Category Archives: Economy & Markets

The Middle-Class Squeeze Isn’t Made Up

My Comments: Are you a middle-class American? I used to be and may still be, but those like me are a dying breed. The economic devastation now engulfing a huge portion of Texas is going to reverbrate across the nation. Apart from the humanitarian crisis, it will add to the unseen crisis affecting middle class America.

Economic inequality led to the downfall of the Democratic Party last November. It’s manifest by the lower economic expectations of those who live in rural America, by those whose education is no longer enough to get ahead, and still pervasive social discrimination against those not white enough. To Trumps credit, he saw the problem and built a movement, even if he is likely to waste the opportunity.

Like many ‘economic’ essays, this may be hard for you to get through. But to the extent you want to preserve the underlying goodness of this nation, and protect yourself along the way, you would benefit from a better understanding of the problem.

By Barry Ritholtz / Feb 15, 2017

Benjamin Disraeli is reputed to have said “There are three type of lies: lies, damn lies and statistics.”

Today let’s address the third component of Disraeli’s formulation in the context of a recent National Review article with the headline, “The Myth of the Stagnating Middle Class.” The article observes that “more Americans have easier lives today than in years past.”

To regular readers, this is a variant of the assertion that “common folk live better today than royalty did in earlier times,” a claim we debunked two years ago. The current argument is more nuanced in that it: a) relies on a few statistical twists; b) contains statements that are true but don’t support the main claim; and c) is an argument against Donald Trump’s populism from the political right. It all has the general appearance of plausibility until you start digging.

This is where we come in.

Let’s begin with the claim that more Americans have easier lives today than in years past. This is true and almost always has been. Progress is humanity’s default setting ever since our ancestors climbed down from the trees and began walking upright on the African savanna.

Thus, it should come as no surprise that the standard of living for all Americans has been rising for many years, mainly because of technological advances. However, the main issue under discussion is actually about how the economic benefits of the U.S. economy get apportioned across the populace.

In other words, how the wealth is distributed. The National Review engages in a statistical sleight of hand that distracts from this.

For further insight I spoke with Salil Mehta, who teaches at Columbia and Georgetown, and is perhaps best known for his role as the top numbers-cruncher in the federal government’s $700 billion TARP bank bailout plan in the financial crisis.

Mehta made short work of the article:
The article is a peculiar mixture of motivating facts and fantasy logic, which is what makes cherry-picking statistics unsafe for policy conversation. The main issue with the piece is that that it continuously mixes and matches data to fit a fated narrative.

Mehta further observed that the National Review argument included in some cases various classes of Americans (such as minorities and immigrants), while excluding them at other times in statistics. This kind of data cherry-picking is always a red flag.

Consider for a moment how the Pew Research Center did its big research report, “The American Middle Class Is Losing Ground”: The report, which actually figures in the National Review article, analyzed the Current Population Survey from 1971 to 2015. It used data drawn from the Bureau of Labor Statistics, which has well-established standards for managing data and making empirical comparisons.

Maybe it’s best to make the point with two of the more telling charts in the report. Here’s the first one, showing that income growth for the middle class has trailed that of the upper class:

The second chart (below) shows that the wealth gap between the upper and middle classes also widened significantly (even after the losses from the financial crisis):

Best practice in these circumstances is to go to the original data source, cite it and analyze it in a way that is consistent, regardless of whether the outcome supports your conclusion.

As I’ve said before, there are many reasons to dislike this economic recovery: it has been lumpy and unevenly distributed by geography, by industry and by level of educational attainment. Much of that has harmed people who were once considered middle class. Add to this the decades-long impact of automation, globalization and the decline in labor’s bargaining power, and it adds up to economic stagnation for the middle class.

But wage and wealth stagnation alone don’t account for the full measure of middle-class angst. Inflation and its components also play a part. Prices for things we want have been deflating, while the cost of things we need have been going up. Mobile phones, computers and flat-panel TV are better and dollar-for-dollar cheaper than ever. The same is true for cars, which in a few years will likely be self-driving.

But those are mostly wants. When it comes to needs, it’s a different story. Housing, even after the 2008-09 crack-up, is expensive. Rentals have gone straight up as home ownership has fallen. The costs of education have skyrocketed and show no signs of slowing. Medical and health-insurance costs are among the fastest-rising of all consumer expenses.

