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The Independent Investor: The Incredibly Shrinking Middle Class
Income inequality in the United States should worry you. Chances are, if you are reading this column, you still consider yourself one of America's Middle Class. Just how long you remain one may be entirely out of your hands.
If you think I'm exaggerating, just take a moment to review this most recent data. You may already be aware that income inequality in America has been on the rise over the last 30 years. Last month, the Census Bureau found that the highest-earning 20 percent of households earned 51.1 percent of all income last year. That is the biggest share on record since 1967. The share earned by middle-income households fell to 14.3 percent, a record low. From 1979 to 2007, incomes of the richest one percent of Americans soared 275 percent. That same 1 percent earned 23.5 percent of all income, the largest share since 1928. At that rate, the rich are 288 times richer than you, the middle class.
At the same time poverty has deepened. Fifteen percent of Americans live below the poverty line, which comes to 46.2 million people — 46 percent more than in 2000. If it were not for unemployment benefits and Social Security payments, millions more would fall below that poverty line. And guess what, the politicians are bound and determined to reduce those benefits within the next year. Bottom line: income inequality is worse today than at any time in American history.
That's right, back in 1774 the gap between American's incomes were smaller than it is today, according to the National Bureau of Economic Research. Hold on to your seats — two historians argue that our present condition is even worse than it was during the Roman Empire! The top 1 percent of ancient Roman earners controlled 16 percent of the Empire's wealth compared to America's 1 percent, who controls 40 percent of America's riches.
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The Independent Investor: The Next Third World Nation The Independent Investor: Income Inequality: The Trend is Not Your Friend |
And yet, when American voters are asked how important income inequality is to them only about 17 percent thought it was extremely important for the government to try to reduce income and wealth inequality. There could be several explanations for that willingness to witness more and more of the nation's wealth falling into fewer and fewer hands.
One reason is the belief that each of us has a chance to become one of those favored few. Back in the Fifties, for example, 87 percent of Americans thought there was plenty of opportunity to progress. After all, that's the American Dream, right? Americans may be worried that if the government attempts some kind of Robin Hood redistribution grab it could hurt their chances or their children's prospect of becoming the next Donald Trump.
Equally important is the belief that capitalism cannot work without income inequality. We have been spoon fed this myth ever since Trotsky first offered his alternative to capitalism. What incentive would the entrepreneur have to invest, to take chances, to innovate if the government's heavy hand of taxation simply appropriated his hard-won gains? It is the same argument that Ayn Rand used in her book "Atlas Shrugged." The logic is simple and erroneously simplistic: since inequality is good for capitalism, the more inequality, the better capitalism works.
Some economists contend that the phenomenon of income inequality is not confined to the United States. The rich are getting richer all over the world. One economic theory that could account for this trend stems from a study by Simon Kuznets called "Kuznets' Curve" that income inequality rises in an industrial revolution, falls as the country grows and develops and then rises again.
For some of the wealthiest nations, especially industrial exporters like America in the 1950s and 1960s, income equality was on the rise. The U.S. was one of the dominant capital goods exporters in global trade and average incomes kept pace with productivity. But as the rest of the world caught up, America began shipping much of our industrial capacity off-shore. In its place the technology and service sectors came to the forefront. Unfortunately, technology actually reduced the number of middle-income jobs in America and the service sector paid far less than factory jobs. This all happened as economic growth began to moderate.
In my next column we will see exactly where the United States now stands in relation to the rest of the world in income inequality. We will also address what this continuing trend will mean for you and your children in the years to come and what can be done to reverse this trend.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
The Independent Investor: Power Shift III
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In the aftermath of the financial crisis, Americans demanded a change in the regulatory system. Since the financial sector was responsible for engineering the near collapse of the global banking system, it is Wall Street that has borne the brunt of the government's expanding role in the markets.
As in everything, increasing government regulation is meaningless without the power to enforce it. The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama in July 2010. Hailed as the most comprehensive and far-reaching reform since the 1930s, the 848 page-long bill has far-reaching power over so many areas of American life that it requires five federal agencies just to enact portions of the rules and regulations.
Essentially the bill was supposed to re-write how Wall Street did business. Everything from predatory lending in the mortgage markets to putting an end to hidden fees and penalties on credit cards was included. New rules would end speculation in the derivatives markets and there would be no more danger of "too big to fail" institutions such as AIG dragging the rest of the financial system down with it.
A plethora of new government powers and agencies would not only have authority over the financial system and the economy that would end up affecting veterans, students, the elderly, minorities, investor advocacy and education, whistle blowers, credit rating agencies, municipal securities, the entire commodity supply chain of industrial companies and much, much more.
In signing the bill, President Obama proclaimed that "these reforms represent the strongest consumer financial protections in history." Before the ink was dry the battle had begun. Wall Street and its cronies faced the largest power grab in its history and they were not about to go down without a fight.
