Good Reading -- June 2014
Facts and Figures
China has used more cement in the last three years than the U.S. used in the entire 20th century. (Source:Vaclav Smil via Bill Gates; the book from which this figure is taken also looks very interesting.)
There are more 23 year-olds in America than any other age cohort. There are more people in their twenties (44.5 million) than in their thirties (41), forties (41.7) or fifties (43.8), helping to offset the 70 million retiring Baby Boomers.
Boomers are projected to receive $200,000 more in federal benefits than they pay in taxes, funded entirely by a deficit for the current twenty-somethings.
The last time there was a relative glut of early-twenty-somethings was 1983.
(Source: U.S. Census Bureau via Bloomberg)
Dream Big -- This book profiles 3G Capital and was recently translated from Portuguese to English (Kindle-edition only for now, although hard copies were sold at the Berkshire meeting). A good review is here. I thought the book had too many details in a few tangential areas and not enough about the core people/companies/transactions, but overall it is a great story and highly recommended.
The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger -- I think it was Bill Gates's recommendation last year that put this book on my list, but in any case I just read it and thought it was excellent. It's part business biography and part economic history, but it's really interesting and well written.
Stress Test: Reflections on Financial Crises -- Tim Geithner's book is candid and well-written. I'm not sure how much it adds to the mix (I think you could flip a coin and read this or "On the Brink") but it's still a good book.
"The Biology of Risk" -- The link between Fed forward guidance / communications and market crashes might be a little tenuous, but this is still a very interesting article (taken from what looks like a good book too).
"The Top 100 Financial History Books" -- A very good and comprehensive list.
How Gmail Happened: The Inside Story of Its Launch 10 Years Ago -- Pretty interesting stuff about the birth of gmail. (Thanks to David for passing this along.)
"China Real Estate is Now Like Dubai Before the Crash" -- This article is written by authors who have previously been pretty balanced/neutral, if not slightly positive, on the outlook in China. I also recommended their book a while back. In this article, things have apparently changed. "China is not “Dubai times 1,000” as some [specifically Jim Chanos. -- Ed.] have claimed. China is a huge country with 10-20 potential Dubai’s in it."
Lawrence Summers on 'House of Debt' -- Larry Summers wrote an unusually good review of Atif Mian and Amir Sufi's recent book "House of Debt." He walks though both the highlights and the lowlights with some interesting notes about his experience in academia as compared to government.
"Daniel Yergin on the next energy revolution" -- A short but insightful essay. "We’re not always going to be able to predict where the innovations will happen. Not by any means. But this great revolution in human civilization around energy innovation is going to continue as far as we can see—indeed, much further than we can see."
Buffett and Coke's Sweet CEO Pay -- For what it's worth, I really liked this column. I read all sorts of hand-wringing columns about the Buffett-Coke situation, but this was the only one that addressed the root of the issue -- namely, Kent himself and his pay structure vis-a-vis KO's performance.
I think most of the uproar and "gotcha" finger-pointing directed against Buffett was overdone, especially in the case of Joe Nocera (who shamelessly and repeatedly got basic facts wrong in his column). I'm always amazed at the number of people who love to hop on the Buffett-bashing bandwagon at every opportunity, but in this case I was, for once, somewhat at odds with his decision. I thought it was wrong for him to pass up this opportunity to influence an episode of poor corporate governance and executive (over)compensation. But then two things became clear. First, Buffett is NEVER going to be the guy to publicly wage a battle like this. He admittedly hates confrontation, so he either avoids it or has other people do it for him. We should all know that by now. The second, and most important, point is that he didn't miss this opportunity. As we've since learned, he's talked about the problem (quietly and behind the scenes) with Kent himself, and KO is now reconsidering the plan. My guess is that the plan gets watered down, and justice will be at least partially served, even if the hysterical crowds don't get the public shaming from Buffett they seem to be clamoring for.
Joe Mysak on Municipal Issuers -- the "Dean of Municipal Bonds" with a column about the perils of forecasting, especially as it pertains to the predicted meltdown in muni bonds.
In a .338 Lifetime Average, Every Day Counted -- This a great look at Tony Gwynn and his career. "For Gwynn, the thrill was in the pursuit of perfection in a job built around failure. He tried to leave nothing to chance. Years before laptops and iPads, Gwynn would lug video equipment around the league, meticulously combing through his at-bats, discarding the rare clunkers and studying the gems. He hit .338 for his career, the best mark — by 10 points — of any hitter who made his debut after World War II and had at least 3,000 turns at bat." Somewhere else it was noted that Gwynn could have finished his career 0-for-1,100 and still been a career .300 hitter.
