economics

Nice City Ya Got There

June 26, 2025 SJLeave a comment

Shame if something happened to it.

There’s a type of person I know who’s very educated yet shockingly naive about some things. We all have our biases and blind spots so I’m sure the same applies to me, but I don’t think it does about yesterday’s electoral earthquake in New York City. I’ll state from the outset that this isn’t a political newsletter: I don’t support a candidate, am not registered to any party, and I’ve never given money to one.

I also no longer live in the city—I just go there a lot, including for work. I guess that makes me one of the “bridge and tunnel crowd,” but I’ll always feel like a New Yorker.

The man the aforementioned educated folks are relaxed or even excited about having as the next mayor of the country’s largest city and business and cultural capital is Zohran Mamdani, who just won the Democratic mayoral primary. Here’s a New York Times writeup with some background. Here’s a less-flattering take on his economic policies by my employer’s editorial page that didn’t make it into “all the news that’s fit to print.”

Draw your own conclusions. I’m interested in why some friends and acquaintances who do live in New York see things so differently than me. Less-educated and single-issue voters are easily-swayed, but what’s the appeal for people who have read and traveled widely?

I think it’s because they don’t understand that safety and prosperity aren’t guaranteed and that they might not have to suffer if they’re wrong about radical policies. I hate resorting to composite sketches, but I’ll make an exception and engage in some insensitive stereotyping because, like I said, our backgrounds explain so much.

This person lives in New York but wasn’t born there, only having moved here as a young adult after Times Square was Disney-fied. One and probably both parents are American-born and they grew up in a small town or in suburbia.

They went to a good and possibly elite university and might have a master’s degree in something like journalism, education or public policy. With the amount of money mom and dad or grandpa’s trust fund paid in tuition, or what they took out in unwise loans, they could be making way, way more with a similar professional degree in law, finance or medicine.

They’re cool with that because those people are, in their assessment, soulless drones or sell-outs. There’s a certain nobility in semi-poverty. Sure these people pay enough in rent that they could have a material standard of living far above their cramped co-op or rental in Prospect Heights if they lived in Dallas, but then they’d have to live in Dallas.

Little Atticus and Clementine like the neighborhood so much and the French immersion at PS 321 is wonderful. Grandma is paying for a tutor and it looks like both have a shot of getting into Hunter. She also might be able to help out if they wind up going private—Grace Church or Berkeley-Carroll would be nice.

Sorry. To be clear, I think people fitting the above composite make cities hip and vibrant. They keep weird ethnic restaurants, cool bookstores, and art cinemas in business. They don’t jump the turnstile, they give back more than they take and they add to a city’s cultural appeal. Long may the graduates of Oberlin, Northwestern, and Middlebury migrate here and make it their home—the next craft IPA’s on me!

So, on to my perspective. I was born in Queens in 1969 to Hungarian émigrés and didn’t really speak English until I started school. I wasn’t aware of such things at the time, obviously, but between then and the time I started first grade close to one million people had left the city because of crime and deteriorating public services. Here’s the famous “FORD TO CITY: DROP DEAD” headline when it was teetering on the edge of bankruptcy in 1975.

I’m not trying to paint you some picture of an Oliver Twist upbringing amid urban horrors—it was fine. My sister and I were latchkey kids raised by an educated, loving single mother. But the normal 1970s New York City stuff happened to us: Petty crime, overcrowded classrooms, and nervously riding dirty, graffiti-smeared subways. My sister’s best friend and her little brother, who lived around the corner, were shot and killed when she was in third grade.

I had 43 kids in my fifth grade class and distinctly remember sharing desks and using a textbook so old that it referred to America having 48 states. The summer of 1977, between second and third grade, was memorable. There was a 25-hour blackout that resulted in widespread looting and the Son of Sam murdered someone in our neighborhood. When my grandmother told me that he’d been caught I felt so relieved because I was worried about my mom coming home from work by herself at night.

Speaking of her work, it was at the infamous Manhattan State on Ward’s Island between Manhattan and Queens—an institution where the city used to put people once called “criminally insane.” In the 1970s, after effective antipsychotic drugs were invented and budgets were slashed, these places were thinned out. You can see plenty of people on the subway or street today who might have been residents back in the day. A lot clearly aren’t taking their meds.

That left my mom with a smaller but really lovely set of patients. It was a scary place and a colleague of hers lost an eye after being stabbed with a fork. One of the final straws came when she was attacked (we left the city just before I started junior high). The aides who were supposed to stop that weren’t doing their job and she was only saved by another patient. There was very little accountability for state and city employees and the nurses would walk out every day with food and paper goods under their coats stolen from taxpayers.

Why is coming from behind the Iron Curtain significant? Because deciding New York has become too crazy is an option if you’re American and your mom and dad live somewhere safe and boring and speak English. It isn’t when you’re the only person in your family in the entire country earning a salary, able to drive a car or who can function as an American adult. There’s no moving back home, and growing up in a communist country has already given you a brutal lesson in the utter folly of policies that are contributing to the decay you see in your new home.

If you’re lucky you get approached about moving somewhere very alien where they’re desperate to take advantage of hard-working people like you but can’t understand your accent, which is what she did—another story for another time. Lots of poor New Yorkers today don’t have that option if the city starts to look and smell like the 1970s.

How did people feel about the future of New York City back then? The year we “escaped” from New York the movie “Escape From New York” came out. It takes place in a dystopian 1997 and Manhattan has been turned into a walled-off prison. It’s ridiculous, but I remember watching it on cable TV shortly after we got out of town and thinking: “Yeah, could happen.”

It was around then that my uncle, who literally escaped from Hungary in 1966, discovered he could make more money as a master plumber than as an engineer. He worked very hard and did a job on some buildings in Greenpoint in Queens. When the owner couldn’t pay him he took possession of them through something called a “workman’s lien.”

The joke was on him—for a while—because nobody wanted the buildings in that blighted area and he had to pay the taxes. Today the neighborhood is full of hip apartments, coffee shops and clubs. People who moved here after 1985 or so and moan about the cost of finding a place to live can’t imagine a time when people were overjoyed if you showed up to buy their apartment. My mom looked at a six-room place on East 95th Street in Manhattan in 1977—we were renters then—and could have paid $26,000. Those apartments go for millions today.

The catch was that there wasn’t school choice like they have now. My sister and I would have gone to a much rougher one in Spanish Harlem than out in Queens.

If you’re middle class, but even if you’re working class, New York City is incomparably more livable today than it was then. That didn’t just happen magically. It took a few good mayors and a long boom on Wall Street. The crack epidemic and the not-so-good Mayor Dinkins set that back a bit during the only years I lived in Manhattan (I was a grad student at Columbia). Homicides peaked at six-a-day in 1990, but it’s been a mostly improving trend.

People from other parts of the country sometimes don’t believe it, but New York is safer than several U.S. cities today. Even Bill de Blasio—or “that communist,” as my mom calls him—wasn’t incompetent enough to really hurt things that much.

But my friends and acquaintances shouldn’t push their luck. Demonstrably dumb ideas like rent control, taking over supermarkets to keep grocery prices down and cutting back policing will leave a mark if they coincide with a downturn in the economy.

And why they feel okay with having a culture warrior as mayor is beyond me. That isn’t his job. Back when Abraham Beame was mayor and Ford told the city to drop dead, we didn’t have today’s divisive politics.

I believe some people would take malicious pleasure in seeing New York City suffer if the transit system, the regional tunnels and bridges or the entire city found itself short of cash and this guy went to Washington, cap in hand. New York isn’t going to enter an “urban doom loop” that places like St. Louis, Missouri have because it’s too vibrant. Even so, dumb policies and incendiary speech at a time when Wall Street money stops paving the streets with gold is flirting with disaster.

Travel

Exploding TVs, Exploded Chicken

June 14, 2025 SJLeave a comment

The year I graduated from high school, before I took my first class in the dismal science, I got a memorable economics lesson.

