the blue screen with 5 buttons. I tried each button. One labeled “Troubleshooting” led to 3 more buttons. I went through the buttons systematically. Each eventually led to 3 buttons: “Roll back to Windows 10 on Volume 7”, “Roll back to Windows 10 on Volume 7” (just like the other one), and “Roll back to last version”. Each eventually led to the blue screen with 5 buttons. I thought of the 1962 Anthony Perkins movie of Kafka’s book “The Trial”. My old colleague, a systems manager and engineer with decades of experience advised me to buy a new machine.


I found two articles on https://answers.microsoft.com, one of Dec 24, 2017, and the other of Jan 6, 2018, that helped me make a flash drive for installing Windows 10 v 1709 cleanly, replacing the old Windows 10. The future of my data was in doubt, but I had backups and a feeling I could resurrect TULIP. The guys who sold me TULIP, Dell, offered to fix it for $129. I said I wanted to pay nothing. The supervisor told me it wasn’t possible, which merely means someone decided not to do it. Microsoft, offered to fix it for $499. I declined. I thought of the economic incentives for tacit or explicit collusion to spur customers to buy new machines and customer service. I thought of my economic incentives colliding with theirs. I thought of WannaCry.


Daniel Brockman, "Bridge Out" (Jan 2018, using Fall Creator)
I’ve no good estimate of the numbers of computers affected by 1709, but you can google “Windows 10 1709 Fall Creator trouble” or search your favorite social media to see many instances.

My darling returned home. “Did you fix it?” “No.” “I want a new computer.” She threatened to write a letter about ransomware to Bill Gates. “There’s one more thing I want to try. Then we’ll buy a new computer if you want.” “I need a new computer.” We put the matter aside for the night.


The next morning, I put the flash drive in the computer and booted. It came to the blue screen and offered me a new button for using the USB device. I clicked. It asked several baffling questions with yes/no answers. I tried each choice but the clean install, hoping I could still save the data. All took me back to the blue screen. Then I went for the clean install. That went well. I set up some users. I set some settings. It was much like a new machine.

I downloaded and installed the applications that no longer existed: Avast antivirus, Chrome browser. Searching for the Microsoft Office download, I discovered that, for a 1-year subscription, in July 2017, I had paid $99. I called customer service, getting a sparklingly helpful agent who set it up nicely. Then the Western Digital SmartWare and encryption lock for the backups. I restored critical directories from the backup disk, congratulating myself for my foresight. My princess returned home. We installed Quicken together. Everything seemed ok. She was glad we didn’t have to buy a new computer.


Daniel Brockman, "Mario Brothers" (Jan 2018, using Fall Creator)
I have two more computers:
12-year-old LILAC which Windows Update hasn’t yet invited to update to 1709. LILAC still runs the predecessor 1703. LILAC is shut off, unused, most of the time.
15-year-old HONEYBEE, which runs XP most reliably, automatically playing music via Winamp all day, plugged into an old boom box with great speakers.

My recommendations on updating to Windows 10 v 1709:

Block the 1709 (OS build 16299) update till Microsoft releases a later one.
If already broken down or not, prepare what you can of these:
Get a full backup.
Set a system restore point manually.
Make a flash drive for clean install. See http://windows.microsoft.com/en-us/windows-10/media-creation-tool-install .
Update all video and audio drivers.
Be aware you can’t predict how or if the 1709 update will fail for you.
Check your backups.
When ready, proceed with the update. If setting up a fleet of systems, then do the first 10 machines 1 at a time, 1 per day to gain experience. If the update fails, try rollbacks first. Use the flash drive after you have tried everything else. You rely on your backups. Good luck.


Daniel Brockman, "Rings of Saturn" (Jan 2018, using Fall Creator)
If two students in a dorm room release some software into the world that locks thousands of computers and displays a screen saying “Send us $129 and we will release your machine”, then we call them “criminals” or “agents of sinister foreign powers”. But if two large commercial organizations do it, then we want to think they meant well, but nobody’s perfect, and we call it “customer service”.




My thanks to my dear friends who critiqued prepublication drafts.





Images


Daniel Brockman, “ORVILLE” series (Jan 2018, Use with attribution, Pinstripe_Fall-Creator_201801_IMG_1252.JPG, Bridge-Out_
Fall-Creator_201801_IMG_1254.JPG, Mario-Brothers_Fall-Creator_201801_IMG_1258.JPG, Rings-of-Saturn_Fall-Creator_201801_IMG_1262.JPG)

Sigismund Jacobi, “Portrait of Franz Kafka” (1906, Public Domain, https://commons.wikimedia.org/wiki/File:Kafka1906.jpg)



Sources


Google search, “Windows 10 1709 Fall Creator trouble” (retrieved Jan 29, 2018, https://www.google.com/search?q=Windows+10+1709+Fall+Creator+trouble)


Franz Kafka, “The Trial” (1925, https://read.amazon.com/kp/embed?asin=B003N2P42G&preview=newtab&linkCode=kpe&ref_=cm_sw_r_kb_dp_edrBAbZN7HJ53)


Microsoft, Support Pages (retrieved Jan 27-29, 2018):
http://windows.microsoft.com/en-us/windows-10/media-creation-tool-install

https://answers.microsoft.com/en-us/windows/forum/windows_10-update/latest-update-122417/957b9e7e-25fc-4855-b58f-a028a7cde557?auth=1


hhttps://answers.microsoft.com/en-us/windows/forum/windows_10-update/blue-screen-of-death-after-windows-10-update-on/77d3c81c-6a1d-4259-955a-07021d084fd7?messageId=94b6b021-e983-4de4-8578-2b8a7b66ad98


https://support.microsoft.com/en-us/assistedsupportproducts


https://partnersupport.microsoft.com/en-us/par_clientsol/forum/par_win/fall-creators-update-version-1709-failed-to/19db936d-8644-4dff-ad6c-d27143335a5e?auth=1

Wikipedia, “WannaCry ransomware attack” (retrieved Jan 27, 2018,  https://en.wikipedia.org/wiki/WannaCry_ransomware_attack)