For the last two years a combination of Republican, bankers and other corporate entities have done everything in their power to reverse the legislation or at the very least prevent its enactment. Using everything from lawsuits to loopholes from intimidation of the regulators and innumerable stalling tactics, the opposition is betting that if they can stall the legislation until the election, then a newly-elected Republican president and Congress can repeal the act as they plan to do with Obamacare and just about every other piece of Democratic-sponsored legislation.
Their tactics are understandable if regrettable. No one likes to relinquish power and in this case there is a lot of money at stake. Money greases the wheels of industry, but also the re-election chances of all politicians. The two are umbilically connected in this country. The wonder is that any sort of legislation to herd in the excesses of Wall Street passed in the first place.
I credit you and me for that success. The American public was so outraged by the greed and thievery of our nation's banks, brokers and insurance companies that we demanded some action. Even the politicians had to cave in to the public's demands if they wanted to have a chance at re-election. But passage and implementation are two different things. As far as criminal indictments, well that's taking the whole thing a bit too far. No one in Washington is going to bite the hands that feed them that drastically.
So while the excesses on Wall Street continue — new derivative trading scandals, mini flash crashes, interest rate rigging by the world's largest banks — the regulators avoid regulating. One wonders therefore if the power shift that has occurred in this country is really from the people to a handful of politicians and their financial handlers on Wall Street.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
The Independent Investor: Power Shift Part II
The Independent Investor: Power Shifts from Wall St. to Washington
The Independent Investor: Power Shift Part II
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Depending on whose sound bite you are listening to, government spending has gotten bigger or smaller over the last few years. Oddly enough, both sides are correct. It all depends on what statistics you are quoting.
President Obama claims that federal spending, under his administration, has risen at the lowest pace in nearly 60 years. His statement is accurate, as long as you remember that the 2009 fiscal budget is considered part of his predecessor's legacy. As such, the $700 billion TARP bailout and the $831 billion stimulus package occurred at the end of President Bush's term, even though Barack Obama signed the stimulus bill and voted as a senator for TARP. How does that work?
Part of the confusion lies in calendar versus fiscal year accounting. Before 1842, the federal fiscal year was the same as the calendar year. Since then it has changed several times and since 1977 the government's fiscal year begins on Oct. 1 and ends on Sept. 30, so the spending in 2009 was pinned on Bush since he was president on Oct. 1, 2009. I guess that is fitting since the cause and result of the financial crisis that continues today occurred while the Republican Party was in power.
Despite the administration's double talk, the fact is that 2010, 2011 and 2012 are three of only four fiscal years since 1945 that the federal government spent more than 24 percent of GDP in a single year. The Office of Management and Budget predicts that this year federal spending will hit 24.3 percent of GDP. That is about what the government spent in fiscal 1942, when the Japanese attacked Pearl Harbor and America went to war in both Europe and the Pacific.
Before we look at spending today, readers need to understand that there are at least two measures of government spending. The one most quoted by the economic journals and politicians we'll call "G," which is how much federal, state and local governments directly contribute to economic activity measured as a share of Gross Domestic Product (GDP). It is the sum of all the goods and services they provide.
There is also a broader measure that captures all the spending in government budgets. This figure includes all of "G" plus interest payments on our debt, transfer payments through programs like food stamps, social security, Medicare and Medicaid, unemployment insurance, housing vouchers, Veterans benefits, et al. As you might imagine, when you add all this into "G," government spending, as a percentage of GDP, turns out to be closer to 37 percent. In comparison, the average spend since 1960 is about 32 percent.
Now that is down from the 39 percent that it hit in the second quarter of 2009, when the financial crisis was at its peak. If we confine our analysis of government growth since then, government spending has decreased whether you use "G" or the broader measure.
However, if you measure government growth from the beginning of the decade, when government spending totaled just 30 percent of GDP, then yes, government has grown by a whopping 6 percent in the last 12 years.
Beneath the statistics we can see that the government's economic role has clearly grown larger and with it the power it welds. Its historical role as provider of public goods and services remains but is shrinking as more and more of government's budget is spent on transferring cash and in-kind payments to taxpayers directly through programs like Social Security, Medicare and Medicaid.
This is no accident. Remember that an entire generation of Americans is close to or already in retirement. Baby Boomers are tapping Social Security while experiencing mounting health issues as they grow older. They are turning to Medicare to answer their needs. And why shouldn't they?
Throughout their working careers, these hard-working Americans, (who fought three wars for this country in their lifetime along the way), have contributed paycheck after paycheck to guarantee that when the time came, Social Security and Medicare would be there for them when they needed it. So, yes government has grown larger. It is the "why" of it that so many politicians conveniently forget.
As the government's role in the economy gains force, so does its power. But power is agnostic. It can be used for good or for evil. We have seen how Wall Street has abused power. In my opinion, government spending that is used to honor its contract with America's retiring workers is a proper use of that power. Whether this country can afford to honor its commitments is another story and a question we will answer in a forthcoming column.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
@theMarket: Profit-taking: An Opportunity
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Now normally, history doesn't repeat itself but it does rhyme, more often than not. The first Federal Reserve Bank quantitative easing (QE 1) was announced on Nov. 25, 2008, and was formally launched on Dec. 16 of that year. QE II kicked off on Nov. 3, 2010, and QE III was announced last Thursday. After both the QE I and II announcements the markets rallied and then spent several days consolidating those gains. That seems to be the pattern we are experiencing now.