The National Review article concludes by saying, “Government can’t fix that problem, because that problem doesn’t really exist.”

Wishing that a problem doesn’t exist doesn’t make it vanish. But it does offer some insight into why the Republican Party was blindsided by the rise of Donald Trump and his populist appeal. It isn’t that the party elite was myopic, but that it actively fabricated a bubble into which no contrary information was allowed entry. The troubling thing is that the GOP is still at it.

Middle-class anxiety has been building for more than a decade and it mixed in the last election with a general sense of frustration with America’s leadership class. No wonder the middle class feels squeezed — because it is.

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Global Markets: Traders Put Record Cash To Work

My Comments: I recall a saying to the effect ‘pride goeth before a fall’. Rampant enthusiasm about investing across the market spectrum probably suggests the same thing. Of course, there’s always a follow up question about how much pride is necessary to trigger a fall. Just know that one is coming and if it concerns you, there are remedies.

Joe Ciolli  /  Jul 23, 2017

In global markets, all signs of sentiment are pointing up. And it’s that very unbridled enthusiasm that could spell their downfall.

But before we get into the negative implications, let’s take stock of everything that shows just how overtly bullish investors are feeling right now.

First, private client cash levels have dropped to a record low as a percentage of total assets, according to data compiled by Bank of America Merrill Lynch. That means investors are feeling more emboldened than ever to put that money to work in the market. They’re choosing that over holding money on the sidelines — a risk-averse move typically associated with uncertainty.

Institutional investors are also holding the lowest levels of cash since the start of the eight-year bull market, survey data compiled by Citigroup show. The measure now sits at less than one-third of a multi-year high reached in 2016.

Second, active equity funds just absorbed their biggest inflows in 2 1/2 years, according to BAML. This is a sign of confidence not just for the market, but for fund managers that make their living picking stocks. It’s a rare bright spot for active management, which has struggled alongside the rise of the red-hot ETF industry.

Third and lastly, in perhaps the most direct reflection of swelling confidence, global markets are hitting records. The S&P 500 and its more tech-heavy counterpart, the Nasdaq 100, hit all-time highs this past week. The gauges are up 265% and 466%, respectively, over the course of the bull market.

Meanwhile, credit indexes have done the same amid 30 straight weeks of investment-grade bond inflows, BAML data show.

What’s resulted is the so-called “Icarus trade,” which has been characterized by the “melt up” seen in risk assets since the start of 2016.

But there’s a downside to flying too close to the proverbial sun — sooner or later, your wings will melt. BAML sees that happening in the second half of the year as the bullish conditions outlined above overheat further.

A “big fall in markets” will be an “autumn, not summer event,” strategists at Bank of America Merrill Lynch wrote in a client note. “Icarus won’t soar forever.”

The comments echo ones made by BAML the week before last, when they cited central bank tightening as a threat to the gradual trek higher in risk assets.

So where do we stand right now? Despite the gloomy late-2017 forecast from BAML, it’s actually a great time to be an equity investor. Company stock prices are moving more than ever on the earnings reports that are trickling out, representing a big potential windfall in the short-term for traders willing to do their homework.

The Danger From Low-Skilled Immigrants: Not Having Them

My Comments: To Make America Great Again, the presumably well intentioned mantra for those leading the GOP these days, someone has to overcome ignorance of economics and start paying attention to reality.

A positive corporate bottom line is the driving force for a healthy US economy. To reach that goal, we need people willing to spend time in the trenches doing whatever grunt work is necessary. Despite machines that increasingly automate the grunt work, a supply of young people has to match the demand created until artificial intelligence takes over.

The supply of labor is not going to miraculously appear. A greater number of us are old and fragile, and fertility rates among young men are declining. Exactly who is going to look after all us old folks because we refuse to hurry up and die?

We should be encouraging immigration and refugees. Yes, there is a potential security threat, which implies applying resources to screen and maintain a reasonable level of security. And yes, someone is probably going to get killed or maimed or whatever when someone nefarious sneaks through.

The laws of supply and demand are well known. Right now we have an increasing demand for labor, which can only stabilize with either more people being allowed into the country, or a large increase in the cost of labor to force more of into the trenches. Either that or starve, in which case you die. Some would have that happen since dead people are less likely to vote against those wanting to restrict immigration.

