Business & Economics: June 2008 Archives
Kyle Wingfield's profile of Robert Mundell offers some interesting insights into some of the economic principles that have shaped our time.
Robert Mundell isn't in the habit of making fruitless policy recommendations, though some take a long time ripening. Nearly four decades passed between his early work on optimal currency areas and the birth of the euro in 1999 – the same year he received the Nobel Prize for economics.So when Mr. Mundell says that rescinding the Bush tax cuts "would be devastating to the world economy," that oil prices are "not so far off track," that Asia needs its own multilateral currency, or that the ham sandwiches sitting before us could use some mustard, one is inclined to pay attention – and, except in the case of lunch, to think long term.
(HT: The Pirate.)
Are you jealous of the billions of dollars those fat cats and their hedge funds are raking in while you struggle just to fill your car with gas? Don't be so sure that the fat cats aren't the suckers. Warren Buffett thinks hedge funds are basically a scam on the wealthy.
Will a collection of hedge funds, carefully selected by experts, return more to investors over the next 10 years than the S&P 500?That question is now the subject of a bet between Warren Buffett, the CEO of Berkshire Hathaway, and Protégé Partners LLC, a New York City money management firm that runs funds of hedge funds - in other words, a firm whose existence rests on its ability to put its clients' money into the best hedge funds and keep it out of the underperformers. ...
We're way past theory here. This bet, being reported for the first time in this article (whose author is both a longtime friend of Buffett's and editor of his chairman's letter in the Berkshire annual report), has been in existence since Jan. 1 of this year.
It's between Buffett (not Berkshire) and Protégé (the firm, not its funds). And there's serious money at stake. Each side put up roughly $320,000. The total funds of about $640,000 were used to buy a zero-coupon Treasury bond that will be worth $1 million at the bet's conclusion.
My money's on the S&P 500. Let's take a look at the steep hill the hedge funds have to climb:
As for the fees that investors pay in the hedge fund world - and that, of course, is the crux of Buffett's argument - they are both complicated and costly.A fund of funds normally charges a 1% annual management fee. The hedge funds it puts that money into charge an annual management fee of their own, which for funds of funds is typically 1.5%. (The fees are paid quarterly by an investor and are figured on the value of his account at the time.)
So that's 2.5% of an investor's capital that continually goes for these fees, regardless of the returns earned during a year. In contrast, Vanguard's S&P 500 index fund had an expense ratio last year of 15 basis points (0.15%) for ordinary shares and only seven basis points for Admiral shares, which are available to large investors. Admiral shares are the ones "bought" by Buffett in the bet.
On top of the management fee, the hedge funds typically collect 20% of any gains they make. That leaves 80% for the investors. The fund of funds takes 5% (or more) of that 80% as its share of the gains. The upshot is that only 76% (at most) of the annual return made on an investor's money accrues to him, with the rest going to the "helpers" that Buffett has written about. Meanwhile, the investor is paying his inexorable management fee of 2.5% on capital.
When you add up all those fees, Buffett thinks the super-rich would be better off investing like the rest of us non-Buffetts: in no-load, low-expense index funds.
The positions on corporations and taxes advocated by John McCain in this article read better than the headline makes them sound: "McCain wants low corporate taxes, regulated CEO pay". "Regulated"?
The Arizona senator, who has wrapped up his party's presidential nomination, also would propose a simpler, alternative tax system and insist that chief executives' pay and severance packages have shareholder approval.
Requiring shareholder approval for huge pay packages doesn't seem like government "regulation" to me. I like the idea.
U.S. taxes were too complicated overhaul, McCain will say in his speech, in which he will argue for an alternative system."As president, I will propose an alternative tax system. When this reform is enacted, all who wish to file under the current system could still do so," he will say.
"Everyone else could choose a vastly less complicated system with two tax rates and a generous standard deduction."
I want to hear more details, but it sounds good. I've long been in favor of a Flat Tax or some other such tax system as have become prevalent in Easter Europe, with much success.
But he also takes aim at top corporate executives with big salaries and excessive severance packages."Americans are right to be offended when the extravagant salaries and severance deals of CEOs ... bear no relation to the success of the company or the wishes of shareholders," he will say, adding that some of those chief executives helped bring on the country's housing crisis and market troubles.
"If I am elected president, I intend to see that wrongdoing of this kind is called to account by federal prosecutors. And under my reforms, all aspects of a CEO's pay, including any severance arrangements, must be approved by shareholders," he will say.
Ahhh... "called to account by federal prosecutors" sounds good, if there's a crime other than mere incompetence. Not sure what other regulations McCain is considering along these lines. Forcing company boards to allow shareholders to vote on pay packages sounds like a great idea though.
I've got friends in the industry, and from what I've heard restaurants are some of the hardest small businesses to run successfully. That said, it's still pretty sad that the United States Senate couldn't even keep their cafeteria in the black. There really is no such thing as a free lunch, but through privatization the Senate might at least get cheap, high-quality food.
Year after year, decade upon decade, the U.S. Senate's network of restaurants has lost staggering amounts of money -- more than $18 million since 1993, according to one report, and an estimated $2 million this year alone, according to another.The financial condition of the world's most exclusive dining hall and its affiliated Capitol Hill restaurants, cafeterias and coffee shops has become so dire that, without a $250,000 subsidy from taxpayers, the Senate won't make payroll next month.
The embarrassment of the Senate food service struggling like some neighborhood pizza joint has quietly sparked change previously unthinkable for Democrats. Last week, in a late-night voice vote, the Senate agreed to privatize the operation of its food service, a decision that would, for the first time, put it under the control of a contractor and all but guarantee lower wages and benefits for the outfit's new hires. ...
"It's so bad that the Senate hasn't yet figured out that House 'Taco Salad Wednesday' trumps any type of entree they have to offer," said Ron Bonjean, a former press secretary to both the House speaker and the Senate Republican leader.
But don't worry! The government will do a great job running our socialized health care system.
(HT: The Pirate.)
Too bad Senator Wayne Allard of Colorado doesn't name names when he says that some Democrats oppose oil shale development because they'd prefer that people quit driving.
Fortune: Has oil shale development always been a partisan issue or is this something new?Sen. Allard: It is something new. The issue with the Democrats now is they want to cut off any source of carbon. And there are those in the Senate who believe the more expensive you make gasoline, the less driving people do and you force conservation by making driving so expensive people can't afford it.
Somehow I don't get the idea that these Democrats themselves would stop driving or flying. They just want the rest of us to.