Buffett and Coke's Sweet CEO Pay
APR 29, 2014 7:00 AM EDT
By Roger Lowenstein
Warren Buffett opposes (though he didn't vote against) Coca-Cola Co.’s new employee stock plan as excessive. The problem, which Buffett didn’t mention, starts with the chief executive officer, Muhtar Kent. Although Kent is far from America’s most overpaid CEO, his compensation demonstrates everything that is wrong with executive pay.
Coca-Cola’s proxy statement jumps through hoops to demonstrate fidelity to the corporate governance ideal of “pay for performance.” In reality, Kent’s pay is rigged to remain at very high levels, with modest downward adjustments in bad years and potentially astronomic rewards in good years.
Kent isn't, to repeat, the poster child for compensation abuse. (That prize goes to Oracle Corp.’s pathologically greedy Larry Ellison, who collected $78 million last year.) Coke’s compensation policy even has some admirable features, such as inhibiting the incentive to take short-term risks.
Yet the numbers show a disconnect between Kent’s compensation and shareholder rewards. At Coke, a consumer icon struggling to re-energize a passe product, stock performance has trailed the Standard & Poor’s 500 in each of the last one-year, three-year and five-year calendar periods.
What's more, the degree of underperformance has been significant: Coke's stock sported roughly half of the Standard & Poor's 500 Index advances of 30 percent and 46 percent over the past one and three calendar years, respectively. Meanwhile, Kent’s annual compensation over the past five years totaled $95 million. (Disclosure: I own stock in Berkshire Hathaway Inc., which is an investor in Coca-Cola.)
How do you earn $95 million over five years for consistently underperforming the benchmark? Mostly, Coke does it through stock and option grants. CEO options are supposed to provide an incentive for truly superior performance over the long haul. (Remember, CEOs already get boodles of dough from other parts of their pay package.)
However, at most companies, including Coke, options provide a reward for any increase above the price level at the grant date over a period of 10 years. To put it mildly, this is a very easy mark -- one that can result in a fortune for mediocre performance.
Last year, Kent got 1.9 million options exercisable at $37.61 a share. If Coke’s stock advances at a 4 percent annual rate over the options’ 10-year life -- a very modest clip -- his grant will be worth $35 million.
Rather than pay for performance, this is “pay for showing up to work in the corner office.” If the stock advances at a merely respectable 7 percent clip, his grant will be worth nearly $70 million.
The other serious problem is that Kent gets a boatload of options every year. Large annual grants corrupt the nature of the incentive. Instead of having to perform over a single, pre-designated period, serial option recipients need only preside over a rise in the stock price over any of a series of rolling time frames.
For example, were the stock to fall in one year, the next year’s options would be that much cheaper and more attractive.
And since the grants at Coke are so large, Kent only has to cash out once to become stupendously rich. Keep issuing giant grants and one of those awards, retrospectively, will likely prove a winner. But the opportunity to earn hundreds of millions should not be recalibrated every year. (Shareholders, after all, cannot re-price their investments every year.)
Coke has issued so many options and shares to Kent and other employees that it is running out of authority to issue them. That is why it pushed through a new stock plan last week. The plan authorizes up to 500 million employee options over four years -- which combined with existing plans could lead to dilution, Coke says, of 14 percent. David Winters, a mutual-fund manager who opposed the plan, says, “It materially dilutes the owners of Coca Cola if fully implemented.”
Coke pats itself on the back for not re-pricing options when its stock falls, but granting new options every year potentially achieves a similar result. Its proxy statement urges shareholders to celebrate its supposedly enlightened policies. “We heard that there were certain elements of our executive compensation programs that some shareowners believed we should consider doing differently,” it says. “We listened and have incorporated this feedback into several enhancements.”
Coke asserts that its compensation process is better and clearer. However, it still resorts to self-interested spin by downplaying conventional metrics such as earnings per share and highlighting its own, more stylized yardsticks in which performance appears better. Coke also presents its pay process as rigorous. Yet it lists no fewer than 27 factors that the board may use to determine pay -- everything from cash flow to “service level.” When you pick from 27 factors, you can get any result you want.