Eduardo Porter \ August 8, 2017

Let’s just say it plainly: The United States needs more low-skilled immigrants.

You might consider, for starters, the enormous demand for low-skilled workers, which could well go unmet as the baby boom generation ages out of the labor force, eroding the labor supply. Eight of the 15 occupations expected to experience the fastest growth between 2014 and 2024 — personal care and home health aides, food preparation workers, janitors and the like — require no schooling at all.

“Ten years from now, there are going to be lots of older people with relatively few low-skilled workers to change their bedpans,” said David Card, a professor of economics at the University of California, Berkeley. “That is going to be a huge problem.”

But the argument for low-skilled immigration is not just about filling an employment hole. The millions of immigrants of little skill who swept into the work force in the 25 years up to the onset of the Great Recession — the men washing dishes in the back of the restaurant, the women emptying the trash bins in office buildings — have largely improved the lives of Americans.

The politics of immigration are driven, to this day, by the proposition that immigrant laborers take the jobs and depress the wages of Americans competing with them in the work force. It is a mechanical statement of the law of supply and demand: More workers spilling in over the border will inevitably reduce the price of work.

This proposition underpins President Trump’s threat to get rid of the 11 million unauthorized immigrants living in the country. It is used to justify his plan to cut legal immigration into the country by half and create a point system to ensure that only immigrants with high skills are allowed entrance in the future.

But it is largely wrong. It misses many things: that less-skilled immigrants are also consumers of American-made goods and services; that their cheap labor raises economic output and also reduces prices. It misses the fact that their children tend to have substantially more skills. In fact, the children of immigrants contribute more to state fiscal coffers than do other native-born Americans, according to a report by the National Academies.

A 60-40 Portfolio Could Return Less Than A Savings Account

My Comments: How fast will your money grow?

An expectation of growing money at an annual rate of 7% to 10% going forward is probably unrealistic.

Interest rates and inflation rates are relatively low, and global economic growth rates are likely to slow down over the next two decades. See my earlier posts to understand this: http://wp.me/p1wMgt-1Rp and http://wp.me/p1wMgt-1Qz

June 30, 2017 • Christopher Robbins

Over the next decade, the traditional 60-40 portfolio will post average lower annual returns than many online bank accounts do today, according to a web tool from Newport Beach, Calif.-based Research Affiliates.

A portfolio consisting of 60 percent equities and 40 percent bonds will post average annual real returns of just 50 basis points over the next decade, said Jim Masturzo, Research Affiliates’ senior vice president, asset allocation, on a Wednesday webcast.

“Investing is hard, and this market will kick you in the teeth,” said Masturzo. “The focus should be on how do we create portfolios well-positioned for the future that are able to meet our future spending obligations. For a majority of investors, risk is failing to meet their long-term spending needs.”

Masturzo explained that most of the firm’s assumptions lie on projections for 50 basis points of annual growth from large-cap stocks. The S&P 500 is projected to produce an average annual dividend yield of 2 percent and long-term earnings growth of 1.3 percent, but lose 2.8 percent in valuation annually.

By comparison, annual percentage yields of 1 percent or more are available in online savings accounts from Ally and Synchrony, and online checking accounts from Aspiration.

The low return estimate might come as a shock to some investors, admits Masturzo. In equities markets, earnings growth has failed to keep up with rising stock prices, while fixed-income returns will continue to be muted by low short-term interest rates and monetary tightening by central banks.

Yet a 60-40 portfolio had returned 4.9 percent net of inflation year to date through May 31, said Masturzo, with the Bloomberg Barclays U.S. Aggregate Bond Index yielding 1.2 percent, while U.S. large-cap stocks have returned 7.4 percent—a “spectacular rise in the markets.”

“The most common question we hear is: ‘Can this continue?’” said Masturzo. “I don’t know, but history tells us that it is unlikely.”

During the webcast, Masturzo used Research Affiliates’ newly updated Asset Allocation Interactive (AAI) tool to visually demonstrate the firm’s projections for future returns across asset classes, geographies and factors.

