Capitalism’s Everyman (woman!)

This is one of the most inspiring and uplifting stories I’ve ever read in the financial press (from Barrons, September 12). Stephanie Mucha has defied what all the policy experts in Washington and Wall St. claim: That one cannot participate in the success of capitalism at every income level through capital accumulation. This woman did not get rich through a salary wage, she got rich by accumulating and investing capital successfully. I can’t tell you how many policy experts I’ve heard state this is not possible. No, not everybody will be as successful, but the basic golden rule of working, saving, and investing prudently in capitalist enterprise is as sound as it ever was.

What we need to do is to stop punishing people who pursue such prudent strategies through our misguided tax code that rewards borrowing and spending money one has never earned. The biggest crime is to continue to convince people that such participation is not even worth trying. That’s what ZIRP, TBTF, and double and triple taxation of capital is doing to us all. Let’s encourage and defend the rights of the small public shareholder.

The second accolade for Mrs. Mucha is her desire to spread that capital around before she dies. She has done this through public charities, but there is no reason not to pursue good by providing angel capital to potential entrepreneurs who hope to create something of lasting value. The venture capital industry is not the only channel. The sustainability of capitalism derives from the constant recycling of capital. I’d have to say Buffett and Gates could learn a thing or two from Stephanie Mucha.

The Oracle of Buffalo

A 97-year-old former VA nurse, Stephanie Mucha lived frugally and invested wisely. Now she’s giving away over $5 million.

Our image of who is rich is often at odds with reality. Consider Stephanie T. Mucha, 97, who remembers the 1929 stock market crash. The Buffalo, N.Y., resident worked as a licensed practical nurse for more than four decades, and has parlayed her humble earnings into a Penta-size portfolio. In recent years, she has given away $3 million—and she still has $2.5 million left. Her goal: to give away a total of $6 million before she dies.Mucha was no debutante. She dropped out of high school and worked as a maid, helping her parents hold on to their house during the Great Depression. Later, she worked for 44 years at the Buffalo Veterans Affairs Medical Center, where she was one of 100 civilians to receive the Purple Heart. Mucha earned $23,000 a year when she retired in 1994.When she was 25, her father, afraid she’d be an old maid, matched her up with Joseph Mucha, a machinist 26 years her senior who emigrated from Poland at age 18. Joseph earned $6,000 a year when he retired around 1958. By the time he passed away in 1985, the couple’s portfolio was worth roughly $300,000.

The Muchas invested without the help of Wall Street. Some 30 years ago a broker advised them to sell their Intel shares (ticker INTC); after that, they ignored his advice. But gifted investors, always on the lookout for ideas, often make their own luck. Mucha was working in the VA hospital when Wilson Greatbatch, a local inventor, implanted a pacemaker in a dying dog. In about 10 minutes, the dog’s tail started to wag; a little later, it sat up and walked around.

“I came home and said to my husband, ‘I saw a dead dog come to life.’ ” What she had seen was a demonstration of the first implantable cardiac pacemaker. The device was licensed in 1961 to Medtronic (MDT). In around 1964, the Muchas spent $255.50 to purchase 50 shares at $5.11. By the time she donated a portion of the shares in 2007, the position had grown to $459,000. She still owns about 300 shares, at $66.

Hard work and frugality also contributed to the Muchas’ success. They created three apartments in their house, one to live in and two to rent out. The Muchas, who weren’t able to have children, owned only one car. After her husband’s death, Mucha sold her diamond ring and wedding band for $2,700, investing the proceeds. She also rented out a room in her apartment for $15 a night to women visiting their sick husbands at the VA hospital. She invested the estimated $25,000 she earned over 20 years from that rental in the market.

A fan of Jeremy Siegel’s book Stocks for the Long Run, she held on to her stocks in both up and down cycles. She also realized that women tend to outlive men, so they need to know how to invest. “Women need to learn how to use their money so it outlasts them.” She waited until she was 70 to start collecting Social Security, and now collects about $40,000 a year from Social Security and her VA pension, plus $675 a month from a renter.

