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2/18/2019 "The Black Economy 50 Years After The March On Washington"

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Stephen Shipman On The Stock Market

Stephen Shipman, Vice-President and Chartered Financial Analyst at George D. Bjurman & Associates, an investment portfolio management company, offers some of the best analysis of the financial markets to be found anywhere. In light of the recent fluctuations in the stock market, we thought it would be good to have Mr. Shipman weigh in with a snapshot of how the stock market works, what impact it has and what it tells us at any given moment in time.

Mr. Shipman has a very unique way of making the complex easy to understand, especially for those who are intimidated by Wall St. Stephen graciously agreed to answer our very broad questions and promises to be available to provide with the benefit of his years of accumulated knowledge and understanding of the financial markets and how those markets are impacted by domestic and international fiscal and monetary policies.

Consider this an introduction to a complete understanding of how Wall

Here is the Q&A: What is the stock market? What distinguishes the Dow Jones Industrial Average from the NASDAQ and the Russell 2000?

Stephen Shipman: The stock market is a forum where individuals buy and sell pieces of publicly held companies. The Dow is the original 30 stock 'index' that attempts to capture the condition of the entire market. NASDAQ is another 'index' that is comprised of stocks that do not trade on the New York Stock Exchange. The Russell 2000 is an 'index' of the 2000 smallest publicly held companies traded in the United States. What do we learn from the price of a company's stock?

Stephen Shipman: We learn the value that investors are willing to pay for the total expected future earnings of a company. Are you concerned at all by the high price-to-earnings ratios of several stocks? Do you think that such high ratios are an indication of excessive speculation or "irrational exuberance"?

Stephen Shipman: High 'P/E earnings ratios' don't bother me if they are accompanied by expectations of high growth rates of earnings. They do bother me if I expect that high inflation will creep back into the system. I think high ratios reflect fairly normal expected rates of return on investment in companies that have prospects of very, very high growth rates of earnings. To this end they are quite rational and not necessarily speculative. However, some market participants likely have unrealistic confidence in the ability of some companies to sustain high growth rates of earnings. You see the market price of gold as a signal? What does the gold price tell us?

Stephen Shipman: The price of gold indicates the precise intersection of the demand and supply of money of any particular currency relative to the entire stock, or inventory, of gold in the world at large. I like to think of the gold price as a standard of measure; like a yardstick is a standard measure of length; or a gallon is a standard measure of liquids. The price of gold, which is universally distributed and easily accessed, tells us if the Federal Reserve Bank has stabilized the purchasing power of money; is reducing the purchasing power (inflation); or is enhancing it (deflation). What impact does the Federal Reserve have on the financial markets? Do you think that Alan Greenspan has done good job as Federal Reserve Chairman?

Stephen Shipman: The Fed can influence the financial markets by taking actions that market participants believe will cause inflation or will reduce inflation. The increase or decrease in the expectation of inflation will determine changes in the interest rate that the market will use to discount the future stream of income or profits of any given company. Overall Greenspan has done a pretty good job. I think that he was best when Wayne Angell, his vice chairman for five or six years, was at his side to guide and to instruct Greenspan about the benefits of using a price rule for managing money rather than using discretionary management. Over the past three or four years, Greenspan has been terrible. He has endorsed policies at the Fed that created deflation, that is a huge increase in the purchasing power of money. The deflation has hurt the poor and laborers because it retards the creation of capital; it has hurt commodity producers and farmers who have seen their prices fall some 30% over this time period; and it as hurt debtors, especially third world nations, who have economies that depend upon commodities as their primary source of production. Which presidential candidate do you believe would do a better job of managing the economy?

Stephen Shipman: Both candidates are awfully uninspiring. Both candidates have failed to embrace policies that unambiguously promote economic growth. Because he has put forward a program of a modest reduction in marginal tax rates and the elimination of estate taxes, I would give a slight edge to Bush. Repayment of the national debt as a political priority is endorsed by both candidates and, to me, is the silliest of their respective platforms. We have too many needs and too low wages to want this program of radical austerity. How has US fiscal and monetary policy impacted Black Americans in a way that others have not been affected?

Stephen Shipman: The great large black middle class pays approximately 2 to 3 times as many total taxes (Federal, state, municipal, and payroll) as their white middle class counterparts did during the 50's and 60's. Why? Because Congress failed to index income for inflation until 1982 after it got way out of hand. Thus, most black (and white) middle class income earners of the 70's, 80's, and 90's are paying tax rates at levels that JFK had only intended the very wealthy to pay. This burden created by so-called 'bracket creep' is the primary reason why blacks have fewer assets and savings per capita than whites. Most whites over the past several decades had their contribution of income to Medicare 'capped' at certain income levels. Not so for blacks anymore. Secretary Rubin lifted the 'caps' in 1994, subjecting blacks (and whites) to an additional 1.6% contribution above the old 'caps.' Finally, the Social Security Commissions of 1983 and 1990 'low balled' the expected growth rates of the economy which required higher contributions of payroll taxes to reduce the now artificially inflated 'liabilities.' ('Caps' are continually raised here, too.) Thus, in the past decade blacks have paid relatively higher payroll taxes on increasing incomes than whites ever had to pay in the 60's and 70's. The double 'whammy' regarding Social Security is that blacks have a shorter life expectancy than whites. This suggests to me that the benefits are fewer and the obligations are higher. What do you think is the most important thing a person should know when investing in the stock market?

Stephen Shipman: The basics. Most especially, the time value of money. That is, how to discount to the present time the value of all future increments of income. An excellent place to start is Ben Graham's Intelligent Investor.

Wednesday, December 6, 2000

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