That winter I visited Communist Hungary, where my parents grew up. Unlike my previous trips, I was old enough to explore on my own and I spent hours walking around Budapest. I also was aware by then that the country had a sort of hybrid economic system—a blend of limited free enterprise and central planning dubbed “goulash communism.”

In terms of wealth, Hungary was about as poor as Mexico at that time, but it was ahead of even the U.S. on some measures of human development—things like crime and education.

In terms of the environment, sadly, the system was a failure. Air pollution back then was 30 times the “acceptable limit.” Since there was no independent media. When Chernobyl, about 700 miles away exploded nine months earlier, word only spread when western radiation detectors picked up the signs days later. A group called Duna Kӧr, started that decade to oppose a controversial dam on the Danube along the border with then-Czechoslovakia, presented an early challenge to Communist rule.

Hungary was relatively prosperous within the Eastern Bloc. You knew there were tens of thousands of Soviet troops somewhere, but they mostly weren’t allowed to leave their barracks, in part because they’d be shocked at how easy it was to buy food and many consumer goods. That made it a lovely place for someone with dollars and able to speak the language in the 1980s. By contrast, even in 1992 when I was backpacking through Russia and Ukraine, I was vastly wealthier (600 rides on the Kyiv Metro for a buck), but I found hardly anything I wanted to buy.

It was possible to make a good bit of money in Hungary in the late 1980s through limited private enterprise. The vast majority of people lived in a parallel economic reality, though, where having a telephone at home was a major bureaucratic achievement.

I remember walking into an auto showroom where the various Eastern Bloc models were on display. It had salespeople, but it might have been the easiest job in the world: Next to each model there was a price and then the number of years you’d have to wait to get the car.

At the top of the list was the relatively new Lada Samara, the most-modern car ever built in the Soviet Union, described by Car and Driver magazine as “early Hyundai” producing “noises that would shame a John Deere dealer.” I can’t recall the price, but the wait was 15 years. The price was lower but the wait identical for the Lada “Zhiguli,” based on a 1960s Fiat 124. (I would buy a used 1986 model in 1993 for $1,400—my Hungarian-American friend Peter and I shared it and paid $700 each). Everything in it broke except the engine and transmission and the heat was on full blast all year. Cool car, though—this is how it looked:

At the bottom of the list was the Trabant, East Germany’s car of the year in 1957 and every year after that. Appearing on many lists of the worst vehicles in history, it was made of something called duroplast instead of metal and had a two stroke, smoke-belching 24 horsepower engine you’d only find on a lawnmower today. I could have bought one about 10 years after spotting it in the showroom for around $120 (vetoed by Mrs. Jakab 😢). I wrote a Wall Street Journal cover story about people who imported them to the U.S. out of nostalgia. In 1987, though, the waiting list was eight-and-a-half years.

Here’s Ronald Reagan with a joke about the Soviet car salesman.

Around that time—the last couple of years before the Iron Curtain fell—some young, entrepreneurial Hungarians took full advantage of the wacky economy. Two close friends I’d meet at work six years later, both of whom are a couple of years older than me and who were university students in East Germany at the time, exploited mismatched Eastern Bloc currency prices and exchange rates and Hungary’s relatively lax travel requirements to make small fortunes. They flew as far away as China or Cuba—any place in the Communist orbit—to their hearts’ content. But they would have been poor as soon as they crossed into the West.

When I moved to Hungary in the early 1990s, armed with lots of graduate courses in how economies are supposed to work, I got several new lessons of how they did in practice. Lots of things existed then that barely do now because they aren’t worthwhile.

For example, when I was backpacking in St. Petersburg in 1992 a smart U.S. grad student asked me about the economic differences between Russia and Hungary, which seemed vast on the surface. He asked if there were people who repaired zippers in Budapest. Yes, all over—that and all kinds of things. He said it was a sign of an underdeveloped economy because it still was worth someone’s considerable labor to do that rather than for people to buy a replacement. A coat or pair of jeans traded at a world market price and was very expensive.

When I moved to Budapest, I hesitated to tell friends in the U.S. my starting salary because it was so low—the temporary price of bypassing U.S. HR departments to get a job there. But my pay was a lot higher than family friends more than twice my age who mostly had advanced degrees. Back then it was totally normal for someone in Hungary to ask what your salary was because they all were pretty similar. I had to tie myself in knots to avoid giving a straight answer and embarrassing them.

But it was a fascinating and fun time for me—exactly the reason I went to live there and why I traveled all around the region. I used to keep track of things like how many McDonald’s each country had and when I’d go for a walk somewhere I’d count the percentage of western-made cars, which rose gradually. On my last trip to Hungary I still spotted a few Polish, East German and Soviet ones, which is sort of amazing.

After moving to Budapest, I wanted to lose my accent and practice my Hungarian as much as possible so, in addition to speaking it most of the day, I got a TV to watch after work. There was a cable in my apartment that allowed you to view a few channels in German or English, but I unplugged it so that I’d be forced to watch the two domestic terrestrial channels.

The cheapest color TV you could buy was an Orion—a Hungarian brand. It cost about as much as a TV would have in the U.S., whereas import taxes made a Japanese SONY, Finnish Nokia, or German Grundig quite a bit more expensive.

It gave me a lesson in the folly of import substitution. It was just so inefficient for Hungarians to make TVs or Russians to pay Fiat to license an obsolete model from the 1960s. Likewise, the only way people would buy a U.S. made iPhone, which would come to about $3,500, would be if every competing device was taxed enough to make them more expensive too.

At least the domestic iPhone would be a desirable brand, though. I mentioned to people at work what TV I got and a couple said, with a slight look of concern: “Hmm, it’s probably okay.” Apparently a shortage of Japanese transistors had forced the company to substitute Soviet components that had caused several Orions to explode, but they figured mine was probably new enough that it wasn’t an issue. Other than the vague fear of burning down my apartment, and the fact that the remote control was a random series of tiny, unlabeled color buttons, it was a fine TV that I had for years.

Money was very tight for me initially as I had to pay American student loans on that modest salary. One way to save money was to buy something called “exploded chicken.” Unable to scrounge up enough hard currency, Russian importers had suddenly stopped buying certain Hungarian food products.

They don’t seem to have been discerning clients since one big poultry factory’s machinery was broken and they would just put cooked chicken with broken bones in a thick metal can with Cyrillic writing on it and sell as much of it as the former Soviet Union would take. It showed up in Hungarian markets and I think it cost about 40 cents. Artist’s impression of me in 1993:

As long as you didn’t mind picking out slivers, it was an okay dinner. I imagine tariffs that seem to change by the day will result in a few shortages in one part of the world and bargains elsewhere.

Free trade is underrated.

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I Picked the Wrong Month To Stop Sniffing Glue

May 7, 2025 SJLeave a comment

Back when I was in elementary school in the late 1970s, what my friends and I wanted to be when we grew up came up often. The number one answer by far was “photographer for Playboy,” followed by drummer for KISS. A few degenerates wanted to be lawyers.

Now that I’m middle-aged, I understand that the best job in the world is one that provides a decent living without feeling like work—one you’d still show up to do tomorrow if you won the lottery. “Not feeling like work” doesn’t mean not being a lot of work, though, and boy has this past month been taxing.

I liked my old job, which I had for nearly 10 years, but earlier this year I got the chance to go back to what I love—writing a regular column of my own instead of mostly editing those written by others. This one is daily, which is tough, and it involves getting up really early to finish the newsletter it’s part of. I’m happy with my decision, though.

The irony of doing something like this is that it’s hardest to appreciate just when I really should. The month since “Liberation Day” has seen more chills, spills and thrills than a typical year. More than once I’ve had to tear up what I thought was a perfectly nice newsletter essay because it would have been tone deaf given the latest Truth Social post or market ruction.

I’m struggling to find the right words here given the anxiety many people reading this are feeling about their retirement savings, but I keep reminding myself to slow down and enjoy the madness—to remember how I felt and what smart people were saying during each twist and turn.