Mucha doesn’t have a computer. She has an Ameritrade account that gives her free trades over the phone, reinvests her dividends, and sends her five research reports a month. She reads The Wall Street Journal every day, along with Barron’s, Forbes, the Economist, and the New York Times, and watches CNBC and Bloomberg. As for picking stocks, she recalls her husband saying, “You can’t build without nuts and bolts.” With that in mind, in recent years she has bought Precision Castparts (PCP), Snap-on (SNA), and Illinois Tool Works (ITW).

Age has caught up with her a bit, but it hasn’t dimmed her wits. Mucha’s portfolio made 11% last year, but when she learned her accountant’s portfolio made 36%, she gave his financial advisor a call. “I wanted to see if I was doing the right things,” she says. Larry Stolzenburg of Sandhill Investment Management in Buffalo now manages her portfolio. “Stephanie’s portfolio was one of the best I’ve seen,” he says. “It was well balanced and thought out. I almost offered her a job.”

Mucha, who never spent a dime of her investment capital, has put $1 million in trust each for the Kosciuszko Foundation, which helped her husband when he immigrated to the U.S.; the University at Buffalo’s School of Arts and Sciences, because it has a Polish studies program; and the School of Engineering, as her husband had wanted to be an engineer. This month, she plans to make a donation to the School of Medicine and Biomedical Sciences. She has also earmarked money for the schools of nursing and dentistry.

“She’s a fantastic, smart person,” says Alex Storozynski, president emeritus and a trustee of the Kosciuszko Foundation. In addition to the $1 million donation, Storozynski says she has given him dietary tips, like eating chia seeds and almond butter. Advice to live by, no doubt.

The Esoterica of Monetary Policy


Okay, this discussion is guaranteed to put the average American to sleep. The notable signal is that the Fed has no plans to shrink its balance sheet and will remain a major holder of US housing mortgages into the indefinite future. Since when was the Fed appointed to actively manage the US real estate market?

The irony is that our lives are being run through this monetary policy mill. Most citizens will discover this long after the fact. From the WSJ:

Behind the Fed’s Dovish Turn on Rates

After sending hawkish signals in July, the Federal Open Market Committee has softened its tone.

The battle at the Federal Open Market Committee is now on. Score the previous meeting in late July for the inflation hawks, but last week’s meeting went for the doves, who are more worried about jobs. I haven’t discussed the meetings with any Fed officials, but here’s my reading of what has been going on.

In the statement following July’s FOMC meeting, Federal Reserve Chair Janet Yellen went to great lengths to placate the hawks with several language changes (but no policy changes). Instead of emphasizing that “inflation has been running below” the Fed’s 2% target, as the committee had been saying, the statement observed that “inflation has moved somewhat closer” to 2%. And instead of calling the unemployment rate “elevated,” it switched to the less ominous phrase “significant underutilization of labor.” Such subtleties matter at the Fed, and markets took note of the more hawkish tilt.

The hawks were not placated. Because voting rights rotate among the reserve bank presidents, this year’s voters include only two real hawks. One of the them— Charles Plosser of the Philadelphia Fed—dissented from the Fed’s statement that low interest rates would be maintained “for a considerable time after the asset-purchase program ends,” making the July vote 9-1. The other— Richard Fisher of the Dallas Fed—did not dissent formally, but had three days earlier made his disagreement known in these pages.

Last week Ms. Yellen gave no ground. The committee’s hawks would like the phrase “significant underutilization of labor” removed from the statement. The Fed kept it. They want the FOMC to stop declaring that interest rates will remain at their current superlow levels “for a considerable time” after asset purchases end next month. The Yellen-led majority refused. The hawks want the Fed to stop saying that it expects to keep interest rates low “for some time” after the economy returns to normal. The Fed didn’t. And there were a few more details, all pointing in the same dovish direction.

Mr. Plosser dissented again, and this time Mr. Fisher joined him, making the FOMC vote 8-2. There almost certainly would have been more dissents if other hawks could vote. At a consensus-based institution like the Fed, this constitutes deep division.

Yet another indicator of rampant disagreement appeared in the famous—to Fed watchers—”dots diagram,” where each committee member is represented by a dot showing where he or she thinks the federal-funds rate should be in the future. Opinions on where the rate should be at the end of 2015 range from near zero all the way to 3%. The range is even wider for the end of 2016: from 0.25-0.50% to 4%. This is a remarkable degree of disagreement.

