The following is in response to the commentary, Maybe This Time is Different, by Andrew Redleaf of Whitebox Advisors, which was published on August 14:
Dear Editor,
I agree with the sentiment of the commentary, but it is missing the most obvious reason why the capital-wage split is not going to mean revert for some time.
Classical economics models are based on the idea of the representative worker/consumer. This is great in models, but often overlooks the lifecycle of the consumer as first being a dependent child, a worker and then a retiree. Everyone is aware of the demographic shift where an increasing number of retirees are living and consuming for a longer period of time. As they are no longer working, they no longer receive a wage. Their income is sourced from either Social Security (government transfers) or their own savings as returns on their investment capital (whether that be equities, bonds or recycled through bank deposits).
If we think about the lifecycle of the representative consumer and what that means for the capital- wages split, it becomes apparent that the ratio will return to historic levels (the mean) at about the same time that the balance between workers and retirees also returns to historical levels. We are probably a generation or two away from this point.
Redleaf’s point about the returns to capital versus the share of income is instructive. It may be that there is more capital income flowing to the increasing number of retirees. Their challenge is to ensure they have enough to afford the retirement they desire in this low-return environment.
Regards
Aaron Minney
Head of Retirement Income Research
Challenger
Sydney, Australia
Andrew Redleaf responds:
How flattering to write a piece and get an intelligent response making a point that I must confess never occurred to me. I am not an expert in retirement and related demographic issues, as Mr. Minney is, but his suggestion is an intriguing one. His letter is the second time in recent months I have been forcefully reminded of the tendency of standard economics to skip over life-cycle issues. (The first being John Mueller’s radically intelligent book, Redeeming Economics.) I suspect we will be hearing more on the subject.
The following is in response to Michael Edesess’ article, Why Hedge Funds Destroy Investor Wealth, which was published last week:
Dear Editor,
This was an interesting article, but my primary criticism is that Edesess’ definition of a hedge fund was somewhat limited. If the authors of the studies cited by Edesess were to include the origins of private investment funds, they should include companies such as Berkshire Hathaway. For all intents and purposes, Berkshire Hathaway was a hedge fund and in many ways continues to resemble one today, except that it is a public company. I doubt the same conclusions would have been reached.
Perhaps the core of the problem is that what was once private has become public. The public hedge fund industry is simply marketing the strategies investors demand. This is compounded by the academic need to classify and dissect everything over short time horizons that do not reward the nature of long-term investing.
All too often investors approach hedge funds as if they are some mystical product. They are not. When an investor buys a hedge fund, they are going into business with and marrying the manager. Investors should approach hedge funds with the same care and diligence a mature individual would have in either of those circumstances. If they did, investor returns and experiences would be different. Instead, most investors make their fund purchases in circumstances similar to a party followed by a drunken wedding in Vegas to someone they just met. As the expression goes, a fool and his money are lucky enough to get together in the first place.
Thanks for the article,
Howard Stolzer
EVP, Chief Investment Officer
United Benefit Advisors
Bound Brook, NJ
