The Haves, The Have Nots and the Dreamless Dead

By: Trader_Mark

A very nice piece via Reuters (quite lengthy - good for weekend reading to cheer you up) touching on themes we've been very early on.  In fact I am starting to see a lot of things in terms of income inequality, wealth concentration, loss of job security, fear of children living worse than their parents, failure of of creating "the American dream" for the masses, and such starting to pop up.

According to Internal Revenue Service data, income inequality in the U.S. is at its worst since the 1920s (before the Great Depression). The top percentile of wealthy Americans earned 21.2% of all income in 2005, up from 19% in 2004, while the bottom 50% of wage earners earned 12.8% that year, down from 13.4% a year earlier.

Maybe that's just a sign of the economic bottom? ;)

I've highlighted a Citigroup piece from 2005 many times, in which an analyst talked of the investment themes from the "Plutonomy" developing in our country. [Sep 7, 2009: Citigroup - America; A Modern Day Plutonomy] Indeed, this analyst (who has since upgraded to D.B.) is cited in the story - along with a host of well known pundits. Whatever the root reasons which surely will be argued over ad nauseum (I've voiced my opinions many times) the reality is little (if anything) is being done to change the course, and based on what I see in our political system - I don't see that changing for a long time. And frankly with globalization, much of the genie can NOT be put back in the bottle. So it's best to get used to it, and continue to find investing themes that cater to the quickly growing lower ranks and working poor, or the top end where all the wealth is shifting.

For those who do not believe it is "that bad" out there for many, I'd ask you to take away the modern day version of soup lines [Nov 10, 2009: Walmart Executive "There are Families Not Eating at the End of the Month"] [Nov 29, 2009: 1 in 4 Children, and 1 in 8 Americans Now on Food Stamps] and unemployment benefits and watch the chaos unfold. Or stop transfer payments (rather than wages) from being nearly 20% of income of the typical American. [May 25, 2010: 1 in 5.5 Dollars of American Income Now Via Government; All time High] Or have a situation where the states top source of income is ... wait for it... funny money from the federal government (which doesn't have the money either). [May 5, 2009: Federal Aid Surpasses Sales Taxes as Top Revenue Generator for States] But maybe the S&P 500 hits 3000 and we all become rich, pensions become fully funded, tax revenues soar, and we all live happily ever by having the Fed buy all the national debt. We don't have traditional prosperity anymore - we have paper printing prosperity. [May 19, 2009: Paper Printing Prosperity Defined] Did you know the Fed is poised to pass China as the largest holder of U.S. debt? The right hand buying from the left hand.... Banana Republic style.

Here is the link to the piece  - again as stock market speculators we reside in the upper pantheon of American society, and apparently the domestic economy no longer matters as long as we have Asians with our old jobs buying stuff from our multinationals ;)

[Warning: anything you read below may be construed as 'class warfare'] 

• Economists are only beginning to study the parallels between the 1920s and the most recent decade to try to understand why both periods ended in financial disaster. Their early findings suggest inequality may not directly cause crises, but it can be a contributing factor.
• This raises a host of social, economic and political questions. Should public policy aim to reduce inequality, and if so by what means? Does concentrated wealth at the top of the income spectrum generate asset bubbles, or vice versa? Could raising taxes or interest rates ward off financial meltdowns?
• Americans are generally not bothered by inequality because they believe with hard work, they, too, can strike it rich. Government policies aimed at spreading the wealth rarely get much support.    Those attitudes may be subtly shifting, although it is unclear that this is anything more than just a temporary knee-jerk reaction to the latest bout of turmoil.
• There is nowhere near majority backing for the sort of progressive New Deal policies passed during the Great Depression, which helped narrow the wealth gap and keep it contained until it resumed widening in the 1970s.
• America has one of the largest wealth gaps among advanced economies. Based on an inequality measure known as the Gini coefficient, the United States ranks on a par with developing countries such as Ivory Coast, Jamaica and Malaysia, according to the CIA World Factbook. 
• During the last period of economic expansion, 2002 to 2007, the top 1 percent enjoyed 10.1 percent annual income growth, adjusted for inflation. For the other 99 percent, the growth rate was just 1.3 percent, Saez found. That meant the top 1 percent received 65 cents of every dollar in income growth.
• "We need to decide as a society whether this increase in income inequality is efficient and acceptable and, if not, what mix of institutional reforms should be developed to counter it," he concluded.
• Raghuram Rajan, a professor at the University of Chicago's Booth School of Business and a former chief economist of the International Monetary Fund, believes governments tend to promote easy credit when inequality spikes to assuage middle-class anger about falling behind.  "One way to paper over the rising inequality was to lend so that people could spend," Rajan said.
• In the 1920s, it was expansion of farm credit, installment loans and home mortgages. In the last decade, it was leveraged borrowing and lending, by home buyers who put no money down or investment banks that lent out $30 for each $1 held.  
• Kemal Dervis, global economy and development division director at Brookings and a former economy minister for Turkey, said reducing inequality isn't just a matter of fairness or morality. An economy based on consumption needs consumers, and if too much wealth is concentrated at the top there may be times when there is not enough demand to support growth.  (this goes back to when Henry Ford decided those who built the cars should be paid a wage where they could actually afford the product they created - now we are moving the other direction as a society)
• "There may be demand for private jets and yachts, but you need a healthy middle-income group (to drive consumption of basic goods)," he said. "In the golden age of capitalism, in the 1950s and 60s, everyone shared in income growth."
• Ajay Kapur, a Deutsche Bank strategist, spotted the inequality parallels between the 1920s and the most recent decade, but didn't see the meltdown coming. The former Citigroup strategist created a stir five years ago when he built an investment strategy around his thesis that essentially divided the world into two camps: the rich and the rest. 
• Kapur told clients in 2005 that the United States and a handful of other economies were developing into "plutonomies" where the wealthy few powered economic growth and consumed much of its bounty, while the "multitudinous many" shared the leftovers. 
• Plutonomies come around only once or twice a century, he argued -- 16th century Spain, 17th century Holland, the Gilded Age. The last time it happened in the United States was during the "Roaring 1920s".
• "When I presented this to clients, they said, 'Okay, this is interesting because you're telling me what happened in the 1920s is happening right now, and you obviously know what happened after 1929, right?'," Kapur said in an interview.  His response? That can't happen again because we know better now.  (oopsie)  

Of course the difference between the solutions post 29 meltdown and 08 meltdown, is the the solutions this time around were to bail out those in the upper tranche and concentrate even more wealth into the 'chosen' class.  For this we should be 'thankful'.  Whereas the extreme damage of the 1930s which was NOT used as  template to save the largest campaign contributors economy, set the stage for a more equitable society 2 generations hence.   Of course, even that is debatable in our hyper political culture.

By Trader Mark

http://www.fundmymutualfund.com

Mark is a self taught private investor who operates the website Fund My Mutual Fund (http://www.fundmymutualfund.com); a daily mix of market, economic, and stock specific commentary.

See our story as told in Barron's Magazine [A New Kind of Fund Manager] (July 28, 2008)

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