The Fed also released a new set of “principles and plans” for bringing monetary policy back to normal, finally replacing the principles it published in 2011, which said, among other things, that some balance-sheet shrinkage would come before interest-rate hikes. These new principles are rather vague, but Jeffrey Lacker of the Richmond Fed, another hawk, refused to sign on.

Fed watchers learned two main things from the new plans. First, that as the Fed “exits,” it will not rely heavily on what are called “overnight reverse repurchase agreements”—in plain English, borrowing in the money markets. Rather, it will do such borrowing “only to the extent necessary and will phase it out when it is no longer needed.” Market specialists had been all aflutter about this issue, some thinking it would become the Fed’s primary instrument.

Second, while the FOMC still “intends” to exit without any outright asset sales from its huge portfolio, it hedged on that principle in several ways. For example, it said it “does not anticipate” selling any mortgage-backed securities, which prompted Mr. Lacker’s dissent. Furthermore, the FOMC didn’t mention selling Treasurys at all.

Regarding current monetary policy, the most notable and perhaps puzzling change in the Fed’s official forecast was less optimism about real GDP growth in 2015. In its previous forecast, the “central tendency” among FOMC members was about 3.1%. Now the central tendency is about 2.8%. Not exactly an earth-shattering change. But as these things go, that’s a pretty big revision in six weeks, and it isn’t clear where the newfound pessimism came from. It does, however, suggest less urgency about raising rates.

The median FOMC member now thinks the federal-funds rate should be between 1.25% and 1.5% by the end of next year, and between 2.75% and 3% by the end of 2016. Both are higher than before, and a bit higher than traders expect.

One way to make sense of all this is to say, as some have, that the Fed may wait a little longer but then raise rates more rapidly once it starts. Perhaps. Another interpretation is that the Fed is projecting faster rate hikes because it is underestimating how strongly bond traders will push long-term interest rates up once Fed hikes begin. The central bank has underestimated market reactions before.

The Bottom Line on ZIRP


These are the results in a nutshell (links provided):

Easy money from the Federal Reserve has made many owners of financial assets rich—U.S. household wealth hit a record in the second quarter—but hasn’t done much for workers. U.S. median income is below the level of 2009 and the labor-force participation rate remains at 1970s levels.

A Medical Doctor Weighs in on Health Care


This is a good quote speaking to the rationality of good health care as being based on the relationship between doctor and patient. Mark Sklar writing in the WSJ:

The patient should be the arbiter of the physician’s quality of care. Contrary to what our government may believe, the average American has the intellectual capacity to judge. To give people more control of their medical choices, we should move away from third-party payment. It may be more prudent to offer the public a high-deductible insurance plan with a tax-deductible medical savings account that people could use until the insurance deductible is reached. Members of the public thus would be spending their own health-care dollars and have an incentive to shop around for better value. This would encourage competition among providers and ultimately lower health-care costs.

By contrast, the Affordable Care Act’s plans for establishing “medical homes”—a team-based health-care delivery model—and accountability-care organizations will only add more bureaucracy and enrich the consultants and companies organizing these entities.

To improve quality, we need to unchain health-care providers from the bureaucracies that are strangling them fiscally and temporally. We can better control medical costs if we strengthen physicians’ relationships with their patients rather than with their computers.

The Roots of Cronyism


We have a revolving door between Wall Street and Washington regulators. This is why it seems that the tail of the financial industry wags the dog of the real economy, or why the interests of Wall St. dominate those of Main St. Past time for real change. An article by two academics printed in the WSJ:

The Federal Reserve’s Too Cozy Relations With Banks

Working at the Fed shouldn’t be an audition for a Wall Street job. Waiting periods and other reforms are needed.

The Federal Reserve was established in 1914 as independent of the president and Congress—and for good reason. The Fed’s founders understood that politicians had to be blocked from using monetary policy to juice the economy before elections. Extensive research supports the wisdom of the Fed’s political independence; monetary policy works best when it is insulated from the vagaries of election cycles.The problem is that while the Fed is largely independent of politicians, it is intimately connected, and even answerable, to the financial institutions that it is supposed to regulate.Consider the board of directors of the Federal Reserve Banks. Nine directors oversee each of the 12 Federal Reserve Banks. Private banks choose six of the nine. The other three are typically the CEOs of major corporations or executives at other financial institutions, such as private-equity firms.Fed presidents are also deeply tied to financial institutions. For example, the current president of the New York Fed (the most important of the Fed’s 12 regional banks) was at Goldman Sachs before taking over the Fed. His predecessor is now president of the private-equity firm Warburg Pincus; his predecessor went to Merrill Lynch after the Fed; and his predecessor is now at Goldman Sachs.

