Mid-May 2013 Blog Update of THE GREAT DEPRESSION of DEBT

Note that my new novel “The Child Remover” is now available on Amazon as both a paperback and in a Kindle version. 

HAVE WEALTH AND WAGE DISPARITY REACHED THEIR LIMITS?

In the economic recovery from 2009 through 2011, the mean net worth of households in the upper 7% of the wealth distribution rose by 28%, while the mean net worth of households in the lower 93% dropped by 4%, according to a Pew Research Center analysis of newly released Census Bureau data.  This was largely due to the stock market going up while housing prices were stagnant or dropping slightly.  Ordinary people have most of their wealth in housing.

Since the beginning of 2011, median housing prices have rebounded (+10% through Feb).  But the stock market rebounded even more (+19%) in the same time period.  So the disparity of wealth between the haves and have-nots has likely grown even wider.  A recent article in The New York Times (http://www.nytimes.com/interactive/2013/04/26/business/Widening-Inequality-In-Wages.html?ref=economy) shows the same growing disparity in incomes. 

How much longer are the have-nots going to put up with this? History shows that this is a recipe for disaster.  Are we seeing the first signs of rebellion by cheap labor with the recent strikes by those working in fast food industries across the country?  National chains like McDonald’s, Wendy’s, and Subway have been affected.  Of special note is that a McDonald’s in Detroit brought in replacement workers to replace strikers, and they also walked off the job!  Workers are demanding $15 an hour versus the $7.40 per hour many are currently paid.  Workers maintain that no one can support a family on $7.40 per hour.  And workers are demanding the right to form a union!

According to the 2011 Bureau of Labor Statistics, there are approximately 2.8 million people employed in food preparation and serving jobs, which include fast food.  This is roughly 9% of the US workforce, so this is not a trivial group to be messing with.  And 5.4% of those workers are college graduates, which gives these workers even more motivation to strike since they are so underutilized versus their education levels.  And their education may give them some leadership skills on motivating other workers to walk.

An interesting observation is that these “strikes” occurred without having a union or any one overall leader.  Apparently the new social media is enough to get this level of action from workers.  This does not bode well for companies wanting to stop unions.  Even states like South Carolina (that has a mantra of “don’t go to China when you can get cheap non-union labor here”) will not be able to flip burgers at low cost for other states as SC does in manufacturing or assembly work.

ANOTHER DISPARITY EXAMPLE – RESPONSE TO SEQUESTER

When air travelers were inconvenienced by hour or more delays, Congress promptly modified the Sequester provision that caused the delay.  But federal funding for senior nutrition has also been reduced, meaning less food for poor people. The Meals On Wheels Association of America puts the loss at 19 million meals.  Congress seems to have no interest in addressing the meal problem.  I guess in the US a business person (or Congressman) being delayed an hour or two is more of a tragedy than poor old people going hungry! 

Sadly, the Sequester probably wasn’t even needed.  The annual deficit has fallen 32% over the first seven months of this fiscal year compared to the same period last year, according to the Congressional Budget Office.  The major reason is the increase in tax revenues.  And that does not include the $59 billion that bailed out Fannie Mae just announced that they are sending the government.  Although we still have a deficit, it is improving and we certainly don’t need the negative stimulus of the Sequester.

ANOTHER DISPARITY PROBLEM – CONTINUING TAX BREAKS FOR WEALTHY COMPANIES

Apple went $17 billion into debt to pay its shareholders a dividend despite having $145 billion in cash.  It did this because a large amount of Apple’s cash is overseas, and Apple would have had to pay an estimated $9 billion in taxes if it brought the needed funds back into the U.S.  It was cheaper for Apple just to sell bonds for its needed extra cash.

The U.S. continues to enable companies to play such tax sheltering games while the U.S. is desperate to use the taxes to reduce the deficit, pay off debts, or increase stimuli to put people back to work.  But hey, companies are people too!

A PREDICTABLE REACTION TO EXTREME DISPARITY

There have been many recent articles about how people are getting used to living on less, and living-on-the-cheap is becoming a socially acceptable life style.  The problem with this (related to U.S. economic growth) is that once frugality is embraced, it isn’t easily reversed.  Are there any of us who have not seen the reluctance of those who lived through the Great Depression to spend, even when later they had huge savings? 

An online poll of 1,538 people conducted March 4-8 by Reuters/Ipsos (http://www.huffingtonpost.com/2013/03/12/cut-monthly-spending_n_2862080.html) found that two-thirds of adults say they are cutting their monthly spending and almost all of the rest say their spending is little changed.

SO WHAT DOES ALL THIS MEAN?

