Marc Levinson

Month: April 2021

  • Dow 36,000*

    Twenty-two years ago, James K. Glassman, a newspaper columnist, and Kevin Hassett, an economist, laid out the bullish case for U.S. stocks in a book called Dow 36,000. Their forecast drew a lot of attention. At the time, the famed stock market indicator was around 11,000, so the authors were implying that the 30 stocks in the Dow Jones Industrial Average would more than triple in value “soon.” Stocks had been undervalued for years, they asserted, but prices would leap to a new plateau as investors recognized that companies were poised to increase their dividends year after year. Looking at how much money an investor would earn from future dividends, they proclaimed, was a new way of valuing a stock, a measure they termed the “perfectly reasonable price.”

    Well, stock prices have been doing pretty well of late, and it’s conceivable that the Dow will hit 36,000 some day soon. But before we hear the bulls bellowing in triumph, it’s worth mentioning a few of the reasons I placed an asterisk on the headline above.

    One is that 36,000 isn’t what it used to be. Inflation has raised the Consumer Price Index 58% since September 1999. The Dow would need to be above 17,000 today just to have kept pace with inflation since the book was published. In inflation-adjusted prices, the Dow has not quite doubled since 1999. That’s not too shabby, but it’s a far less buoyant performance than the raw numbers suggest.

    Another reason for viewing the numbers cautiously is that this isn’t your grandfather’s Dow. The people who run the average systematically cook the books, adding stocks that look poised for good things and discarding the dogs. Back in 1999, the Dow still was mainly an industrial average: 23 of the 30 companies actually manufactured things. Today, by my count, 14 of the 30 Dow companies aren’t really industrials at all. Over time, tech stocks like salesforce.com and Cisco and financial companies like Visa have been added to the average, while underperformers like General Electric, ExxonMobil, and Alcoa have been dumped. If you had purchased the 30 Dow stocks in 1999 and held them until today, you’d be sorry.

    Also, the promised dividend increases have proved nowhere near as reliable as Glassman and Hassett implied. Three of the companies in the Dow average in 1999, General Motors, Eastman Kodak, and Sears Roebuck, ended up in bankruptcy. Their their shares lost all value, and their dividends proved not to be a reliable source of income.

    As I explain in The Economist Guide to Financial Markets, there is no ideal measure of stock market performance. Each of the many available averages and indexes tells a different story. The Dow Jones Industrial Average is among the least meaningful. So when the Dow hits 36,000, as it inevitably will, I wouldn’t break out the champagne.

  • General Average

    In the modern world of global commerce, it isn’t easy being small. Yes, if you go on the internet to book passage for a container of your precious cargo, the ship line will accommodate you. But you may be sorry. You’ll have to pay the carrier’s published rate for your box, which will undoubtedly be far higher than the rates negotiated by the large manufacturers, retailers, and freight forwarders that ship hundreds of containers each week. You’ll be subject to all sorts of indignities from customs authorities and security officials who are suspicious of unfamiliar shippers, likely delaying your goods. And, in case you haven’t heard, you may be on the hook if something goes wrong with the ship that is carrying your cargo.

    In the eight days since Evergreen Marine’s ship Ever Given was freed from the muck of the Suez Canal and sent north to the Great Bitter Lake for inspection, it’s become clear that small shippers are likely to be among the biggest losers from its ignominious grounding. The reason is something called the General Average, a practice that requires a shipowner and the shippers whose cargo is aboard to share the costs of saving the vessel after a major casualty.

    In this case, the shipowner, the Japanese company Shoei Kisen, has declared a General Average and has engaged a London-based insurance adjuster called Richards Hogg Lindley to figure out the value of each of the thousands of shipments on board. Once the cost of the casualty has been determined, each owner will be assessed a proportionate share of the costs, usually expressed as a percentage of the value of its cargo.

    Figuring out the cost of the casualty will take a while. In order to get the ship underway sooner, the cargo owners are expected to put up deposits to have their cargo released. For most big companies with goods aboard, that should be no problem: they’ll call their marine insurers, who will provide guarantees. But small shippers — think of a tiny umbrella manufacturer in south China, or a Belgian discount store with an order of cheap blouses on the way — may have skipped marine insurance to save money. To gain control of their cargo, they’ll need to put up cash deposits, but they may be hard pressed to raise the cash without controlling the cargo. If they fail to resolve this chicken-and-egg problem, the ship owner can hold and, eventually, sell the goods. Some of the shippers may lack the resources to withstand the loss.

    As maritime accidents go, the grounding of Ever Given will probably not be among the most costly. Even so, there are likely to be many parties that claim damages, including Egypt’s Suez Canal Authority and the owners of the hundreds of vessels that were delayed while the canal was closed. We can expect to see enough claims and counterclaims to keep lawyers busy for years. And I expect we’ll read the sad stories of small business owners with big dreams, who discovered that the global marketplace hides risks they’d never thought about, such as responsibility for an accident they did not cause.