Investors who purchased equities during that consolidation phase were greatly rewarded. The stock market after QE1 gained 29.8 percent during the next 12 months. After QE II, the markets gained another 13.2 percent in just six months. The lion's share of those gains came within the first three months after the announcements. This time around, stocks rallied in anticipation of a third easing so some of those gains could already be in the market.
Nevertheless, a fairly safe prediction would be that over the next 6-8 weeks we should see a substantial rally. That should take us just into the November elections or slightly after. That is where things could get a bit dicey, in my opinion.
The stock market, using the S&P 500 Index as a benchmark, is already up almost 16 percent since I advised readers to get back in the market. If the stock averages were to rally into the November elections, we may be looking at a gain of greater than 20 percent for the year. On Wall Street, there are three kinds of investors: bulls, bears and pigs. I try to avoid "pigging out" when it comes to profits so, by November, it just might be time to cut and run.
In the aftermath of the general elections, there are a multitude of economic issues that the lame-duck Congress will either face or flunk. Chief among them is the often mentioned "Fiscal Cliff." Will the makeup of the House and Senate be such that we can avert across-the-board tax increases and deep spending cuts by Jan. 1, 2013? Will politicians agree to raise the debt ceiling once again? If so, what will that do to the U.S. credit rating?
Those are only some of the gnarly issues Congress and the president–elect will face. Depending on who wins, the first quarter of 2013 might also be a bit stormy. Given that I have no idea of how all of this is going to play out, November might be a great month to take profits this year. There is a risk that things may go absolutely wonderful. Congress and the president could make up. A raft of great legislation could pass before the end of the year and this year's Christmas rally could be stupendous. In which case, I would have left some money on the table by getting out too soon.
So be it. No one ever went broke by taking profits. This year has been a good one so far. Although it is only late September, it is time to begin thinking about an exit strategy. Hang in there for now because I do think there are further gains to be had in the markets. But plan for the future.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
The Independent Investor: Power Shifts from Wall St. to Washington
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The financial crisis of 2008-2009 turned the economy and the private sector on its head. Hobbled by the largest crisis in generations, Wall Street was drowning. With the banking sector about to implode, the Street had no choice but to ask the U.S. Treasury for an unprecedented bailout. As one corporation after another (think the auto industry) faced the threat of bankruptcy, the center of financial decision making shifted to Washington, D.C. It remains there today.
Government's role in the economy is nothing new. For many years it has guided the overall pace of economic activity, attempting to maintain steady growth, high levels of employment and price stability. For decades after the Depression of the 1930s, it relied a great deal on fiscal policy to combat the recurring recessions the nation faced.
During the 1960s, the heyday of fiscal policy, the president and Congress played a leading role in directing the economy. However, ideas about the best tools for stabilizing the economy changed after that as a period of high inflation, high unemployment and huge government deficits undermined the country’s faith in fiscal policy. Enter monetary policy (the control of the nation’s money supply) administered by the Federal Reserve Bank and its tools of interest rate manipulation.
In the midst of the panic of 2008-2009, as giant banks went broke and insurance companies teetered on the edge, the government was firing both monetary and fiscal barrels at the problem. The combined policies worked in the sense of staving off a worldwide financial meltdown and another Great Depression. Since 2008, however, because of partisan politics, fiscal policy has fallen by the wayside. Today only the monetary policy option remains to prevent another recession.
In this election year, opposing forces are criticizing the Fed for doing too much or too little to grow the economy. Conservatives say the Fed is creating inflation down the road by its stimulus policies while driving down the value of the dollar. Some have actually accused the Fed of treason in even considering further quantitative easing. Liberals have argued the opposite: criticizing the Fed for being overly worried about inflation and not doing enough to lower the unemployment rate.
Since 2007, the Fed has been engaged in a historical and largely uncharted area of economic manipulation that transcends anything attempted in our country's past. They have been at the center of propping up or selling huge institutions, making loans to banks and others in entirely new and radical ways and buying upward of $2 trillion in government debt and mortgage-backed securities. There is no question that the Federal Reserve Bank, in my opinion, has assumed the throne of financial power in this country by default.
Its power, unlike the private sector, is concentrated in a handful of individuals with considerable independence from the President and the Congress. Both the President and the Congress have all but abdicated their own power to control the economy if not in words, certainly by their actions. The polarization of both parties since the 2008 elections has made fiscal policy initiatives impossible.
The Federal Reserve Bank, through its chairman Ben Bernanke, has on numerous occasions begged the president and both parties to at least share the power via new fiscal policy initiatives. To date that call has been rejected in the name of politics. In my next column I will examine just how big the government has grown as a percentage of GDP and how power could become even more concentrated within our nation's capital in the months and years to come.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