If the fast food workers are successful in unionizing and driving up their wages, the cost of fast food will go up.  The workers on the next higher wage tier will see themselves passed in wages by the fast food people, so they will also demand higher wages.  People worry about the Fed printing money and eventually triggering inflation, but a wage spiral driven by unionism can do the same thing. 

If people continue cutting back on spending, companies will see business decline.  To keep profits up, companies will have to raise prices, triggering inflation.

The wealthy have been very successful in driving up wage disparity and keeping their wealth through tax loopholes.  They have achieved these loopholes by buying politicians and even buying the courts.  But the wealthy will be powerless against the huge forces of the masses if the have-nots get fed up and start demanding what they see as their fair share.  Kings, tyrants, and dictators all learned this lesson in the past.  Capitalists will too!  Without a doubt! 

When will this rebellion occur?  I suspect it has already started with the fast food people.  How fast will the movement grow?  I don’t know.  But I suspect that once these workers taste victory in forcing higher wages, which could be within a year or two, the floodgates of unionism will open.  Then, man the lifeboats and watch the stock market fall!  We will have inflation with a slowing economy.

WILL THE REPUBLICAN PARTY BE DESTROYED BY THE NEWTOWN TRAGEDY?

The families of those killed in the Newtown tragedy want some action, even if it is a largely token expansion of background checks of gun purchasers (which is supported by 85% to 90% of people) and perhaps some limit on gun magazines.  Not only did Congress (mostly Republicans) successfully stop all action on this, some local Republican groups are literally making a mockery of any actions involving restrictions on assault rifles.  For example, the SC Bluffton Republican Club is conducting a raffle on an AR-15 assault rifle, with two 30-round magazines thrown in to whet the appetites and excite prospective ticket buyers.

Republicans should learn from the history of MADD (Mothers Against Drunk Driving.)  Beckie Brown, who started MADD, became involved when her son died at age 18 from injuries suffered in a traffic crash involving a drunk driver.  MADD has grown into a very successful non-profit group that has made huge changes in the way the US deals with drunk drivers.  There were 26 people killed at Newtown by an assault rifle (don’t email me that guns don’t kill), and those 26 people have families just as motivated by their losses as Beckie Brown was when she took on drunk driving laws.  Republicans just don’t realize the limitless energies of a grieving family, especially a mother who has lost her young child, to take on all who stand in their way.  And many of these families have the financial resources, the education, and the political backing of people like VP Biden in their battle.  The Gun Manufacturer’s lobby (the NRA) won’t know what hit them when the dust settles, and neither will many Republicans.  Sure, representatives from states like South Carolina won’t be affected.  Someone says “2nd amendment” in SC and the people, including their Representatives, all bring out their assault rifles, their pit bulls, their confederate flags, and give a hearty rebel yell. 

But there are many states not quite that radical.  And Senators in those states will be targeted and will pay the price.  For example, for the following targeted four Senators that voted against background checks, polls show that Sens. Kelly Ayotte (R-N.H.), Mark Begich (D-Alaska), Max Baucus (D-Mont.) and Lisa Murkowski (R-Alaska) have seen precipitous drops in their approval ratings.  I am sure that more than a few other Senators that voted against background checks have taken note.

By the way, Republicans will also be blamed for the coming bad effects of the Sequester.  Next year’s elections will bring tears to the eyes of many Republicans.

WHAT SHOULD AN INVESTOR DO?

I should note that I do own a small amount of stock in a company that is shale drilling in North Dakota.  But the rest of my money is in money market funds.  I no longer own the ETF TIP.  I may buy TIPS directly from the government eventually, but only when the base interest rate goes up.

I make no claims on knowing what others should do with their money.  I think that it may be a great time to buy a home if you need one, because mortgage rates are so low and home prices are at their historical mean.  Other than that, it may be best to rely on old fashioned savings going into cash (money market?), and then eventually buying TIP directly from the government once you see inflation raising its ugly head. 

As always, people should use their own judgment/data to affect their own investment strategies; and they should not blindly use the above information.  Intelligent people can, and do, disagree.

Advertisements

11 Responses to “Mid-May 2013 Blog Update of THE GREAT DEPRESSION of DEBT”

  1. John S Says:

    Hello warren,

    Thank you for your insight,an unbiased opinion. Please elaborate on real estate situation and impending movement of interest rate,its time frame and its ramifications.

    Thank you.

  2. tom Says:

    The government intends to introduce variable rate bonds in January 2014. It looks like they know inflation is coming.

  3. goshdig Says:

    Hi Warren,
    Would you share with us your decision for switching from TIPS to money market funds?

  4. wbrussee Says:

    goshdig Says: “Would you share with us your decision for switching from TIPS to money market funds?”