Give Coke some credit: Kent’s non-stock bonus is sensitive to performance, and in 2013, a disappointing year, it was cut by almost two-thirds. However, in another sorry hallmark of American compensation plans, Kent’s total package is an aggregate of five distinct pay categories. One bracket will rise as another is cut. In Kent’s case, though the bonus fell, three other categories increased. The total package fell only 16 percent, to $18.2 million.
In other words, in a year in which Coke’s performance, by the company’s reckoning, failed to meet some of its targets, Kent earned enough to make him one of the richest people on the planet. Now, the company has authorization to pay him even more.
Remember the Great State and Municipality Meltdown of 2010, 2011, 2012, 2013?
I think we can now say: That didn’t happen. There was no great mass repudiation of bonded debt, no wave of defaults, no collapse of the market. Municipalities today, the good and responsible ones (in other words, most of them), can borrow money for 10 years for around 2 percent.
Again: Municipal bond crisis? Having satisfied myself that this didn’t happen and that this particular market “call’’ can be retired, my question is: Why?
There are a couple of parts to this question. For one thing, you have the people who were calling for the Muni Apocalypse.
They seem to have been motivated by their finding of an undiscovered country, the urge to be first with bad news, or simply, political hatred of the public sector. None of them were well-versed in munis. That didn’t stop them from making the most dire predictions.
The messengers, tourists in MuniLand, were ill-informed.
What about their message? More precisely, why didn’t the market collapse?
First, the critics generalized about a subject that is particular and specific and resists generalization. In their
opinions: All municipalities were overleveraged. All of their pension plans were underfunded. All of their employee unions were rapacious. All of their tax bases had evaporated in the housing collapse.
In fact, not all states and municipalities were overextended in terms of their bonded debt. Pensions and so-called Other Post Employment Benefits were a burden, of varying degrees. Some governments had been very responsible about making their actuarial required contributions to their pension plans. The housing collapse had been a national rather than a regional phenomenon, yet not all states had participated in it in the same way.
Perhaps the biggest error of the Cassandras was questioning the volition of public officials. As a 2011 report by Roubini Global Economics put it so well, critics “assume the Titanic is set on autopilot heading for the North Pole.’’
This is why there was no municipal market crackup. As we have seen, states and municipalities fired employees, reduced borrowing and spending, and raised taxes and fees. Apparently confounding to detractors was the absolute determination of most government finance officers to make their debt service payments and avoid insolvency and either Chapter 9 bankruptcy (where
available) or state takeover.
The critics also failed to appreciate the perpetual nature of states and municipalities, as well as what little economic engines they can be. That is, small moves can yield big results.
I haven’t heard anyone calling for the death of the municipal market lately. I don’t think we’ve heard the last of them. They will raise their voices again at the next Chapter 9 filing, the next big default, the ultimate disposition of Puerto Rico.
“See,’’ they’ll say: “See, we were right after all!’’
No, they weren’t. As one of the headlines of an early piece put it: “The Coming Collapse of the Municipal Bond Market’’?
That didn’t happen.
In a .338 Lifetime Average, Every Day Counted
Tony Gwynn’s 2 Hitting Secrets: Work and More Work
JUNE 16, 2014
By TYLER KEPNER
Tony Gwynn may have embodied the game of baseball better than anyone else who has played. It was not because Gwynn, who died of cancer on Monday at age 54, was among its greatest hitters. It was because of the wonder he found in the game and the joy he took in applying his daily discoveries.
Gwynn liked baseball as a child in Southern California. He and his brothers would cut up socks, tape them together and practice hitting. He was enthralled by Willie Davis, the Los Angeles Dodgers’ All-Star center fielder. But basketball was his first love.
“Like a lot of kids, you kind of think baseball’s boring — that’s the perception,” Gwynn said in 1999 as he closed in on his 3,000th career hit. He added, “Really trying to learn all I could about the game, you began to understand the nuances of the game, and it became really fun.”
Gwynn, a San Diego Padres right fielder who retired in 2001, said proudly that he learned something new at the ballpark every day. It was a simple but powerful lesson, easy to forget in a sport with a punishing schedule: six weeks of training before a six-month, 162-game grind.
Other sports, to be sure, are enthralling. But when a player so accomplished could be so eager in his search for new frontiers, what a waste it was to ever focus on the drudgery.
Some players do, and that bothered Gwynn. In 1994, while on his way to the fifth of his eight National League batting crowns, he spoke passionately about the attitude of the modern player.