Research Affiliates predicts that there is a less than 1 percent chance that a traditional 60-40 portfolio will be able to post real returns of 5 percent or more over the next decade. The company assumes that the portfolio will generate a 2.4 percent average annual net yield, but an average annual valuation change of 1.9 percent.

A portfolio offering a 5 percent average annualized return is still possible, said Masturzo, but advisors would be better off optimizing returns through diversification and rebalancing than by adding risk.

Masturzo said that advisors and investors will have to think beyond traditional investments to generate yield and growth.

“Opportunities do exist beyond mainstream stocks and bonds to take advantage of asset classes with lower valuations or attractive cash flows,” Masturzo said. Yet most advisors are diversifying within highly correlated areas of the market and not across asset classes. Higher returns might be found in credit markets, commodities, REITs and private investment opportunities, and within non-U.S. markets.

Investors might also consider active strategies to produce differentiated returns, said Masturzo.

“Alpha is an important part of this discussion, especially when you’re talking about expensive asset classes,” he said. “We’re big believers in adding value through contrarian trading.”

At the heart of the tool is a scatterplot of risk and return demonstrating historical data or expectations from Research Affiliates projecting an efficient frontier defining a normal distribution around a portfolio’s probable returns.

The AAI tool is an interactive web tool that provides expected return data across more than 130 assets and model portfolios. The tool allows advisors to create and customize their own portfolios, or to blend existing portfolios to view expected and optimized returns and risk across five different currencies, and to discover correlations within their portfolios.

AAI also allows users to view cyclically adjusted price-to-earnings (CAPE) ratios across equity markets and compare them with each other, or compare current valuations against the historical range for each market.

During his demonstration, Masturzo used the AAI tool to show that, based on the Research Affiliates projections, increasing the volatility of a 60-40 portfolio by 14 percent by diversifying away from bonds and U.S. stocks is still not enough for it to reliably post 5 percent average annualized returns.

“Increasing volatility tolerance is a bad approach to achieving 5 percent real returns,” said Masturzo. “For those who want to do so, we believe you should approach a maverick approach to risk and add value beyond a passive approach by accessing contrarian advice within asset classes.”

Protectionists Are Wrong About Unemployment

My Comments: This doesn’t tell the whole story. But it helps. And, yes, this does have political implications.

Make America Great Again is a very complicated matter. What a surprise. And you thought it would be easy and would happen overnight after we drained the swamp. Well…

Donald Boudreaux is a senior fellow with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University, a Mercatus Center Board Member, a professor of economics and former economics-department chair at George Mason University. He writes:

What I think is missed is the average income for those employed. We know there is an increasing disparity between those at the top and those at the bottom. We have to find a way to turn this around, or there will be more than just rioting in the streets. It’s in our best interest to do this, not just for those in the middle and the bottom, but also for those at the top. If no one can afford what those at the top are offering, no one will buy it.

The following quote is from pages 30-31 of my Mercatus Center colleague Daniel Griswold’s excellent 2009 volume, Mad About Trade (footnotes excluded):

In the past four decades, during a time of expanding trade and globalization, the U.S. workforce and total employment have each roughly doubled…. Since 1970, the number of people employed in the U.S. economy has increased at an average annual rate of 2.22 percent, virtually the same as the 2.25 percent average annual growth in the labor force. Despite fears of lost jobs from trade, total employment in the U.S. economy during the recession year of 2008 was still 8.4 million workers higher than during the 2001 recession, 27.6 million more than during the 1991 recession, and 45.8 million more than the 1981-82 downturn.

Nor is there any long-term, upward trend in the unemployment rate. In fact, even counting the recession year of 2008, the average unemployment rate during the decade of the 2000s has been 5.1 percent. That rate compares to an average jobless rate of 5.8 percent in the go-go 1990s and 7.3 percent in the 1980s.

After decades of demographic upheaval, technological transformations, rising levels of trade, and recessions and recoveries, the U.S. economy has continued to add jobs, and the unemployment rate shows no long-term trend upward. Obviously, an increasingly globalized U.S. economy is perfectly compatible with a growing number of jobs and full employment.

The Next Recession

My Comments: It’s a given there will be a ‘next recession’. People much smarter than me say it’s not many months away. It’s a normal event and we’ll most likely survive.

