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Fact and Comment
Fact and Comment
Steve Forbes, 09.21.05, 3:11 PM ET

Uncertainy=Equity Opportunity

Wise investors realize that we're in one of those periods that characterize a bull market--an overdose of caution. In bull markets, contrary to myth, people are very aware of the negatives. They know the things that can go wrong, the problems that weigh us down--deficits, inflation, bubbles, Iraq, Iran, North Korea, incompetent government. Unbridled optimism doesn't manifest itself until near the end of a bull market. Smart investors know this is the time to load up on equities--while they're relatively cheap.

A considerable part of wealth is expectations. If a company's prospects look bright, it will obviously have a higher valuation than if its future looks grim. Markets want to know what's going to happen next, not what's happened in the past or what's happening now. The stock market crashed in 1929 when it became clear that Congress was likely to enact devastating, protectionist trade legislation. The Smoot-Hawley Tariff, signed into law in June 1930, triggered a horrific trade war that contributed mightily to the Great Depression.

Which leads to today's big question: Why isn't the stock market doing better? When this bull market began three years ago, the P/E ratio for the S&P 500 was 26. Even though the S&P is up nearly 60%, P/E ratios have slumped to 19. Corporate profits have surged and continue to grow far more than experts predicted. The stock market should be booming. Inventories are low. Companies are spending more on capital projects. Consumer incomes are healthy. Corporate tills are awash in nearly $2 trillion of cash and cash equivalents. Rarely has cash made up such a large portion of corporate assets. American households are also liquid. If you were to add up what people own in stocks, bonds, money-market accounts and the like and subtract consumer debt and home mortgages (leaving aside the values of houses that people bought with those mortgages), you'd find that U.S. households are liquid to the tune of about $26 trillion.

There's no shortage of liquidity to fuel the economy--and the stock market.

What's temporarily holding the market back is the Federal Reserve. Our central bank continues to raise short-term interest rates, but it's still printing too much money. Which is why gold, the best measure of monetary mistakes, is hovering around $450 an ounce--up more than 60% from three and a half years ago. The Fed inadvertently triggered the bubble in oil prices through its inflationary monetary policy. But it will eventually correct this mistake.

Smart speculators will quickly take their profits in oil and invest their gains in equities.

Junking Judicial Malpractice

President Bush has proposed putting caps on jury awards in medical malpractice cases. Too often, frivolous lawsuits succeed with juries that are unversed in medicine. And many times awards bear no relation to culpability or the damage allegedly done. A more effective, lasting approach to fairness, however, would be to create medical courts. After all, we have special tribunals for bankruptcy, patents, taxes and other areas. Typical citizens can't be expected to master the intricacies of medical care.

The recent Vioxx decision is a good example of a case judged on emotion instead of fact. The plaintiffs never demonstrated that the medication killed the patient, but the jury wanted to punish Merck and "send a message to the big drug companies." The bestseller Blink, by Malcolm Gladwell, discusses how doctors who don't have a good bedside manner get slapped with lawsuits far more frequently than do their brethren with more patient-pleasing personalities.

Medical courts would rely on impartial experts rather than hired guns for the plaintiff bar (or for defendants). These panels would be able to distinguish between genuine malpractice and high-risk, complicated medical procedures.

Senators Mike Enzi (R-Wyo.) and Max Baucus (D-Mont.) and Representative Mac Thornberry (R-Tex.) have introduced legislation that would allow states to experiment with medical courts. Victims of medical malpractice would receive justice--as would innocent doctors and hospitals.

Taxpayers Squeal With Delight

One potential dark horse for the Republican Presidential nomination in 2008 is Governor Mark Sanford of South Carolina. The Palmetto State chief executive has Reaganesque principles and exhibits a willingness to stand up for his beliefs, even if that means going against his party.

A number of South Carolina Republican legislators have suffered from the same ailment that many of their GOP cousins in Congress have--spendingitis. Unlike President Bush, who has yet to wield his veto pen, Sanford has fought hard and imaginatively to prevent a spending free-for-all. He's even showed up at a state capitol press conference with two piglets under his arms to vividly illustrate the pork-barreling inclination of all too many South Carolina lawmakers.