“They just feel like stuff is supposed to happen to them,” he said. “They’re not going to have to work for it. And that bugs me because I know how hard I had to work to get where I got. Sometimes they sit there in amazement at why I come out here every day. But I cannot let their way of thinking into my head.”
For Gwynn, the thrill was in the pursuit of perfection in a job built around failure. He tried to leave nothing to chance. Years before laptops and iPads, Gwynn would lug video equipment around the league, meticulously combing through his at-bats, discarding the rare clunkers and studying the gems.
He hit .338 for his career, the best mark — by 10 points — of any hitter who made his debut after World War II and had at least 3,000 turns at bat. He had more games of four or more hits (45) than of two or more strikeouts (34). He faced Greg Maddux more than any other pitcher, 107 times — and batted .415 with no strikeouts. Pedro Martinez never struck him out, either, in 36 confrontations. The two pitchers finished their careers with seven Cy Young Awards between them.
Gwynn was an extraordinary athlete, nimble enough to be drafted into the N.B.A. (he did not sign) and to set the career assists record at San Diego State. He had four seasons of at least 33 stolen bases, with a high of 56. As he gained weight later in his career, he retained the physical tools to be an elite hitter, along with his ever-improving mental acuity.
Gwynn, at a Glance
3,141 Base hits, 19th on career list
.338 Batting average, tied for 18th on career list
2,378 Singles, 10th on career list
8 Batting titles
15 All-Star Games
5 Gold Glove awards
590 Career assists as a point guard for San Diego State, a university record
He could not have foreseen such success at the beginning. Assigned to a farm team in Walla Walla, Wash., in 1981, he stung his hands on a pitch off the end of the bat on his very first practice swing.
“It hurt so bad I just dropped my bat like a little kid,” Gwynn said. “I remember shaking my hand and saying, ‘Man, I’m in trouble.’ ”
He applied himself, of course, and figured it out quickly. But he fretted on his way to San Diego the next summer, after a promotion from an affiliate in Hawaii. The whole flight, Gwynn said, he worried about the prospect of facing Steve Carlton, an imposing left-hander for the Philadelphia Phillies. He landed in San Diego and went straight to a newsstand to check that day’s starting pitcher. It was not Carlton.
Gwynn hit a sacrifice fly off Mike Krukow his first time up. His first hit came later that game, a double off Sid Monge. The Phillies’ first baseman, who trailed the play, shook Gwynn’s hand at second.
“Congratulations,” said the player, Pete Rose, who went on to become baseball’s career hits leader. “Don’t catch me after one night.”
Gwynn — whose 3,141 hits make him No. 19 on the list, to match his uniform number — told me that anecdote from the bench in Philadelphia one day in the early 1990s. All the stories here came from our conversations in dugouts.
Gwynn liked to do interviews there so he could sit at eye level with the reporter and express himself freely, away from the bustling clubhouse. Maybe, too, he could notice something useful on the field while he chatted.
I was a teenager when I first interviewed Gwynn, working for a small magazine I published from home. This was not Sports Illustrated or ESPN. He had no special reason to be nice. But every time the Padres came to town, Gwynn would greet me warmly.
He noticed things others would not. One time we spoke, I was wearing a Vanderbilt golf shirt. Gwynn noticed the logo and asked if I went there. When I said yes, he lit up. The Padres beat writer Buster Olney, of The San Diego Union-Tribune, also went there, Gwynn said excitedly. “You’ve got to meet him!” he said.
Pause for a moment to consider how rare this is. Few players would bother to notice a detail on a reporter’s shirt. Few would know which college the team’s beat writer had attended. Fewer still would then offer, with genuine enthusiasm, to play matchmaker.
But that was Gwynn. When our interview ended, he went back to the clubhouse, found Olney and brought him to the dugout to meet me. A few years later Olney was writing for The New York Times, and he recommended me for a job. Gwynn had set me on my career path.
Twenty years later, I remember almost everything about those interviews with Gwynn: his piercing laugh, his high-pitched voice, the way the Phillies broadcaster Harry Kalas would stroll by and announce his name, somewhat royally: “T. Gwynn!” I remember the cap with the white S and the orange D, and the thick wooden floorboards of the dugout and the late-afternoon shadows across the AstroTurf.
I also remember that the dugout always smelled like tobacco. I loved that because to me it smelled like the big leagues. But on Monday Tony Gwynn died of cancer of the mouth and salivary glands, which he believed was caused by years of dipping tobacco. And it absolutely breaks your heart.