In her column, Marta Mossburg ("Kamenetz's risky bet," Sept. 26) asks, "Would you borrow money to pay off your mortgage and instead risk it in the market?" (I assume that she actually means "borrow money and increase your mortgage, risking the proceeds in the stock market.") She then uses the answer to attack Baltimore County Executive Kevin Kamentz's proposal to sell bonds and to use the proceeds to invest in assets that will be placed in the county pension fund. The attack is unfounded because Ms. Mossburg doesn't seem to understand the difference an individual faces when making an investment decision and the calculus that governmental entities make.
Governmental entities, such as Baltimore County, enjoy the benefit of long investment horizons. That's why, for instance, they are able to offer their employees pensions, and their employees are willing to accept the promise of pension benefits as part of their compensation packages. The benefits of this long-term horizon can be illustrated by Mr. Kamenetz's proposal. That proposal has two parts.
First, Mr. Kamenetz is proposing that the county "sell high." Interest rates are at a historic low. Thus, the value of county bonds is at a historic high. By issuing bonds now, the county will be maximizing the sale price of these bonds.
Second, Mr. Kamenetz is proposing that the county "buy low." That is, he is proposing that the proceeds from the sale of bonds be used to invest in equities held by the county pension fund. (Actually, the proceeds will be invested in a wide variety of assets, but this is the assumption that Ms. Mossburg used and, while simplistic, works to illustrate the proposal.) Ms. Mossburg takes issue with this part of the proposal, contending that "U.S. stocks are close to record highs." That is simply not true.
While it is the case that the nominal price of U.S. stocks, measured, say, by the S&P 500 average, is closing in on its all-time high, the value of U.S. stocks is actually fairly low. The current price earnings ratio of the S&P 500 is 16.19. This is only slightly higher than the level of the P.E. ratio at the bottom of the Great Recession. Except for that point, one has to go back to 1990 to find a point in time at which the P.E. ratio was lower.
Over the next 20-30 years, it is reasonable to expect both the P.E. ratio and dividend yield of the S&P 500 to rise fairly dramatically and, with those increases, there will be a significant increase in the nominal dollar price of the S&P 500 index. The nominal price of other sorts of equities held by the pension fund will rise in a similar fashion. And, of course, the county will have fixed its pension obligation, repaying the bonds with 2012 dollars at a low interest rate. If it sells its equity investments, the county will have sold high, used the proceeds to buy low, and then sold the purchased at a significantly higher price, a certain way to make money.
Why won't I make the same investment bet as Baltimore County and place a mortgage on my house, investing the proceeds in the stock market? Well, basically I cannot look at a 20-30 year investment horizon. Baltimore County can and should.
Stuart Levine, TowsonCopyright © 2015, The Baltimore Sun