What we may not survive, however, apart from a random collision with an asteroid, are the effects of income inequality across the planet and the massive debt overhang facing us in this country. Combine those two forces and you know there’s going to be chaos down the road.

Olivier Garret, Forbes Contributor / Jun 26, 2017

In the coming years, we will have to deal with the largest twin bubbles in history. It’s global debt (especially government debt) and the even larger bubble of government promises.

Together, these twin bubbles make up what investor John Mauldin calls “The Great Reset.” Nobody can tell how this crisis will play out, but one thing is for sure, it will affect everyone in a big way.

The Debt Burden Is at a Breaking Point

The mere existence of these bubbles has profound economic implications, as research shows high debt levels weigh heavily on economic growth.

The total debt-to-GDP ratio is at 248% today. The non-partisan Congressional Budget Office (CBO) projects it will rise to 280% by 2027. And that’s assuming nominal GDP grows at 4% per annum.

Despite the post-election optimism, nominal GDP growth in 2016 was just 2.95%—making it the fifth-worst year on record since 1948. There are no signs it will pick up soon either.

That means the reality may be even gloomier than what the CBO projects.

If a higher debt burden means lower growth, the recovery from the next recession, whenever it arrives, will be even slower than the last.

Now Count in Government Promises

Those sky-high debt-to-GDP ratios don’t factor in the unfunded liabilities—pensions, Medicare, and Social Security, which the US Government has promised to millions of Americans. Those total about $100 trillion today.

The chart below shows that by 2019 those unfunded liabilities, along with defense and interest, will consume ALL tax revenue:

Last year, the first baby boomers turned 70. The average boomer has just $136,000 in retirement savings. If that individual lives for 15 years after retirement, his annual income comes to just $9,000.

Because boomers are living longer and need income, they’re staying in the job market longer. The fastest employment growth now is among people 65 and older.

However, with 1.5 million boomers turning 70 every year for the next decade, a huge strain will be put on government finances in the form of pensions and Social Security.

But the pension crisis isn’t just in the US.

A Citibank report shows that the OECD countries face $78 trillion in unfunded pension liabilities. That is at least 50% more than their total GDP.

Pension obligations are growing faster than GDP in most, if not all, of those countries. Those obligations sit on top of a 325% global debt-to-GDP ratio.

Prepare in Advance

Politicians and central bankers could try to “fix” these problems in several ways.

They could default on the debt and pension obligations, or they could print money to fund them. There is no way of knowing ahead of time how these bubbles play out.
What we do know is the chosen approach will bring a different type of volatility and effect on the markets.

For investors, this will be a period of enormous volatility.

That’s why it’s essential to arm yourself with the knowledge of how to deal with this volatility ahead of time.

Growth Is Not Dead, But It Is Dying

My Comments: My post on May 26th last about Demographics and Money suggested reasons why economic growth in long established nations will be nothing to brag about going forward. Despite the current Administration suggesting a return to not just 3% annual growth for the US economy, but wait for it, 4% annual growth, it’s just not going to happen.

The tax plan outlined by the White House the other day makes the basic assumption that with high growth, tax revenues will grow to pay for everything. What is not said is that without significant growth, the hole we are in now will simply get deeper.

Right now the Federal deficit is almost $20T. That’s a staggering amount. Pretty soon, the annual cost to service that debt will be $1T per year. That money has to come from tax revenues, which means you and I. Are you prepared to pay your share when the top 1% get more tax breaks?

I’m far from a pacifist, but do we really need to keep paying more annually for our military than the next seven nation’s combined spending? Yes, some of that spending filters back into the economy and functions as a stimulus, but the Administration wants to spend more than we do now.

May 28, 2017 Lorenzo Fioramonti

Growth is dying as the silver bullet for success. Why this may be good thing

The idea that the economic “pie” can grow indefinitely is alluring. It means everybody can have a share without limiting anybody’s greed. Rampant inequality thus becomes socially acceptable because we hope the growth of the economy will eventually make everybody better off.

In my new book “Wellbeing Economy: Success in a World Without Growth” I point out that the “growth first” rule has dominated the world since the early 20th century. No other ideology has ever been so powerful: the obsession with growth even cut through both capitalist and socialist societies.

But what exactly is growth? Strangely enough, the notion has never been reasonably developed.

