WASHINGTON POST - Sunday, January 24, 1999; Page B01
On Social Security A Good Way To Blow It By James J. Cramer
NEW YORK - You will have to search far and wide to find someone who believes in stocks--and the stock market--as much as I do. I live and breathe stocks. I have made my living buying and selling them for two decades. I have proselytized the value of equities to millions of people both in print and on television. I have to work hard not to think about them and their potential virtually every waking minute.
And I can't think of a dumber idea than the government putting any of our Social Security funds into equities.
You might think I would favor such a proposal, which President Clinton endorsed in his State of the Union address last week. After all, as a money manager for others and an investor myself, what could be better than the thought of billions of dollars in government money rolling into the market every year, boosting the value of the stocks that I own or love? But I find the prospect scary, because the government does not operate under the same rules as private investors. By definition, the government must take into account political considerations that can distort what should be essentially an economic decision.
It's not as if individuals don't already have ample latitude and incentive to invest in the stock market. The government allows any level of stock speculation or tax-free investment in Individual Retirement Accounts and 401(k) plans. It encourages investment in equities through greatly reduced capital-gains taxes on the profits from those equities. The public is already in, big time.
That alone could prove extremely dangerous. As those of us on Wall Street keep saying, stocks have risk. They haven't shown that risk of late, as the S&P 500 has been on a multi-year tear. We've been in a bull market for almost 17 years, depending on how you measure it,. Sure, stocks over long periods have been shown to outperform all other types of assets, but how can we presume that the extraordinary valuation level of equities, higher than any time since the Crash of 1929, will continue at this same blistering pace?
I am a bull--and I don't believe it can. What I find reassuring about the current setup is that the government has taken care of the fixed-income component of our savings, Social Security, allowing a nationwide backstop for those who might invest all of their personal savings into the stock market. Social Security is our guaranteed nest egg; it's one of the reasons why we are free to take risks in the stock market. A prolonged bear market, one that could strike at any time, could wipe out a substantial chunk of people's equity savings. But under the current system, their Social Security would be unaffected.
As wrong-headed as stock investing for Social Security would be for the government, it would create a terrible set of consequences for the stock market and the economy. Look at what happened to Japan: A country of remarkable resilience and energy has been mired in more than a decade of recession, largely because its stock market received too much support from the government.
For most of the 1980s, the Japanese government worked closely with business to keep the stock market rising, well beyond levels that had any relation to corporate earnings. This governmental support fostered an environment in which individuals and corporations became heavily enmeshed in a stock market that was totally divorced from the "fundamentals," as we say on Wall Street. When the Japanese stock market began its dramatic fall from its 1989 peak, nearly everyone in Japan was in trouble. The 25,000-point unwinding of the Nikkei stock index--which represents a heart-stopping 64 percent drop in valuation--has reduced Japan to a hapless second-rate economy that cannot be jump-started, no matter how many stimulus packages get floated. Its equity market, once the source of incredibly cheap capital to keep its companies competitive, barely functions as a capital-raising mechanism.
With the Nikkei index almost two-thirds off from its peak, many people are too frightened to invest further in equities or spend a lot on consumer goods. There's probably more money in mattresses in Japan than anyone wants to admit, and it's not about to resurface as fuel for an economic rebound any time soon. One look at Japan's falling interest rates--they have been below 1 percent, a level that would create an inflationary boom here--shows just how much the people there have soured on taking any risks with their capital.
While I remain bullish on some aspects of the equity market, we are in danger of going down the same path as Japan. The NASDAQ 100, the go-go list of companies that include Microsoft, Intel and Cisco, is rising faster than the companies' earnings justify. If the U.S. government came roaring into the market now, signaling to everyone that this was the place to be, we might well end up where Tokyo was a decade ago. That sort of endorsement of equities could lead to a massive speculative bubble that goes well beyond the one that we have currently in the Internet segment of our economy.
Nor would I, as a taxpayer, want the government choosing stocks for me. Let's say Uncle Sam's stock pickers get together to decide which individual stocks to buy. Do they invest in the steel industry, where imports have been hurting U.S. steel firms? Do they support high-tech because that generates good jobs? Do they buy America Online because that might slow down Microsoft? (I don't even want to imagine the furor when the government decides to unload a stock and knocks it down badly.)
So, someone at the Treasury's new stock-picking department says, maybe we should just play it straight and buy an index of select blue-chip stocks. But whatever index the government chooses, because of the tremendous force of its own buying power, will immediately send valuation levels climbing. If it chooses the S&P 500, then it will be push that index--already at its highest level ever--even higher. If it chooses a small capitalization index, the stocks will no longer be small!
The average American now has more exposure to the equity markets than at any time in history. That's enough. Leave Social Security alone. There should be one aspect of our savings that will be impervious to high valuations and potentially sharp declines. If we are worried about the effects of a stock market crash, we don't need to exacerbate those fears by marrying Social Security to Wall Street. We are already flirting with a Japanization of equities. Let's not have Social Security be the reason that stocks go so far beyond any reasonable value that we have to spend the next 10 years fighting a stock-induced economic quagmire.
James Cramer is president of Cramer Berkowitz, a money management firm based in New York, and a senior columnist for www.thestreet.com, an online daily. At the time of this publication he owned shares of Intel, Cisco, Microsoft and AOL.