A growing body of academic research indicates that the stock market values these bank-Fed connections. A 2013National Bureau of Economic Research paper by Daron Acemoglu, Simon Johnson, Amir Kermani, James Kwak and Todd Mitton, “The Value of Connections in Turbulent Times: Evidence from the United States,” provides a case in point. In November 2008, when it was announced that then-New York Fed President Timothy Geithner would be nominated for Treasury secretary, the stock prices of financial firms with which he had close personal connections soared relative to those of other financial firms. Those same stock prices plummeted when his nomination briefly ran into problems over his taxes.

Markets might be right about the value of close relations with the Fed. A paper recently presented at the NBER by Anna Cieslak, Adair Morse and Annette Vissing-Jorgensen —titled “Stock Returns over the FOMC Cycle“—finds evidence suggesting that the Fed has been leaking information. Senior Fed officials regularly gather between their highly publicized Federal Open Market Committee meetings to discuss monetary policy. Although the information from these lesser-known meetings is not released to the public until weeks later, the authors found that stock prices respond immediately after the meetings, suggesting that people and financial institutions are trading and possibly profiting on information contained in those meetings.

Cozy bank-Fed relationships are especially important for financial regulation and crisis management. We pursue these topics in our books “Fragile by Design: The Political Origins of Banking Crises and Scarce Credit” (which Mr. Haber wrote with Charles Calomiris ) and “Guardians of Finance: Making Regulators Work for Us” (which Mr. Levine wrote with James Barth and Gerard Caprio ).

There are too many examples to list here, but the Fed’s response to the 2007-08 subprime mortgage crisis is illustrative. We do not question the Fed’s rescue of the banks to protect the economy from a potentially catastrophic collapse of the financial system.

We do, however, stress that in the months and years leading up to the crisis, the Fed did nothing to curtail the run-up in risky lending that caused the crisis. We also point out that when the Fed finally acted, it not only rescued the banks, it also bailed out their shareholders as well as the executives who had helped steer the banks and country into the crisis. In contrast, when the government rescued General Motors, it forced shareholders and bondholders to take huge financial losses and executives to be fired.

The Fed’s multibillion-dollar assistance to financial institutions—including lending commitments to Citigroup and Bank of America, supporting J.P. Morgan‘s purchase of Bear Stearns, rescuing AIG and through that aid to Goldman Sachs and many others—occurred without transparency. After Bloomberg News filed a Freedom of Information Act request in 2008 regarding the Fed’s actions, Congress urged the Fed to comply. The Fed refused and fought all the way to the Supreme Court—which in 2011 ordered it to release the records. When the Fed finally complied, it provided thousands of pages in a non-searchable PDF format, making it difficult to piece together the relevant facts.

What to do? A few simple reforms would be helpful. First, the tight links between the Fed and the financial-services industry could be weakened by reconsidering the number of Fed directors appointed by banks. Second, Fed officials should be required to agree to a waiting period—perhaps as long as five years—after leaving the Fed to take a position at a financial-services firm. Fed officials should not be auditioning for jobs on Wall Street.

Third, there should be greater transparency and oversight of the Fed’s role as a financial regulator. Congress should establish mechanisms—including a group of experts with the authority to demand information from the Fed and the capabilities to assess Fed performance.

Such reforms will not be a panacea: They will not address the extensive reach of finance into the political process of drafting and implementing financial regulations. But they represent principled first steps.

Mr. Haber is a professor of political science at Stanford University and a senior fellow at the Hoover Institution. Mr. Levine is a professor of business at the University of California, Berkeley.

How Do You Say QE in German?


Europe’s politicians want monetary easing without pro-growth reform.