Sanford is also a policy innovator. He is pushing hard for school choice and for the creation of more charter schools. And he's come up with a proposal that would bring sanity to the state's runaway Medicaid program. Still-skyrocketing state spending on Medicaid nationwide exceeds state outlays for elementary and secondary education combined. Sanford's plan would give most beneficiaries the equivalent of what Medicaid spends on them currently and let them buy health insurance plans that best meet their particular needs instead of sticking them with the current one-size-fits-all approach. Eligible insurance providers would have to meet strict solvency rules and offer the level of care (or better) that Medicaid does now. Competition would keep prices down and lead to innovative ways of delivering health care at ever more affordable costs. The Sanford approach would let people obtain more affordable insurance, allowing them to spend any savings on other health care needs not covered by traditional Medicaid plans.

Florida Governor Jeb Bush is pursuing a similar approach. The Sunshine State already spends nearly $7,000 a year per Medicaid beneficiary (in South Carolina the amount is $4,000).

Given Washington's inability to curb its porky excesses, even in the aftermath of Hurricane Katrina, Governor Sanford's prospects, if he decides to take the presidential plunge--and assuming he runs for reelection next year--will remain bright.

We're the Government and We're Here to Harm You

The Department of Transportation is engaging in an exercise that is thoroughly unnecessary and, indeed, harmful to motorists' health. It wants to stiffen the fuel-efficiency standards applied to light trucks sold in America. The smallest of these vehicles would have to average 28.4 miles per gallon (mpg) by 2011, and the biggest 21.3mpg. The average fuel-efficiency improvement would be around 6%. Environmentalists cry that these changes don't go far enough. They're also pressing the Administration to substantially raise the so-called Corporate Average Fuel Economy (CAFE) standards for all classes of vehicles. But all this is uncalled for.

When gas prices go up, people search out more-fuel-efficient vehicles. Consumers don't need Beltway bureaucrats to dictate what they will do naturally. The gas shortages of the 1970s gave an enormous boost to Japanese automakers, whose vehicles were stingier burners of gas than their Detroit counterparts. With gasoline exceeding $3 a gallon these days, dealers are practically giving away their SUVs.

Regulators also can't seem to grasp the fact that energy efficiency does not necessarily mean less use of energy resources. Over the years refrigerators have been built to consume less and less electricity per square foot of size. Result: Consumers buy ever bigger, ever fancier refrigerators. The same phenomenon has held true for automobiles and trucks: Greater fuel efficiency has meant we drive more and more.

Even more sobering is that CAFE standards have perversely made cars less safe. To meet existing CAFE standards, many automakers have used lighter materials, thereby making vehicles more vulnerable in crashes.

Washington, in this instance, should stand back. Markets work better than regulation.

Edible enlightenment from our eatery expert Tom Jones and colleagues Patrick Cooke and Monie Begley, as well as brothers Bob, Kip, and Tim.
 
Centrico--211 West Broadway, at Franklin St. (Tel.: 212-431-0700). The Mexican fare at this bright and cheerful establishment is first-rate. From the excellent salsa and guacamole to the fresh and exquisite ceviches to the perfectly grilled tuna, all is beautifully presented and tasty indeed.
The Capital Grille--155 East 42nd St. (Tel.: 212-953-2000). The dramatic interior design almost makes it worth the visit, but when you pay top steak house prices, you deserve more than a beautiful space. The food is reasonably good; the portions are huge, the desserts much too sweet. The waiters disappear for long intervals, and all the niceties go by the wayside.
Yumcha--29 Bedford St., at Downing St. (Tel.: 212-524-6800). An innovative place that uses Chinese ingredients, but is far from a typical Chinese restaurant. The menu is fun to read, with selections such as Concubine's Forbidden Pleasure, and all of its exotically named dishes are delicious. Particularly so are the fluke carpaccio, the steamed pork and the Szechwan-dusted beef tenderloin. The desserts are sublime.