The last two times markets got this crazy were in March 2020 and September 2008. Like most of you in 2020, I was trying hard to keep my family virus-free and stocked with milk and toilet paper. I was also figuring out how to edit and manage people on three continents via Zoom meetings and Google docs.

And in 2008 I had just started a new job writing the Lex Column at Britain’s Financial Times. My first day at work was when Fannie Mae and Freddie Mac were taken over by the U.S. government and I was just trying to learn how to file stories and deliver what my editors wanted.

In the next several days banks and insurers were being rescued and Lehman Brothers, located a couple of blocks away, went bust. I don’t think I even walked over there until months after they had taken down the sign—it was a Barclays office by then and I had a meeting with their strategist. I asked to see Dick Fuld’s office and was told it had been dismantled.

In both cases the market history being made hour-by-hour felt like a blur. When I read Andrew Ross Sorkin’s “Too Big To Fail” two years after Lehman’s collapse, it filled in the details of an event to which I supposedly had a front seat. And when I did the research for my second book, the one about the origins of WallStreetBets and GameStop mania, I found I had missed many of the crazier details of the rush of dumb money into the market.

There’s another challenging thing about this particular gig: I don’t expect it to last forever, but it’s very hard not to delve into politics given the constant stream of market-moving pronouncements coming out of the White House. The Wall Street Journal’s readership spans the political spectrum, but it skews conservative, and there’s been a fair bit of hate mail for focusing so much on Donald Trump.

I really don’t know what to say because it would be weird not to, and sometimes it feels like I’m walking on eggshells. There was one day this month when the Dow had a 3,500 point swing during the afternoon—the sort of change that would be typical for an entire year—because of the Oval Office intervention that Scott Bessent and Howard Lutnick staged.

If being a financial columnist is the best job I can imagine, being a politics reporter is close to the opposite for me. People who work in finance might not all be the loveliest, but politicians manage to be both boring and awful—a rare combo. Reporting on it regularly would make me want to gouge my eyes out. It would make me want to gouge their eyes out too, which would bring a visit from the Secret Service.

Anyway, I didn’t write this to complain, and I really shouldn’t. Some people get their stimulation from bungee-jumping. I’m most-excited when the market is doing that, my dented retirement nest egg notwithstanding.

Travel

Balaton Memories

January 30, 2025 SJLeave a comment

Growing up in the U.S., your idea of a beach vacation may have been sunny Florida or something more modest like The Jersey Shore. In communist Hungary, the nicest place to go was “Balaton.” It’s a lake, but no ordinary one as far as Hungarians, or the hundreds of thousands of East Germans who also vacationed there, were concerned. (it’s called “Plattensee” in German). Nearly 50 miles wide and eight or nine across, it was the equivalent of an ocean for a landlocked country where foreign travel rarely was possible.

I’ve been there a few times, but my most memorable visit by far was in August 1979, the summer between fourth and fifth grade. It was my first trip and I had been regaled with tales of how wonderful it was by my mom, who spent summers camping there as a “Young Pioneer.” By “memorable” I don’t mean pleasant, by the way, though that’s not her fault.

The three of us (me, my mom, and my sister) went there with my mom’s best friend from medical school and her daughter, who is my age. The whole trip was weird to an American kid — you went there on a slow, packed, stuffy train filled with people smoking harsh cigarettes. Passengers brought lots of food with them — bread, salami, cheese and juicy Hungarian peppers and tomatoes — no McDonald’s. Never ones for modesty, most Hungarians on the train already were half naked and ready to jump in the water. By the time they got to the actual beach, most of the women were truly naked from the waist up — an eye-opener for an American kid (I didn’t mind that part).

Instead of a hotel, most people, including us, rented a room or an entire house in a village near the shore. The one we rented seemed incredibly rustic to me — we had to feed the owners’ chickens — but it made for pretty luxurious digs by local standards. Anyway, the trip started out fine. We were on the southern, shallow side of the lake and I went swimming on the first afternoon. I remember having a nasty fall on the rocks and being carried out, sobbing, by a very kind East German teenager. It turned out to be my last excursion into the lake as I started feeling ill the following morning. We found out later that lots of people developed similar symptoms. In a communist country, this sort of information trickles out slowly, if at all.

I got worse and worse and I developed a high fever. I should note here that, back in Budapest before our trip, I had watched a popular Hungarian children’s film on TV based on a famous play called A Pál Utcai Fiúk (The Paul Street Boys) by Ferenc Molnár. In the end, the hero dies of a fever – typical, cheery Hungarian youth programming! Being nine years old and already a budding hypochondriac, I had visions of succumbing to my illness like the hero in the movie. At first my mom wanted to try a home remedy — chicken soup — but we couldn’t eat the live ones in the yard. She bought a duck instead and made some very greasy soup. It didn’t work and finally she found the lone local doctor.

Being the eastern bloc, this took a while and he had no medicine anyway. After scouring the area, my mom finally found some Bulgarian penicillin. I don’t want to sound bratty, but it was the most disgusting thing I’ve ever had to ingest — a bottle of poop-brown liquid with an aroma to match. I kept vomiting it up and, after a while, developed a Pavlovian reaction to the bottle, barfing as soon as she unscrewed the cap.

It was also really hot in the peasant house and I just lay in bed most of the day drenched in sweat. There was no ice or, of course, air conditioning. The main diversion was playing with the stray cats who wandered into the house and lay down in my bed. One day I picked up what looked like a glass of water on the table. It was actually vodka that my mom’s friend, who was a bit of a lush, was drinking straight.

I finally got so sick that my mom had to take me back to Budapest and call in a favor to get me treated in a “special” hospital. What was so special about it? I’m not sure, but I shudder to think of what the run-of-the-mill ones were like. A nurse took me into a room and pulled out the most gigantic needle I’ve ever seen — 1940s medical technology — to draw blood. She stuck it in my arm, but blood started spurting out all over me because she had neglected to place a glass tube on the other end. After yelling at me for not being “a man,” she found the missing piece and I was free to go.

They didn’t seem to have any normal penicillin either because I had to go back every day after that on a train, trolley, and bus while feeling awful to get a shot in my leg with a slightly smaller needle. After the shots my legs would stiffen and I had to limp back to the bus. They alternated sides each day. I was sick for the rest of our trip but a bit better than at the lake. When we got home, I went to the pediatrician in Queens, got some medicine, and it took me about a day to improve. I nearly had a fit when they asked to draw blood but was relieved when it was just a virtually painless finger prick. I had a bacterial infection.

They say that young children can’t appreciate being taken abroad. I’m not sure that’s quite true, though it may seem like that at the time. My sister and I didn’t really understand how different life was behind the Iron Curtain, even in Hungary, the “happiest barracks in the camp.” I thought lots of kids went on trips like that. I remember bringing back a “Pioneer” belt buckle with the inscription “Előre” (forward!) that I wore to school. They didn’t know quite what to make of it at P.S. 174.

This all made a strong impression on me — especially getting so sick and thinking, with my childish logic, that I might die of a fever. For lots of poor people in the world, that’s a distinct possibility.

I don’t want to scare anyone away from Balaton, by the way. It’s actually very nice and the water is perfectly clean now. It also has plenty of beautiful villas and some nicer hotels than back then, plus vineyards and spas. I went there twice when I lived in Hungary — once on a boozy weekend with some friends when we rented a cheap “Zimmer Frei,” Hungarian style, and once on a more high-end trip involving a sailboat with work colleagues. I had a pretty good time but, unlike probably 99.9% of people who went there as kids, my initial association with Balaton was unpleasant — feeling sick, scared, and uncomfortable.

Youthful memories leave an outsize imprint. My sons used to ask me when they were young if it was really “the best lake in the world.” Um, no, but that’s what their grandmother keeps telling them. She’s still lobbying for them to go there with her.

These days even middle class Hungarians are as likely to jet off to places like Corfu on cheap package tours as to spend time on Balaton. The analogy I would draw is New Yorkers who used to flock to the Catskills in the 1950s but now travel to Florida with the advent of air conditioning and affordable airfares. It’s not a perfect comparison. Balaton is special and accessible in a way that no similar place is for all Americans. It’s culturally significant enough to show up in many brands.

Going to Balaton may not quite rise to the level of a formative memory, but it’s a powerful one. I was inspired to write all this down after reading Gary Shteyngart’s wonderful memoir, Little Failure. He grew up near my neighborhood in Queens around the same time as me after emigrating from the Soviet Union, but the portion that got me reminiscing about my trip to Balaton was his description of summer beach vacations in Crimea. He also detailed some pretty medieval medical treatment he got for his asthma because Soviet doctors didn’t have modern inhalers.

I got off very lightly by comparison. Now all I have to do is become a bestselling author! Oh, one more thing. Sharp-eyed readers will notice that the postcard at the top of this entry shows not only Balaton but, for some strange reason, an Amphicar in the lake (I wrote about those a while back).

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My Mom Was a Billionaire

October 29, 2024 SJLeave a comment

Here’s what that taught me

I’m the target of good-natured ribbing in my upper-middle-class New Jersey suburb for my spending habits. My wife’s friends told her they’ll pass on going on vacation with us because I’m too cheap and would probably take a bus from the airport, pack sandwiches, and stay at budget hotels.

Guilty as charged. That’s in part because both my mom and dad spent money like there was no tomorrow when they were kids. They had to–there was no time to waste.

Without running water or medicine, hardly any food or clothing, and her father murdered by the Nazis, my mom was the poorer of my parents, but she managed to save a little bit of money in 1946, the year she turned five, to buy herself some candy. The banknote she had probably made her a local currency billionaire, yet it was literally worth less than the paper it was printed on by the time she was ready to spend it. My grandmother didn’t have the heart to tell her. With both of his parents still alive and the wisdom of being a decade older, my dad had a few more zeros on his net worth–not that it mattered much.

That was the insane reality in postwar Hungary. From time-to-time I’ve quizzed my colleagues in finance or journalism about which country had the highest inflation in history. They almost always guess Weimar Germany, Brazil, Zimbabwe, or, occasionally, early 1990s Yugoslavia. Nope.

In that fateful year Hungary’s inflation rate hit 41,900,000,000,000,000%. Not a year—a month. At the peak it took about 15 hours for prices to double. I once asked my grandmother how often she was paid and what she did with the money. Couldn’t she just throw it out the window on her lunch break for someone to buy groceries with it before they changed prices on her way home? She just smiled and shrugged. Nobody really wanted to hang on to cash so the main value of her job was that they fed her. She said that if you really needed medicine then the only way to get it was if you had a little bit of gold, which she didn’t.

Here’s the sort of thing my mom might have had in her pocket–a billion pengő–though maybe it was just 10 million, or a million or a thousand, depending on exactly what month she set it aside. (Milliárd=billion in Hungarian).

To keep things somewhat manageable, and to save scarce paper, old bills were printed over and reissued in denominations with nine zeros removed–the millpengő. That only lasted for several weeks, so then came the billpengő. (Billió=trillion).

Three months after the above bill was produced, the government printed, but never issued, a sextillion pengő note (one followed by 21 zeros). Then they gave up and scrapped the currency entirely, introducing the forint and making every pengő legally worthless. (I have almost the full collection of banknotes at home, but unfortunately not the rare specimen below, which is worth about $7,000 today to a collector).

Lots of people have parents who grew up poor. It usually makes you a bit frugal–no bad thing in moderation, though sometimes people don’t want to take trips with you 😢. But having almost no money and seeing money cease to have meaning are two entirely different things. To me, at least, those stories make any level of wealth or savings seem ephemeral.

It’s hard to imagine that in a country as blessed as the United States, the issuer of the world’s reserve currency. We have an “exorbitant privilege” compared with people whose wealth, salary, and future pensions are denominated in rubles, bolívars, dirhams, ringgits, pesos, reais, or, sadly, forints. Everything from the cars in our driveways to the appliances in our homes and smartphones in our pockets are more-likely-than-not procured from industrious foreigners who gladly accept electronic bits and bytes representing dollars. Since we don’t have as many useful things to sell them, the surplus is recycled into our financial system. Trillions of dollars are parked in Treasury bills, notes, and bonds earning hundreds of billions in interest annually. With a budget deficit of $1.8 trillion last fiscal year–the second biggest ever–the interest is effectively deferred, with no anxiety about it being paid.

You can read plenty of clickbait nonsense on the internet from doom-mongers comparing America’s fiscal future to Weimar Germany or Zimbabwe (they would cite Hungary if they or their readers were more aware of history). Things would have to go very, very wrong for that to happen.

But we certainly could get a whiff of it. I’m surprised how little my educated friends and neighbors question the solidity of our currency. It’s just a construct, backed by nothing but faith in America’s centrality to the world economy, the wisdom of its leaders, and its military might.

My wife and I had dinner this past weekend with two couples who also just shipped their youngest child off to college this year. The conversation soon turned from roommates and majors to the next exciting stage in our lives after becoming empty-nesters: retirement. One dad is old enough to have started collecting Social Security. While he could have gotten more if he had waited longer, I pointed out that it probably made sense to start taking it now because the retirement trust fund could be depleted in nine years. That was news to him and the others, but it was sort of like someone telling them the sun will one day consume the earth in a supernova–the sort of weird, theoretical thing they expect to hear from the nerdy finance guy they know, not an actual concern.

One reason most people aware of that projection by the government’s actuaries also don’t take it seriously is that they assume the federal government will step in and cover any projected shortfall. Paid for with what, though? Even on the outright panglossian projections of the Congressional Budget Office, which foresees no recessions, wars, or crises ever, Social Security, Medicare, and other mandatory outlays will be more than $6 trillion in 2033.

Meanwhile, debt held by the public will have doubled by that year to almost $50 trillion on those benign assumptions, and just the annual interest bill is projected at $1.6 trillion. Yet the model concludes that sane people will lend Uncle Sam the money to cover that interest due plus a deficit approaching $3 trillion for just 3.5% a year. That’s less than the yield on any Treasury bill, note, or bond being sold today.

So will politicians double payroll taxes on people still working or tell retirees that they’re out of luck and that they need to accept a third less each month? Probably neither, but you might not love the alternative. It’s something not totally unlike what Hungary was forced to do in 1945 and 1946. While the economy won’t be in ruins (I hope), the U.S. has an active central bank, borrows in its own currency, and does have a printing press. They don’t even need to worry about issuing banknotes any more because money is mostly electronic. Buying bonds and keeping interest rates artificially below inflation, dubbed “financial repression,” is one indirect way of doing this.

Is that outlandish? Between the prospect of doubling or tripling taxes, what would you expect Washington to do? Taking a step so likely to spur inflation is in-and-of-itself a form of taxation and is dubbed “the cruelest tax” because it raises money from people who live on a fixed income.

Before you pore over the actuaries’ report about Social Security, that might not be the thing that breaks. A war, a financial crash, or another pandemic could all push us close to the precipice. Or it could be that the scales fall from our creditors’ eyes one day and interest rates start to rise on their own, forcing the Federal Reserve’s hand. There is some speculation that the moment is nigh, though that has been predicted prematurely many, many times.

None of this remotely means the dollar will go the way of the pengő, but seeing our savings lose a third or a half of their real purchasing power would be pretty lousy. I started off this note telling you how annoyingly frugal I am. If my fears about the fragility of our currency are justified then I’m doing the exact wrong thing. I should be living it up and accumulating possessions instead of saving as much as I can.

If you see a new car in my driveway or hear that I’ve been flying business class and staying at The Four Seasons, that might be why. After all, I’m the child of billionaires.

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Goodbye, Yellow Brick Road?

September 22, 2024 SJLeave a comment

“Don’t fight the Fed” is one of the oldest and best-known nuggets of investing wisdom out there, but do people really understand it?

I have my doubts. Coined more than 50 years ago by the late, great Martin Zweig, who warned investors to be cautious ahead of the October 1987 stock market crash, it basically means that, when the world’s most powerful central bank puts its finger on the scale, you would be wise to be on the same side. Buy when policy is loose, be cautious when it is restrictive.

But something can go from being a novel and useful insight about markets in 1970 to such a piece of conventional wisdom in 2024 that it is best ignored. You might even want to bet the other way by taking some chips off of the table. (Hey, you’re something from the publisher of “The Hungarian Contrarian”–what were you expecting?).

My column this weekend made that point by comparing the faith people have in Jerome Powell sending stocks soaring to new highs to the blind belief Dorothy and her companions initially had in the Wizard of Oz. There was initial excitement in the market, but, as has been the case the last couple of times a bull market was long in the tooth, the market might soon conclude that the man behind the monetary curtain frantically pulling levers isn’t really so “great and powerful.”

Back in Zweig’s heyday the Fed just had to lean in a certain direction to make markets move and individual investors weren’t parsing every word. For 25 years now–ever since the Fed opened the spigots to save the financial system following hedge fund Long Term Capital Management’s collapse–it has repeatedly ridden to the rescue in an increasingly aggressive fashion. That has reinforced the expectation that whatever leads the Fed to be concerned enough about the economy that it might cut rates, or stop raising them, is great for stocks. Once upon a time a disappointing report on the labor market was unequivocally bad news. Now it often sends stocks rallying. When cause and effect are that muddied it should give investors pause.

Why? For one, monetary policy isn’t some sort of magic wand. It takes quite a while to filter through to companies and individuals and to have an actual effect on corporate profits. If the economy is already weakening and valuations high at the outset then the start of a cutting cycle can be a massive head fake.

From my column:

Take the start of the rate-cutting cycle in 2007—one that coincidentally began on the same day of the year, the same starting federal-funds rate, and was for an identical amount, half a percent (50 basis points)—as Wednesday’s move. The effect was electric: The Dow Jones Industrial Average had its largest gain in more than four years, rising 336 points, the equivalent of about 1,000 points today. Lehman Brothers shares were among the top performers, surging 10%.

But, as we know now, stocks were just three weeks from their bull-market peak, a recession would begin in January 2008, and Lehman would collapse less than a year later in the largest-ever U.S. bankruptcy. By that time, the Fed had cut rates six more times—moves of 25, 25, 75, 50, 75 and 25 basis points, in that order. The moves took rates to 2%, their lowest in nearly four years. In the two months following the Lehman panic, the Fed made three more steep cuts, slashing rates to zero (technically a range of 0% to 0.25%) for the first time ever.

Stocks surged then too, with the benchmark S&P 500 jumping 4.7%. The Dow’s gain of 360 points would be nearly 1,700 today. Yet they erased all of that day’s rally in less than a week and would go on to shed another quarter of their value before bottoming in March 2009.

To be clear, the conditions that existed during the housing crisis were extreme, sparking the worst U.S. economic downturn since the Great Depression. Extreme events are by definition rare, and most predictions of doom are false alarms. More money is lost bracing for bear markets than in them, even when they really happen.

Will history repeat? That’s doubtful–the conditions back then were extreme. The housing crisis sparked the worst U.S. economic downturn since the Great Depression. There are plenty of excesses now, but only limited signs that the economy might be headed for a recession at the moment. But starting valuations matter and, based on reliable long-term measures, stocks are more expensive than they have been more than 95% of the time over 150 years of history. They also have returned more than 35% since the Fed began to raise rates.

A few readers took my column as doom-mongering. It isn’t. I’m trying to puncture a silly narrative that a handful of people in Washington can take a decision that sends stocks soaring from all-time highs. That isn’t their job and, even if it were, they wouldn’t have the power to make stocks rise in perpetuity. The market’s initial rally means nothing. If life were that simple then recessions and bear markets would barely ever happen. In the past century alone there have been 17 and 22 of them, respectively. The Fed has existed during that entire period.

Don’t fight the Fed, but don’t speculate on stocks at record highs because you think it’ll bail you out either.

finance

Big Purchases Go Wrong Sometimes—Deal With It

July 21, 2024 SJLeave a comment

Your anxiety is someone’s profit margin

I was reminded recently of how expensive a bit of nervousness can be when combined with clever marketing (screenshot below). My youngest son is off to college in a month, which makes his mom and me proud, excited, and just a little weepy. It also leaves us poorer–the cost of college is no joke! I may actually have to charge for my blatherings in this newsletter some day.

We went into it with eyes wide open and will be fine, but any large expenditure tends to make people anxious. I distinctly remember one of my closest friends calling me the night before signing the papers to buy his house in London to ask if it was normal that it worried him more than getting married or having kids.

Yes, he’s normal (well, in that respect). I was about a year ahead of him on all three major life events and felt exactly the same way about it–like I was some sort of sociopath. We humans spent 99% of our existence as hunter gatherers or in subsistence agriculture. Instead of catching a gazelle, we bring home a paycheck and try to save some of it. Money is the stored-up fruit of our labor. It confers social status and also ensures survival since we’ll depend on it to sustain us and our families one day.

By parting with a chunk of it all at once, or borrowing and pre-spending our future wages, we’re getting something we value at least that much but also bothered by what feels like a mortal risk. Whether it’s a physical object like a $900 iPhone or an experience like the $90,000 annual sticker price for some elite colleges these days, bad things occasionally happen. You might crack your screen as soon as you enter your contacts into your phone or your kid could drop out a few months into what should be four fun-filled years, missing out on a prestigious degree.

But we overestimate the actual benefits of hedging against bad stuff happening after a big financial commitment–and not by a little. That supports businesses worth billions of dollars a year. Literally a day after our payment cleared for my son’s yet-to-begin first semester, we got this:

His college, and it seems pretty much every other private and public institution in the U.S that I looked up, has “partnered with” – that’s the language they all use – companies like A.W.G. Dewar and GradGuard that are backed by larger insurers, including AXA. This is the 3rd prompt I’ve received to consider signing up for a specific insurer’s product, with their emphasis in bold, so I assume it confers some financial benefit to the university.

In the case of my son’s college, a refund for 75% of tuition, room, and board costs $676 per semester. It is “meant to safeguard your financial commitment.”

Hmm.

It depends to some extent on how much you’re paying because most students receive aid and don’t pay full freight. Using GradGuard, which makes it easy to get a quote for different out-of-pocket amounts (sorry guys, “Ab Cd” will not be purchasing coverage), I said that my child’s cost of attendance would be $40,000 a year at Harvard University, one of their “partners.” The quote for a year of coverage living on campus for an out-of-state student was $1,554.

At first blush that doesn’t sound so excessive compared with the full outlay–less than 4%–but what’s covered? Not sitting in your dorm room smoking pot and flunking your classes. (Dropping out to start Microsoft or Facebook don’t count either, but I suppose the Gates and Zuckerberg families aren’t pestering their sons any more about how much money they wasted on Harvard tuition).

Your student has to have an “illness, injury, or medical condition…disabling enough to make a reasonable person completely withdraw from school.” In the case of mental illness, a licensed professional must advise them to “withdraw completely.” Pre-existing conditions? Nope, not unless specifically waived. Nothing “foreseeable, intended, or expected.” Was the kid injured while training for an amateur sport? Sorry. Committed a crime? Tough luck. School ceased activity (it’s happening more and more)? Not that either.

And what if one of those approved things happens once you’ve paid but not yet begun class. The standard formula seems to be a 100% refund from the college itself, so the insurance will have been in vain. In the case of Boston College, which seems pretty typical, you then get 80% of what you paid back the first week, 60% the second week, 40% the third week and 20% the fourth week. It sounds like it can be for any reason and, if memory serves from the late 1980s, the early weeks were when most kids who decided this college thing wasn’t really for them quietly left.

So let’s say Mom and Dad have paid half of that annual $40,000 for a semester and Junior comes home after 10 days. They are out-of-pocket $8,000 (plus $1,554 if they bought insurance). Looked at another way, though, they just saved $152,000 in tuition over the remainder of those four years, plus $4,662 in tuition insurance they now won’t be coaxed into buying. So what is sold as protecting your “financial commitment” actually is a bit of an unexpected windfall.

But that’s not all. If Junior enters the labor force directly instead of college–a completely respectable choice–he’ll easily make $100,000 over the next three-and-a-half years that he wouldn’t have as a student. Or if he enrolls in community or state college instead the family will at least save tens of thousands compared with the private institution’s sticker price. His education probably will be quite good and less-likely to be disrupted by an, er, “autonomous subgroup”.

So what financial calamity were you insuring against? And what are the odds that a previously healthy 18 year-old will be ill or injured enough, but still sufficiently with-it, to get a doctor to document it within the prescribed time limit and receive a payout?

Oh, there’s also death. Thankfully that’s rare too, but what sort of consolation is that for the grieving family? “Hey, Junior died in a car crash, but at least we got his last semester’s insurance back!” (Side note for those who’ve seen child life insurance advertised on TV from Gerber, the baby food people–this is a grotesque product and a ripoff. Here’s the White Coat Investor with his thoughts).

I can see why people buy this insurance, but not why they should. And I wonder how much the vendor–in this case the school–gets out of the bargain.

That certainly is the model for those “protection plans” you’re invited to pay for when buying an expensive piece of electronics. The store makes a better margin on insurance, often provided by a third party, than on what you just bought. For example, Best Buy’s Geek Squad protection for an $800 smartphone costs $9.99 a month for up to two years. A new phone has a manufacturer’s warranty so this would cover an accident and then kick in for mechanical defects after that period expires. But there’s also a $199 “service fee,” otherwise known as a deductible, on top of the $240 you’d pay for two years. So it costs you up to $440 to “protect” that $800 phone which the Geek Squad will fix or replace with a similar model. And how much is that now two-year old phone worth if purchased refurbished? Not $800.

A similar thing I see every time I buy plane tickets or book a VRBO these days: “Protect your trip!” You typically are about to check out and could lose your booking so there isn’t a lot of time to think about the financial pros and cons–perfect conditions for an ill-considered purchase.

Buying something like medical cover while abroad might make sense, but not reimbursement for canceling your trip for one of the narrowly-defined reasons in the fine print. Say I booked a trip to Europe and had to cancel because someone not traveling got ill? It has to happen during the trip. Death in the family? Ditto.

From insurer Generali, which writes a lot of these policies: “Your or your traveling companion’s sickness or injury must first occur during your trip in order to have coverage. Pre-existing medical conditions are generally excluded from coverage.”

And protecting what you paid for a rental before traveling? It’s certainly possible you’d invoke the policy, but then, as with tuition insurance, you’d also avoid a bunch of expenses you might have incurred during your trip. A ruined vacation stinks, but, financially at least, you’re better off. And even if you get your money back, it won’t give you another week of paid time off. For working people–especially Americans–time is scarcer than money for a vacation.

The dumbest insurance scheme of all no longer exists. When I was a kid there still were kiosks at airports where you could put in a small amount of cash, fill out a form, and, if the plane you boarded crashed, the beneficiary would get a payout. There’s an old machine on display at The Smithsonian Air and Space Museum (pictured). It cost a quarter for $7,500 of coverage.

A publication called Insurance Business Magazine recounts a lawsuit from 1963–the dawn of the jet age and a more dangerous time to fly than today–that laid bare the numbers. It said that “a recent annual report filed by a group of underwriters who handle a large portion of air trip insurance business in the United States, showed total premium collections for the year to be $3,382,561. In the same year the group wrote air trip insurance for $84,564,025,000 and paid out $1,388,839 in losses.”

That is just wildly profitable (even with the occasional plane blown up by relatives who had taken out policies). Fortunately the business has disappeared as people aren’t as afraid of flying–nor should they be. According to the most recent data from an industry body through 2021, there had been just two domestic fatalities in total since 2010. Even in 2009 when there were 50 it came to 0.010 per 100,000 departures.

Is insurance generally a scam? Not at all. I personally am insured to the gills–both the mandatory types like home, auto, and health as well as term life and even umbrella insurance. (Unless you understand what you’re buying or are doing it as some sort of estate planning, high net-worth tax boondoggle, don’t buy more than a cheap term life policy to cover your productive years).

Term insurance makes sense. There’s a low probability of my dying while the policy is in force and the market is transparent and competitive enough that I know the insurance company is making only a reasonable profit for their risk. If all goes well my family will never see a penny back. The insurance company verified that I don’t smoke or use drugs, checked my weight, blood pressure, cholesterol, and family history and made me an offer. I’m reassured that I’m not subsidizing an overweight skydiving chain smoker who got the same price.

That is what insurance is–pooling risks to protect you against an unexpected financial blow. Don’t buy it as a way to assuage buyers’ remorse.

(This post was published earlier on my new Substack newsletter, which is free).

career · investing · journalism

If the Man Wants a Purple Suit …

July 13, 2024 SJLeave a comment

I’m in the process of clearing out my basement and, as dusty old boxes sometimes do, the contents of one took me on a trip down Memory Lane. They also made me think about a lesson I learned that investors would do well to understand today.

The artifacts were the lucite “deal toys” from various initial public offerings and secondaries I worked on as an equity analyst. These usually adorn the desk and then, as they get more senior, the office of any self-respecting investment banker. Lots of trophies made you a “big swinging dick.” Fighting my hoarder tendencies and my ego, I dumped them in the trash.

But there were three rectangular hunks of clear plastic in that box that I kept: my Institutional Investor awards. Back then at least, the best thing you could do for your career as an analyst was to be “II ranked” in that magazine’s annual survey of fund managers–coming in among the top three in a category. And if you were number one then the magazine would write a flattering blurb with anonymous quotes and a caricature artist would make a drawing of you as an athlete–football in the U.S. and soccer in Europe. Your face also was on the cover of the magazine. It figured heavily into your career prospects and bonus. Andy Kessler wrote a nice piece about it back in 2001 when I was still in the business.

As soon as I heard about this, I made it my goal to be on that magazine cover, and for three years in a row I was. Is that because I was so good at picking emerging market stocks? I suppose I was okay, but it really was a measure of how much clients liked and valued you. For most of them that meant how often you called, how ready you were to organize trips and entertainment for them, and how smart you made them feel. I remember hearing one of our large clients repeat almost verbatim to a bunch of his clients, a group of pension consultants–a rare peek for me at how that particular sausage was made–part of the presentation I had recently given him. He got a detail or two mixed up, but I don’t think they noticed.

But before my Institutional Investor glory and all those 90 hour weeks and client ass-kissing, pretty much exactly 30 years ago, I was wet behind the ears and, to quote Liar’s Poker, still “lower than whale shit on the bottom of the ocean floor” at dear-departed CS First Boston. Our then-largest client asked me about two Eastern European companies and I told him that I was pretty sure one was run by a crook and that the other one, despite being backed by some well-respected financiers, was headed for bankruptcy. Much to my surprise, the client wasn’t happy that I had shared this opinion with him and bought more of them instead of the stock that I recommended.

A salesman covering the account who had way more Wall Street experience than almost anyone on my team took me out to lunch in Budapest that summer of 1994 and clearly was exasperated at what a dummy I was. “Spencer, if the man wants a purple suit, sell him a purple suit.” In other words, we’re in the selling business. If someone wants to do something dumb then he’s a big boy so just make sure we’re the ones who get the fat commission.

I remember feeling like a little kid learning that there‘s no Santa Claus*, but he was absolutely right. One company went bankrupt and the CEO looted the other one. A competing analyst got quite a bit of attention for a brilliant exposé about him and his offshore dealings and I remember feeling envious–probably an indication of why I later went into financial journalism. But I made way more money than her in the business and got to be on those magazine covers, so there’s that.

Even after all these years, Wall Street isn’t so much in the advice as in the customer satisfaction business. Last week I saw one of my former Wall Street Journal colleagues, Eric Wallerstein, on CNBC. He was a brilliant financial scribe and I’m sure he’ll do really well in his new role as chief strategist at Yardeni Research. But in an interview on “Closing Bell,” Scott Wapner immediately gave him a hard time because the firm he had just joined hadn’t raised its S&P 500 target for the end of the year. The figure had already been reached after a torrid first half. Everyone else was doing it, and Eric said he still liked the market, so why not raise it?

The interaction tells you how un-serious financial media can be. First of all, if I remember correctly, Eric’s boss, Wall Street veteran Ed Yardeni, had set a 5,400 point target in 2023 when the S&P 500 was around 4,000, so he made a good call. But I’m pretty sure he doesn’t possess a crystal ball to tell you where an index, much less an individual stock, will be trading in six months.

There’s nothing like a rapidly rising market to make people even more confident in stocks, though, so CNBC’s viewers were looking for a number to underpin their optimism. I hate to sound so dismissive of my former profession: Analysts and strategists work hard and do a lot of useful things, but spending thousands of hours writing hundreds of pages to tell people what they want to hear with a false degree of precision isn’t one of them.

A prime example of the horse following the cart comes from the market’s now-favorite stock, Nvidia. If an analyst had been really, really smart then he or she might have guessed that AI chips would be worth their weight in gold and that Nvidia would get a lot more valuable.

But last April, with the stock at $27.75, analysts’ price targets all clustered at or slightly above that level with the average target being 2.3% higher. There were no three-digit price targets (the stock has since split so I mean on the current number of shares). Any analyst who had stuck his or her neck out and said that would be a legend but probably would have been doing it to gain notoriety like Henry Blodget and his infamous “Amazon $400” call in 1998. Merrill Lynch soon fired its analyst covering Amazon and hired Blodget from second-tier broker CIBC Oppenheimer for a princely sum.** It isn’t worth the career risk of making a prediction like that for someone already working at a top firm. And if you are going to stick your neck out at a big bank, try to be an optimist. This week JPMorgan Chase dumped its strategist, Marko Kolanovic, described as “the biggest bear” on Wall Street for, among other things, missing the AI boom.

Back to Nvidia: Fast forward to last July and the price and the average target had jumped dramatically to $46.75 and $50.09. By this January those numbers were $61.53 and $67.45. In April it was $86.40 and $99.70, respectively, with analysts racing to keep up. At the end of June 2024 it was $125.83 and $129.01 with not a single “sell” recommendation out of 62 analysts polled by FactSet (55 “buy” or “overweight” and 7 “hold”).

Yes, good things have happened. No, it isn’t the case that any serious discounted cash flow model making good faith projections instead of looking at the stock price spit out exactly $28 last April and $128 today. That doesn’t mean the latter number can’t be right, or even too conservative, but it does tell you that analysts are watching the price rise and telling their customers what they want to hear.

As another recently-departed WSJ colleague, Charley Grant, wrote as his swan song this past week, “No Nvidia in Your Portfolio? You’re Just Toast.” For both analysts and fund managers–the ones who pay them and vote in those surveys–not being on board has been career suicide. At the time of Charley’s article, Nvidia stock was up a whopping 149% year-to-date compared with 4.1% for the average S&P 500 stock so just missing that one name, or even worse some of the others lifted by AI mania, would devastate a fund manager’s relative returns. And forget about getting your caricature on that magazine cover if you insist Nvidia is really worth $50 a share and stick to your guns.

If you’re reading this and you aren’t paid a salary by Wall Street then take note: Your career isn’t at risk if you don’t own the latest hot thing. You might have one less thing to brag about to your friends, but don’t let groupthink or FOMO make you do something that leaves your spidey-senses tingling–you’ll be better off in the long run. The next time a well-paid investing professional makes a persuasive case for something that doesn’t feel or sound right to you, just picture this guy in your mind.

*I felt almost the same way a month into my current career as a journalist when I was told that it really didn’t matter if I wrote well since that isn’t what I get paid for.

**He was later banned from the securities industry for life.

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Show Them You Care: Be Like Clemenza

June 9, 2024June 9, 2024 SJLeave a comment

‘Tis the season to waste money and enrich huge corporations in a performative act of kindness.

With the school year ending and graduation from college or high school upon us, you have a problem. A gigantic industry will make more than a trillion dollars offering you a solution, pocketing a very handsome profit for itself.

Your kids’ teachers and coaches as well as your children, nieces, nephews, grandchildren, and friends’ and neighbors’ children all traditionally receive a gift at the end of a school year, and especially around graduation. Who has the time to buy an actual physical object for them, though? And who knows if they’ll like it? Returning a small item with a gift receipt is a hassle so they will just have one more piece of junk to clutter up their house.

Gift cards are the obvious choice, which is why hundreds of millions of the plastic cards loaded with money will be handed out year round with peak periods at the end of the school year and the winter holidays.

There are two basic types of gift cards—closed loop and open loop. The far more common closed loop ones are for a specific company such as Applebee’s or Nike and can only be spent there. They’re usually denominated in multiples of five starting around $25. Open loop ones are a pre-loaded debit card that typically comes with a fee for the buyer and an indirect one for the recipient—they lose value over time if not spent.

Both are a bonanza for issuers. First of all, they have your money well before it’s spent, and often it never is. Unused or expired ones earned companies $14 billion in 2020 according to Mercator. You’ve probably heard of “leakage,” the retail industry’s euphemism for losses from shoplifting. This one is called “breakage” and they are a lot more quiet about it. Breakage is pure profit.

For example, Starbucks had what is technically a liability on its balance sheet in early 2022 of about $2 billion. It decided the previous fiscal year that it could book $181 million of that as a gain because some probably would never be used. Meanwhile, it has your cash. If it just put that amount of money in the bank then it would earn an extra $100 million at current interest rates over a year.

There’s more. Most people do spend their gift cards, but usually not exactly the round amounts—particularly for lower-denomination cards that you’re giving the neighbor’s kid for his birthday. The industry calls this “overspend” and it is also a nice chunk of change. Gift card facilitator Blackhawk Network gleefully calculated that people will spend an extra 74% on average on a $50 gift card. The lower the denomination the greater the likelihood that additional money is spent.

Even people who try to spend only about the amount of their gift often can’t because they got one for a business they rarely visit. Speaking as the husband of a school aide, I can tell you that it happens a lot. Mrs. Jakab will eventually use that Dunkin’ card because I keep reminding her about it, but we’re thrifty, make-coffee-at-home people. And many of her fellow school aides aren’t as fortunate as her being married to a lavishly paid journalist and author (🤔). Plenty are trying to keep it going another year or two on creaky knees so they can get a higher Social Security benefit or even to help their adult children with student loans.

Whether they don’t need it or they just really need the money more, this has spawned an inefficient, secondary market in gift cards with the discount to the face value rising the less-frequented the business is. Amazon cards are almost like real money, changing hands close to face value. A $25 gift card for Bob’s Discount furniture, though? Unless you’re buying a $30 sofa, it probably will gather dust. Many do. Or you could sell it online for a whopping $14.

Why do people spend more and more each year on gift cards? Because they’re convenient and it’s polite. But here’s a solution that’s just as convenient for you and far better for the recipient: Give them cash. Legal tender can be spent on literally anything. No, you can’t buy a car or a house with cash without arousing suspicions, but small sums are fine and can even be put in the bank and saved.

Were you considering a more generous gift that would be tougher to spend in cash? Give a check. In the American Jewish community that’s still the default gift for a Bar or Bat Mitzvah and, if a kid is smart, he or she will save a chunk of it. Those small gifts invested in an index fund at age 13 could turn into a down payment for a house at age 33.

Isn’t compound interest the best? Multiples of 18 (the 18th letter of the Hebrew alphabet is Chai, which means “life”) are auspicious, so $180 or $360 if either some or all of the family is invited to the party is pretty standard where I live.

Likewise, if you live in a building with a doorman (generally a team of doormen, plus a “super” in the New York area), you’re expected to hand each of them a holiday bonus. These are people who don’t earn a lot and won’t be reporting these annual tips worth thousands of dollars to the IRS. Cash is appreciated, but most apartment-dwellers write checks these days (makes it more likely they actually get it and that they’ll remember your generosity).

Why don’t people give cash for the many smaller gift-giving occasions? I think it’s because it’s seen as gauche and, sorry for using this word, but “ethnic.” Americans think of the bag full of cash gifts at the wedding in “The Godfather” and the low-class antics of immigrants who don’t know better—a sweaty Clemenza drinking from a pitcher of wine and wiping his mouth on his suit sleeve.

Cash also has a whiff of criminality—like you have something to hide. That perception is both at least a mild inconvenience for the recipient, though, and just wrong. Tony Soprano can buy a gift card with cash and so can you. In fact, criminals love gift cards. Get over it and show that special person you really care by giving them currency.

Columns

A Real Hotel California

February 9, 2024 SJLeave a comment

Something funny happened when my late mother-in-law came to live with us six years ago. No, it wasn’t that I decided to move to a tent–she was lovely. But she really needed her own place. Renting anything that was nice, close to us, and accessible to public transportation was beyond her budget. Then my wife and I lucked out and found a beautiful co-op, studio apartment with majestic views of Manhattan and two swimming pools for only $62,500.

That isn’t a typo. The monthly fees, which included everything from utilities to cable to a parking spot for us, were just $1,000. Co-op rules made it impossible for someone of her limited means to buy it, even if we gave her the money, so we did and she just paid the fees.

As an owner (technically a shareholder), I got the financial statements and board meeting notes of the co-op, which consisted of five large buildings. (Here’s an explainer for those of you unfamiliar with this type of apartment, which is most common in the Northeast). The balance sheet was a mess due to its unionized workers’ reliance on a multi-employer pension plan that was underfunded. As more employers default, the surviving ones pick up the liabilities.

I was aware of that going in. But the most surprising thing was how some of the other residents saw things. For example, there was a big debate about what to do with a gorgeous penthouse apartment the co-op had taken into possession when the owners died and their estate defaulted. It had a spacious balcony big enough for a party with an unobstructed view of the Manhattan skyline and Hudson River. If it had been a condo it would have been worth millions. Yet the co-op board had it on sale for $38,000, barely half what we paid for my mother-in-law’s far smaller place, and was finding no takers. The problem is that the fees were proportional to floor space and they had climbed to more than $7,000 a month–about what the most expensive rental in town would cost.

The board minutes indicated that residents were shocked it was so cheap and were wary of selling even at that price because it would depress the value of their own apartments. But the foregone fees were costing them all money every month they hesitated, and that the low price wasn’t the actual problem–it was what it foreshadowed. The liabilities they had all signed up for could eventually erase the resale value of their smaller apartments too.

The penthouse was, financially-speaking, far inferior to a rental of similar quality, which is why nobody was interested. If you can’t afford a fancy place any longer, you just move out at the end of the lease. A landlord doesn’t chase you down asking for that amount in perpetuity until you can find someone else to live there. And if there are some emergency expenses like fixing a roof, he or she can’t just tack on the cost to your rent.

We sold our apartment at a small profit after my mother-in-law’s passing, but I thought about the upside-down economics of that complex as I was researching my latest column for The Wall Street Journal. If you own any type of property, and certainly if you’ve ever considered buying a timeshare, keep reading.

It was provocatively titled “How To Buy a Week in Paradise for $1.” The average sale price for a timeshare unit bought from a developer is about $24,000, typically for a one-week per-year deed. There are 1,541 resorts in the U.S. alone with more than 200,000 units divided into 51 weeks (one is for maintenance). If just three-quarters are owned by individuals who attended one of those 90 minute sales pitches and owners’ mental accounting puts existing units’ value at just $15,000 apiece then the combined (imaginary) value of those weeks is well over $100 billion. These days some people buy units in a land trust giving them points to use, but the same principle applies, and the points are even more profitable for developers (I explain why here).

Timeshares bought on the secondary market might be worth it for larger families who enjoy going to the same place every year or people with the patience to navigate complex exchange schemes, but what are they really worth? Even some beautiful properties can be had for a dollar. There’s a reason the developer doesn’t just take them back for free.

The management of an absolutely stunning Four Seasons resort in southern California that let me use a photo angrily asked the paper to take it down when I pointed out in the caption that several units could be had there for practically nothing. At least one actually cost less-than-nothing as the desperate seller was willing to pay $1,000 in property closing fees too. You can check out any time you like, but you can never leave.

(Here’s a pic of the print issue where the photo appeared).

Just a casual search on sites like RedWeek or Timeshare Users Group turns up hundreds of listings for a buck, or even zero, and that understates the problem because many properties would only be worth buying if you were paid way more than the closing costs. Sellers can’t afford that, and those sites don’t accept negative numbers anyway. Owners who just walk away are hounded by collection agencies. Two people I spoke with, a retired New York sanitation worker and an ex-Marine sniper who was wounded in Iraq, are still trying to sell properties they thought were bargains.

It is possible to force a resort to take a property back by hiring a reputable lawyer. But someone has to pay those delinquent fees to keep the lights on. Distress compounds the burden on those who can afford, and choose, to keep paying.

The high-end of the timeshare market–the most desirable weeks at nice resorts, such as President’s Day week in Florida or Vail managed by a large, deep-pocketed company–is still worth something. Maybe a week was purchased for $30,000 and could sell for $4,000, which is a specific example cited to me in the article by broker Don Nadeau. As one person told me, buyers should think of resorts more like engagement rings than property–their value is immediately less than what you pay a developer, but you can still enjoy it and have a sentimental attachment.

So I hope that you don’t own a timeshare that you regret, but I encourage those of you with larger families to consider renting weeks from owners at a secure site–I’ve used verified transactions on RedWeek. They can be a good deal for people on both sides of the transaction.

How does this apply to homeowners? Well, taken to an extreme, the math eventually works the same way.

A pretty typical house near mine is for sale for $749,000. The owner had tried to rent it for $3,800 a month in 2021, according to Zillow. I would expect it to sell because a shortage of properties is keeping prices high in New York City suburbs for now, but the underlying costs have gone up a lot. Someone making a 20% down payment would still be out-of-pocket $60,000 a year for their mortgage, insurance, and property tax. The latter two of those can keep going up as inflation and the wages and health care costs for local, unionized teachers and police march higher. We just got our assessment for 2024 yesterday and I’m trying not to think about it.

Clearly you would struggle to make money as a landlord buying it at today’s mortgage rates and prevailing rents–you’d be out of pocket by about $10,000 a year even before maintenance. But what about just biting the bullet and owning it? It’s an investment, right?

When my wife and I bought our house 20 years ago, the combined tax and insurance was 1.5% of the price we paid. Today it is nearly double that–not a deal killer, but not good. Extrapolating that trend, if we decided to become snowbirds in 20 years, that would have grown to 6% of the home price every year. Of course that assumes all of our neighbors are able to keep paying those taxes. What if many can’t, or if there is a political uproar resulting in people below a certain income or wealth level receiving a break at the expense of those able to keep paying? What if that starts to hit the appreciation of homes in our town and state? The $38,000 co-op cost more than $80,000 a year.

Of course the dirty secret of the timeshare business is that they were never “worth” $30,000. The price reflected the costs of a slick sales job and all the goodies they had to give away. Marriott buys back old timeshares for $80 million to $90 million a year that it resells for $1 billion or so, according to my conversation with its CEO, John Geller. That means you can pay slightly more than Marriott would pay–maybe 15 or 20 percent of the price at a presentation–and get a timeshare that way too. Yet even some bargain hunters are now surprised at the difficulty of finding a buyer.

Homes don’t have a secret secondary market and the math won’t get so extreme. But it can grow to enough of a burden that people who counted on retiring on their home equity might find that there isn’t nearly as much left as they expected there to be. The older couple who sold us our house in 2003 were very interested in maximizing the sale price because it was pretty much all they had saved, and that was pretty typical.

The moral of the story? Other than steering clear of timeshare promotions (unless you are 100% confident you won’t buy) is to consider the future liabilities of things that sound like investments.