    It was not TIPS (sold directly by the government) I sold. It was the Electronic Traded Fund (ETF) TIP, which is stock. TIP has done very well for me since I first started buying it in 2005. But one of the main reasons TIP did well was NOT because inflation was high during those years. It was because the earlier TIPS which were purchased by the ETF TIP had a base interest rate as high as 4%. This made the older TIPS held by the ETF worth more, since the current TIPS have a base rate of close to zero and actually sell at a negative rate.

    But let’s assume that inflation starts to take off and people start to buy other Treasuries with fixed higher long-term rates rather than TIPS, or they buy other stocks. Then, to attract people to TIPS, the government will have to raise the base rate on TIPS, as they did before. That will make the older TIPS with zero base rates less attractive, and therefore the price of the ETF TIP will go down. So, anyone owning TIP in the coming years might experience the exact opposite of what I experienced the last eight years.

    Of course, if inflation doesn’t take off, then the above scenario won’t happen. Or, if people continue to buy TIPS no matter what. So, who knows? But you can see what I am betting on.

  5. Gary-in-VA Says:

    Hi Warren,

    It is always a pleasure to read your insights.

    As for where we are going as a society, the generational book The Fourth Turning, compares these times to the Viet Nam period. Lots of turmoil, with the troubles coming from the right instead of the left.

    So there is hope that we are just in a destructive phase. However, this time it will be the Republican Party that will have to journey in the wilderness for a period of time.

    I often wondered what happened to bring Rome down. While there are many citing moral decay, it seems to me to be plain and simple greed among all of us, but expecially amount the capitalistic wealthy. There is too much of “let them eat cake” and they “deserve to suffer” in America today.

    But you have to admit, these times provide each of us a chance to get clear on what we think, and what we will do.

  6. wbrussee Says:

    Gary-in-VA Says: “…there is hope that we are just in a destructive phase. However, this time it will be the Republican Party that will have to journey in the wilderness for a period of time.”

    I believe that in the long run, and that could be in only two or three years, the US economy will take off due to the energy independence that more and more experts are now agreeing that the US is heading for. But yes, in the meantime, The Republican Party will have to figure out how to get back into the mainstream.

    Gary-in-VA also says: “…these times provide each of us a chance to get clear on what we think, and what we will do.”

    But how many people have already made up their minds on everything of importance and are unlikely to change their minds no matter what. For example, polls showed that 90% of people wanted to broaden the background checks for people buying guns, yet Republicans in the House voted against it.

  7. Bill Says:

  8. theeconomicfractalist Says:

    Above crystallizes the problem with the financialized leveraged asset debt system.

    Medical school positions are hard to come by.

    A physician is lured away from a societally useful occupation ….
    to speculate in the financialized bubble world of London, Brussell and Wall Street where money is used merely to make additional money.

    Not only is there no lasting benefit to the real citizen economy by this gaming activity, there are real long term adverse consequences for the useful citizen based asset debt system – as citizen job related money is transferred during bubble collapses into the hands of the fraudulent few and as after 2009 citizens are left with massive debt relative to their wages on grossly overvalued mortgages.

    This guy was ‘smart’ enough to go short on bad subprime investment.

    He made a lot speculative money it.

    That’s his claim to fame and the reason he is addressing graduating economic majors.

    What’s his message?

    The government is inept at running the system and you can make a lot of money by just gaming the system without having to do anything really useful in life for your fellow citizens.

    It is a sign of the financialized leveraged asset debt system times – that he would be asked to provide inspiration for graduating economy majors.

  9. Albert Says:

    What money market fund are you currently putting your money in? Aren’t these funds paying next to nothing or less than .25 %? With the recent uptick in the 10 year treasury bond the so called conservative short term bond funds are going negative.

  10. wbrussee Says:

    Albert Says: “What money market fund are you currently putting your money in? Aren’t these funds paying next to nothing or less than .25 %?”

    Right! They are paying zilch. I sold my TIP and put the money into a money market fund until I see something I want to buy. Being out of TIP for the last three months has saved me from a 7% loss, which I am very happy about, especially since I had gained 55% on TIP over the previous 8 years. A zero percent yield for three months is MUCH better than a 7% loss!

  11. Albert Says:

    Warren,

    You timed the TIP sell perfectly. Today I noticed the Dow closed down over 100 points and the 10 year bond went up. Usually when there is a sell off in the stock market the 10 year bond goes down. That corrrelation seems to have stopped…. Is the FEDS losing control of the bond market and mortgage interest rates? Is this a trend? Are we on the verge of something cracking in the stock or credit market?

    Albert

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: