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Politics : Ask Michael Burke

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To: Don Lloyd who wrote (81982)	6/27/2000 2:47:00 AM
From: Simba	of 132070

More on MSFT, CSCO pyramid schemes: www10.nytimes.com billparish.com billparish.com The Most Important Leading Inflation Indicator In The New Economy Is Wages and Benefits, Not Raw Materials. Wage and benefit inflation is now captured by the employment cost index or ECI, a key indicator for the Federal Reserve Bank. The ECI is compiled by the Bureau of Economic Analysis from surveys provided to a large sample of companies that file unemployment insurance or UI reports. Even though the UI reports generally include stock option wages, which are ordinary income to employees that appear on their W-2's, the UI report is only used to select the firms to send a survey or 790 report. The wage data on the UI report is not used. Rather, employers fill out this 790 survey form which generally does not include stock option wages. What this means is that wage inflation statistics used by the Federal Reserve grossly understate wage inflation through a reporting anomaly. This introduces a gross inefficiency into the financial markets, in particular an artificial incentive to invest in equities on a comparative basis due to the underreporting of wage inflation. The average person has a feel for prices and they know that inflation is much higher than reported by the government but they still can't explain why. They are falling behind economically and this one factor itself could indeed be a major contributor to the "day trader" phenomehah. In my practice I see people from physicians struggling with the impact of managed care to teachers locked into wage increases based upon inaccurate government cost of living statistics that have become day traders. Their goal is clearly to "catch up" to the impact of inflation but in this case I would call it false inflation. The irony is that this is false inflation because it is generated by a breakdown in accounting rules that have inflated equity values in a narrow sector of the economy, what one could call the pyramid. Many of these same firms also provide a 401K match in company stock which is similarly printed on the equivalent of a photo copy machine. These benefits are given equal weight to those employers who make a cash matching contribution to the 401K. Parish & Company does not have complete data but it does seem clear that offering a 401K match exclusively in company stock is a significant related distortion yet to be addressed. This is penalizing private employers and public firms that make a more honest cash matching contribution to these plans. It has also triggered the wave of conversions to "cash balance" pension plans.

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