Still Hard to Believe

I was reading an article in Barron’s this week about how companies are using the increases in revenue from the recent changes in the corporate income tax laws to buy back their own stocks, and provide larger rewards to shareholders in record amounts, and wondering how anyone watching this could possibly be surprised by it. I realize that this blog is starting to sound more and more like The Grumpy Old Man blog and less like a business blog, but the fact is that I’ve generally been in a bad mood since roughly 1977, I’m certainly not young anymore, and I’m absolutely a male human being of adult age for all that I don’t behave that way. And this latest reaction by business to our changing financial climate is the sort of thing that could have been predicted by a particularly dim six-year-old – or anybody else with no grasp of how money works…

It’s important to remember, I think, that stock shares aren’t just representative of an ownership position in the company; they are also sold by the company to raise money. Buying them back does cost money; potentially a lot of money. But as a result, the remaining stockholders effectively end up owning a larger share of the company, because the repurchased shares are now owned by the company, which is to say, by them. Even in the case of an overvalued stock, the share price is likely to rise because the shares themselves are now actually worth more than they were before. Naturally, this will make the stockholders happy, which will in turn make them more likely to retain (continue employing) the current board and management team, who can in term continue to collect their (sometimes ridiculously) large salaries…

This isn’t really a difficult concept. In fact, it’s somewhat simpler than a normal stock price increase. Most of the time, when the market price of a stock rises, it is because the people buying it believe that the company is or shortly will be worth more than the total value of the stock price indicates. This may have no connection to reality whatsoever, particularly in the cases where investors are speculating about things that haven’t happened yet. This is one of the factors that makes picking stocks that will increase in value so maddening; in addition to all of the economic, financial, political, and social factors involved, you’re also trying to predict buying decisions that may be completely irrational. Even people who are very good at picking stocks are only correct a relatively small percentage of the time…

From where I’m sitting, the question here is really why anybody would expect the companies who were in a position to do this to do anything else. The people responsible for the changes in the tax codes keep insisting that businesses will use the extra funds made available by the lower tax rates to expand their operations and create additional new jobs, but why should they? If any of those corporations want to use their own money to expand they probably could, but their stronger stock position means (among other things) that they can borrow money at a much better rate, and they can use the repurchased stock shares as collateral if they need to. And if a company is already profitable, and they have just become considerably more profitable, why would they or their ownership group want to mess with a good thing?

Now, I would be the first to admit that finance can be intimidating if you’ve never studied it. But this isn’t really a question of finance, or even of economics. Anybody who can grasp the idea of making the people who own your company happy being a good way to keep your job can understand why repurchase programs would happen, and anybody who can imagine that a time when people who are clearly driven by political advantage over any practical concern are making irresponsible changes to both our tax codes and our international trade status would make people cautious about expanding their operations can understand why these companies aren’t, in fact, expanding their operations…

I’ve heard a lot of people insisting that finance and/or money is too complicated for them to understand over the years – and I’ve annoyed a number of them by replying that the subject is entirely within their abilities, and refusing to learn about it means turning control of every part of our civilization that runs on money over to people who have no particular reason to act in the public interest. Let’s hope that somebody starts paying attention – to the economy, if not to me – before things get any worse…

You’re Not Helping

I think it’s probably fair to say that things have been a bit weirder than usual around here since the last Presidential election, and given how weird life in these United States has gotten to be in this 21^st Century, that’s really going some. Life in this country is always a bit confusing right after a change in administrations, and this one is stranger than usual. A lot of things that “everyone knew” could never happen just did, and with the arrival of a “post-factual” society it’s getting harder every day to tell what is real, what might be real even though it makes no bloody sense, and what is just people acting out something they saw in a Saturday Night Live sketch. And while it seems unlikely that tomorrow will see either flights of angels with trumpets soaring over Washington D.C. or the entire city dropping straight into the Pit, some of the things people and organizations around the world are doing to celebrate the event aren’t making things any more believable…

Consider, for example, the story about a Russian company minting commemorative coins, in silver or gold, that bear the likeness of our President-Elect on one side and the legend “In Trump We Trust” on the other side. You can pick up the story from the CBS News page if you’d like, but so far it looks as if this one is correct. A Russian company called the Art-Grani Metal Works is striking a small series of 45 commemoratives, each supposedly about five inches in diameter and weighing about two pounds, although that should vary depending on the base metal. In addition to the aforementioned Trump portrait, the other side of each coin looks very much like the one on the back of the U.S. Presidential dollar coins, although carrying a different motto, of course. How much these “coins” will sell for, or rather if they will sell for more than the price of the metal, remains to be seen…

Now, we should probably acknowledge that this is a publicity stunt, almost certainly aimed at a Russian audience, rather than us. Even assuming that the company was making a large number of these coins, it’s difficult to imagine that there are that many people anywhere who would want to spend over $38,560 for a commemorative coin bearing the likeness of a U.S. president, no matter how controversial he or she happened to be. Even the silver coins would be a bit of a stretch at $545.92. But more to the point, perhaps, there are private companies all over the world, many of which actually have the word “mint” in their name, who produce gold and silver commemoratives featuring all manner of images of people and places all the time. The only reason this one is drawing attention on the Internet, instead of being relegated to the inside cover of a dead-tree magazine, is the momentary notoriety of its subject matter…

If the past 240 years are any indication, it seems probable that the new administration will be rather less wonderful than its supporters would have you believe, and possibly even slightly less horrible than its opponents are forecasting. If we are all very lucky, sometime in the very near future this whole passage will be left to the historians to figure out, and the rest of us can get back to trying to figure out what is fact, what is fiction, and what is something that somebody just pulled out of their hat. But on behalf of a generally confused American electorate, I can honestly say to the Art-Grani people, and all of the other companies like them, you’re not helping matters…

What Ever Happened to Free Parking?

Over the years I’ve gotten into disposable income arguments with a number of people, most of whom have told me that conspicuous consumption is disgusting no matter how small the amounts involved are relative to your income, and people who spend $800,000 on a car or $200,000 on a bottle of whiskey should just get a Honda Accord and a bottle of some premium brand and donate the other $970,000 or so to charity. I’d like to think that I’m more tolerant than that, although in fairness I should probably just admit that I don’t particularly care how people want to squander their money. I follow the Heinlein school of ethics, which holds that anything you enjoy that does not unnecessarily harm another person is not wrong in an ethical sense – although it may stupid. The case of the million dollar parking space, as reported in the New York Times this week, probably falls into that last category…

Even if you’ve never been to New York City, the concept that parking would be hard to find and very expensive there shouldn’t be too hard to grasp. Space within the city is extremely limited, and as a result all real estate is expensive. Most of the residents don’t even own cars, and a surprising percentage of them will be happy to tell you, at the drop of anything resembling a cue, how wonderful it is to be able to go anywhere you want to go on public transportation, how much money they save every year by not having to make car payments (or pay for car insurance), and why this is further evidence of the complete superiority of their city to anywhere else in the world you could possibly live. I’m not convinced that the existence of a parking space that will cost you as much as $6,600 per square foot supports that contention, however…

According to the story in the New York Times website, the parking spaces are part of a new condo development in a building that will offer three-bedroom units in the $8.7 million to $10.45 million range – or around $3,150 per square foot; less than half of what the parking spots cost based on footage. Or, to look at it another way, each of these parking sports will require financial resources that would be sufficient to purchase a really nice house (complete with multi-car garage) in many other large cities, or four quite large houses in a good part of East Lansing, Michigan, outright. This would seem extravagant almost anywhere, but in a city that prides itself on its public transportation – and which is widely associated with both horrible driving conditions and unbearable automotive expenses – it seems like a complete logical disconnect…

Now, we should probably acknowledge that according to the same story it isn’t that unusual to see parking spaces with a six-figure price listing in New York; the author also points out that the available number of off-street parking spaces has dropped by around 26% over the past 30 years, whereas the population of the city certainly has not. We might also want to concede that someone who is paying in excess of $10 million for a new residence (especially a condominium) might consider an extra 10% in order to park in the same building no more than a minor expense – or possibly an interesting investment, since it will both enhance the value of the condo and also offer a property than can be sold separately from the residence. But it should probably also be noted than anyone who can afford to spend that kind of money on real estate can most likely also afford cab fare…

In the long run a parking space that costs four times more than the national average for a house may seem like a particularly disgusting example of conspicuous consumption, but if the people who buy them end up selling the properties at a good profit in five or ten years it’s hard to imagine what was wrong with this choice from a business standpoint; if the spaces appreciate the way some real estate did in the early 2000s the owners might end up having the last laugh on all of us. The truth is, if I could realize a profit of millions of dollars – or even $200,000 for a nice 20% profit – on buying and selling a piece of property, I don’t believe that I’d care whether it was a 200-unit apartment complex or a 200 square foot parking space…

And I can’t imagine why anyone else should care, let alone give me a whole lecture on conspicuous consumption…

Go Smurf Yourself

A long time ago, a major concern that parents had to worry about was having children who were too young to know any better calling those “976” pay-per-minute telephone services and running up huge telephone bills. Some of it was that these services had “adult” material, but mostly it was just that a three-year-old could call the recorded “Message from Santa” number six hundred times in a day (kids that age do not get bored as easily as you might think), and a few weeks later the parents might be faced with a thousand dollars in phone charges. Even otherwise intelligent people who were old enough to know better would occasionally make this mistake; using a phone service to get updates about their soap operas every weekday for a month until their parents started yelling at them about a $700 phone charge (at $4.95 per minute, it adds up quickly). Of course, that all seems so quaint now…

The phone-service menace had faded, if not quite vanished, when websites that charge for content became the new electronic threat. Most of these required a credit card in order to use, but those aren’t that hard for an enterprising young tyke to get hold of, especially when their parents use the same credit card number on the same computer to buy their own online content; in some cases the computer’s own auto-complete software will fill in those fields for them. For at least ten years now, we’ve been bombarded with stories of children as young as 2 years old placing orders for everything from pornographic movies to large construction equipment using their parents’ computers, and this along with the threat of online predators has convinced most reasonably sane people that you’d have to be an idiot to let small children surf the ‘Net unsupervised…

Now it would appear that Apple has pushed back this frontier, as they have so many others, with iPhone and iPad technology. A story from the Associated Press by way of the Yahoo News tech page presents the curious case of the “Smurf’s Village” video game, which is available for Apple gadgets as part of the run-up marketing for the upcoming Smurfs movie. Like a lot of the current generation of online games, the Smurf’s Village gives the user the option of simply buying resources (using real money) instead of working for them through game play. What’s special about this case is that the game is intended primarily for small children – and the usual failsafe of requiring the user’s iTunes password in order to purchase things within the application apparently doesn’t always work…

Now, the Apple leadership and the game publishers have correctly pointed out that parents can restrict all in-application purchases with a simple settings adjustment; it also seems reasonable to ask about kids and unsupervised online gaming in the first place. Any child who is too young to understand about money (and credit cards) is probably too young to be using web-enabled electronic devices without supervision, and letting your child do so isn’t functionally any different from letting them have access to X-rated cable channels, adult websites, or chat services, all of which are already on the list of socially unacceptable parent behaviors (and will probably end up in the legal definition of child endangerment soon if they aren’t already). A much more troubling point is how easy these applications are to abuse – and how blatantly the programmers are trying to get the user to do so…

Consider the case of the Smurf’s Village game, for example. Like most such applications, it has a wealth of challenges that can take days or weeks of constant play to overcome – or you can complete them instantly with the application of a few real-world dollars. Even adults who should know better can fall prey to this type of programming; expecting small children not to is unrealistic. And while children might consider the idea that purchasing a sword or a biological-warfare grenade launcher in order to slaughter other players might be bad, it’s hard to picture them applying the same logic to purchasing “Smurfberries” in order to build their village faster…

Even worse, in my opinion, is the attitude that some of the parents quoted in this article seem to be taking; that none of this is their fault and everything should go back to the way it was when they were children. Like it or not, in-app purchases are here to stay, just the way online communities and cyber-stalkers are. Letting your children play with a web-enabled computer/communications device that is connected to your credit cards is every bit as stupid as letting them play in traffic would be – and these electronic hazards are no more likely to go away than automobile traffic is…