For common sense people, there is growth when – all things being equal – our overall wealth increases. Growth happens when we generate value that wasn’t there before: for instance, through the education of children, the improvement of our health or the preparation of food. A more educated, healthy and well-nourished person is certainly an example of growth.

If any of these activities generate some costs, either for us individually or for society, we should deduct them from the value we have created. In this logical approach, growth equals all gains minus all costs.

Paradoxically, our model of economic growth does exactly the opposite of what common sense suggests.

Negative values of growth

Here are some examples. If I sell my kidney for some cash, then the economy grows. But if I educate my kids, prepare and cook food for my community, improve the health conditions of my people, growth doesn’t happen.

If a country cuts and sells all its trees, it gets a boost in GDP. But nothing happens if it nurtures them.

If a country preserves open spaces like parks and nature reserves for the benefit of everybody, it does not see this increase in human and ecological wellbeing reflected in its economic performance. But if it privatises them, commercialising the resources therein and charging fees to users, then growth happens.

Preserving our infrastructure, making it durable, long-term and free adds nothing or only marginally to growth. Destroying it, rebuilding it and making people pay for using it gives the growth economy a bump forward.

Keeping people healthy has no value. Making them sick does. An effective and preventative public healthcare approach is suboptimal for growth: it’s better to have a highly unequal and dysfunctional system like in the US, which accounts for almost 20% of the country’s GDP.

Wars, conflicts, crime and corruption are friends of growth in so far as they force societies to build and buy weapons, to install security locks and to push up the prices of what government pays for tenders.

The earthquake in Fukushima like the Deep Water Horizon oil spill were manna for growth, as they required immense expenditure to clean up the mess and rebuild what was destroyed.

Disappearing growth

Against this pretty grim depiction, you may ask yourself: where is the good news? Well, the good news is that growth is disappearing, whether we like it or not. Economies are puffing along. Even China, the global locomotive, is running out of steam.

And consumption has reached limits in the so-called developed world, with fewer buyers for the commodities and goods exported by developing countries.
Energy is running out, particularly fossil fuels, and even if polluting energy sources were endless – as some supporters of shale gas, or fracking, suggest – global agreements to fight climate change require us to eliminate them soon.

As a consequence, mitigating climate change forces industrial production to contract, thus limiting growth even further. What this means is that, on the one hand, growth is disappearing due to the systemic contraction of the global economy. On the other, the future of the climate (and all of us on this planet) makes a return of growth, at least the conventional approach to industry-driven economic growth, politically and socially unacceptable.

Window of opportunity for change

Even the International Monetary Fund and mainstream neoliberal economists like Larry Summers agree that the global economy is entering a “secular stagnation”, which may very well be the dominant character of the 21st century.

This is a disastrous prospect for our economies, which have been designed to grow – or perish. But it is also a window of opportunity for change. With the disappearance of growth as the silver bullet to success, political leaders and their societies desperately need a new vision: a new narrative to engage with an uncertain future.

In my new book, I argue that as we begin to recognize the madness behind growth, we start exploring new paths. These include: forms of business that reconcile human needs with natural equilibria; production processes that emancipate people from the passive role of consumers; systems of social organisation at the local level that reconnect individuals with their communities and their ecosystems, while allowing them participate in a global network of active change makers.

This is what I call the “wellbeing economy”. In the wellbeing economy, development lies not in the exploitation of natural and human resources but in improving the quality and effectiveness of human-to-human and human-to-ecosystem interactions, supported by appropriate enabling technologies.

Fulfilling lives

Decades of research based on personal life evaluations, psychological dynamics, medical records and biological systems have produced a considerable amount of knowledge about what contributes to long and fulfilling lives.

The conclusion is: a healthy social and natural environment. As social animals, we thrive thanks to the quality and depth of our interconnectedness with friends and family as well as with our ecosystems. But of course, the quest for wellbeing is ultimately a personal one.

Only you can decide what it is. This is precisely why I believe that an economic system should empower people to choose for themselves. Contrary to the growth mantra, which has standardised development across the world, I believe an economy that aspires to achieve wellbeing should be designed but those who live it, in accordance with their values and motives.

Source article: http://theconversation.com/growth-is-dying-as-the-silver-bullet-for-success-why-this-may-be-good-thing-78427