As we can read in this WSJ editorial, fiscal policy reform is no better in Europe than it is here in the US. The result is that the central banks of the world are kicking the can down the road by creating excess liquidity to shore up the global economy. As the US dollar is the world’s reserve currency, the Fed has been able to pursue this strategy at little cost upfront. It has convinced Japan to adopt such credit policies and soon the ECB will be dragged into greater levels of QE as the Euro economy falters. At some point China and Switzerland will be on-board. In fact, these central banks have little choice.

The centripetal forces of global finance are forcing the rest of the world to adopt the credit driven policies of the US. This is also leading to centrifugal forces in national politics that have the potential to create serious conflicts. As long as this policy holds, the benefits will accrue to the US while the risks build. Anybody who holds $ assets will also reap the benefits, meaning the inequality gap between the haves and have-nots will widen.

If the system experiences another serious global shock, nobody really knows what happens then, but it could be the Mother of All Global Depressions, or it could be WWIII. We’d like to think these are very small probabilities of disaster, but it’s seems imprudent to pursue policies that raise these probabilities.

The Draghi Default

You can’t say Mario Draghi isn’t doing his part. The European Central Bank President once again fulfilled the pleas of European politicians Thursday with another round of rate cuts and the promise of more monetary easing to come. Too bad the politicians keep using Mr. Draghi as an excuse to dodge their responsibility to pass pro-growth reforms.

Thus we are getting another round of the Draghi Default, in which monetary policy is supposed to do all the heavy growth lifting for Europe. The central banker obliged by cutting the main lending rate to 0.05% from 0.15%, even though he had said in June the central bank was already at “the zero bound.” The ECB also increased the so-called negative deposit rate, or the rate banks will pay for holding deposits at the central bank, to minus-0.2% from minus-0.1%, in a bid to force more bank lending.

Mr. Draghi’s larger goal is to keep talking down the euro exchange rate against the dollar in a bid to lift inflation in Europe closer to the ECB’s 2% target. With inflation at 0.3% year over year in August, and the U.S. dollar getting stronger on the hope of faster U.S. growth, you can at least make a case for easing on monetary grounds within the ECB’s mandate to maintain stable prices. Mr. Draghi had already talked down the euro to 1.315 from 1.40 to the dollar since May, and on Thursday it fell again to 1.295 after Mr. Draghi’s announcement.

Yet further reductions in interest rates, even into negative territory, aren’t enough to assuage euro-zone politicians. So in his press conference Thursday Mr. Draghi also announced a version of quantitative-easing lite. For political and legal reasons, expanded buying of government debt a la Washington, London and Tokyo is more difficult for the ECB. Mr. Draghi says he’ll instead buy covered bonds and so-called asset-backed securities, or ABS, which are bundles of corporate and household loans.

Unlike U.S. credit markets, only some €300 billion ($390 billion) of ABS are outstanding in Europe at the moment. Mr. Draghi has been trying to expand such a market with the new cheap, medium-term lending program he announced in June, and perhaps the central bank’s cash can stimulate a wider and deeper credit market.

The problem comes from believing that QE is some magic growth elixir. The world’s Keynesians have convinced themselves that the U.S. is now growing faster than Europe simply because the Federal Reserve implemented QE while Europe hasn’t. That overestimates QE’s impact on U.S. growth, which has hardly been gangbusters at a mere 2% average annual rate. But it also underestimates the degree to which European economies are burdened by aging populations, high taxes, regulations on business, and constricted labor markets.Mr. Draghi understands this, which is why he keeps repeating as he did Thursday that Europe needs “ambitious and important” reforms “first and foremost” to return to growth. Yet those reforms never arrive, and now the politicians have another excuse to delay as they wait for an ABS program to start next year. This has already happened once on Mr. Draghi’s watch, when his promise of unlimited sovereign bond purchases in 2012 pushed government bond yields so low so fast that it eased credit-market pressure on governments to reform.

The other danger is that Europe will interpret the ECB’s opening for more fiscal policy stimulus as an excuse for more government spending. Mr. Draghi has hinted at easing the EU’s deficit limits. This would make sense if politicians followed through with pro-growth tax cuts as Spain has. But another burst of government spending won’t spur growth and would only set the euro zone up for more tax-raising austerity later.

Europe’s main economic problem is a political class that doesn’t want to address the structural impediments to growth that have nothing to do with monetary policy. Mr. Draghi is being asked to perform miracles he can’t deliver.

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