The Poverty and Inequality Party

Between 2001 and 2008 it was impossible to discuss economic issues with a liberal without getting a stentorious sermon about the evils of the “Bush tax cuts for the rich” and the resulting surge in income inequality. Now the Bush years are looking like the “good old days” because poverty and inequality have surged under Obama, even though we are in the sixth year of economic expansion and high earners were hit in 2013 with two big tax hikes that were supposed to reduce inequality:

  • A tax rate of 39.6% (up from 35%) on incomes above $400,000 for single filers and $450,000 for joint filers.
  • Obamacare imposed an extra 3.8% tax on capital gains and dividend income for filers who have above $200,000 (single) and $250,000 (joint filers) in adjusted gross income.

The Fed and Census Agree: Obamanomics Sucks

Two authoritative studies released earlier this month document the increase in poverty and inequality under Obama. The Federal Reserve’s Survey of Consumer Finances, which examines in minute detail changes in Americans’ finances from 2010 to 2013, discovered a big increase in income inequality. Specifically:

  • “Between 2010 and 2013, mean (overall average) family income rose 4 percent in real terms, but median income fell 5 percent, consistent with increasing income concentration during this period.” (emphasis mine)
  • “Families at the bottom of the income distribution saw continued substantial declines in average real incomes between 2010 and 2013, continuing the trend observed between the 2007 and 2010 surveys.”
  • Only families at the very top of the income distribution saw widespread income gains between 2010 and 2013, although mean and median incomes were still below 2007 levels.” Most of the gains were in the top 3% of the income distribution.
  • As I detailed in a recent post, Main Street small businesses have suffered under Obama, with the exception of businesses owned by rich people.

Then we have the annual publication from the U.S. Census, Income and Poverty in the United States: 2013. A few highlights:

  • During the Bush years 2001-2008 (which included a slow recovery from the 2001 recession and the start of the 2008 recession), median household income averaged $55,230. In 2013 it was just $51,939, or 6% less. For blacks it declined by 8%, from $37,621 to $34,775.
  • The poverty rate, which averaged 12.45% under Bush, was much higher in 2013 at 14.5%. Six years into an economic expansion, the poverty rate is still at a recessionary level, equal to the recessions of 1980-83 and 1991-93 and above the level in 2001.
  • Inequality has climbed. The ever popular Gini coefficient rose from an average of 467 in the Bush years to 476 in 2013.
  • Another way to measure inequality is to ask “How much more does a rich guy in the 95th percentile of the income distribution earn, compared to the median or 50th percentile?” This metric has also climbed sharply. During the Bush years, it averaged 3.56; now it is 3.78x, meaning if the median guy earns $50,000 the rich guy earns $189,000, up from $178,000 in the Bush years.

Part-time Nation

Bottom line: Obamanomics has been a disaster for the poor and middle class. Tax increases, Obamacare, Dodd Frank, Obama’s anti-business rants, the war on fossil fuels, bank shake-downs, absence of tax reform or foreign trade deals—the litany of economic malpractice is too familiar to dwell on. With one exception: the shift to a part-time labor force was a major driver of the drop in median incomes. In the WSJ, William A. Galston notes “In 2007, 108.6 million Americans were working full time, year round; in 2013 only 105.9 million were doing so….[from 2007 to 2013] the number of Americans working part time who wanted a full-time job jumped to 7.2 million from 4.6 million.” (Note that the 2.7 million decline in the full-time workforce is virtually the same as the 2.6 million rise in the part-time workforce.)

Like other liberals, Galston ignores the obvious role of Obamacare in corrupting the U.S. job market, even though the Congressional Budget Office estimates the law will cut the equivalent of two million jobs as people elect not to work in order to get benefits. Obviously low-income people will remain poor and dependent if they are not working full time.

The Prosperity and Opportunity Party

The challenge for Republicans is obvious but, for them, daunting: Convince voters, in an optimistic, forward-looking, Reaganesque way, that the GOP’s pro-growth policies will dramatically improve economic conditions for poor and middle class voters, men and women alike. More and better jobs. Lower energy costs. Lower taxes. Less burdensome regulation. More opportunity for their kids. Republicans need to be articulate, specific, and persuasive, going beyond stock slogans like “free enterprise” and “job creators” and “where are the jobs?” and “crony capitalism” to a clear and compelling description of steps they will take to improve the economy for the middle class. The emphasis should be on helping workers who have been screwed by rich Democrats.

Copyright Thomas Doerflinger 2014. All Rights Reserved.

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Gross-Out: End of an Era

The news flash crossed the wires at 8.29 AM. CNBC’s Becky Quick was astounded. Bloomberg’s Tom Keene was stunned. They had to double-check that the William H. Gross joining Janus Funds was indeed THE William H. Gross, bond king, whom they had interviewed many times. The answer was YES—the Two Billion Dollar Man was leaving Pimco, the firm he founded.

Why should we care? That’s a real good question, unless you happen to own shares in Janus or Allianz, owner of Pimco.

Here’s the answer. This Gross-Out signals the end of an era, an era of ever lower bond yields and higher bond prices. Yields have been dropping for a long, long, long, long time. Back in the early 1990s I helped write a bullish report on the bond market (the theme and title were conceived by my co-author, Edward Kerschner). The report’s daring title was “Six in ’96,” and it was followed in due course by “Five at the Turn” (of the century) and then “Fours Before Long.” We never thought to write a report called “One and Not Yet Done,” which is now appropriate for the 10-year German Bund.

Anyhow, the era of ever-rising bond prices, which Mr. Gross brilliantly rode to fortune and fame, is very probably over, at least in the U.S. QE bond buying by the Fed is about to end. The U.S. economy is finally strengthening. Unemployment is fairly low. The Fed will start to tighten next year. Bond prices will stop rising. I admit they may not decline all that much, what with inflation restrained by the strong dollar and foreign bond yields depressed by deflationary pressures in Europe, China and Emerging Markets. So maybe bond yields gradually drift higher from 2.5% to 3.5% over the next year or two. That is still a difficult bond market in which to produce attractive returns for mutual fund investors.

A Parade of Gurus

Historical perspective is useful. Bill Gross is just the latest celebrity fund manager whose brilliant career coincided with a specific phase of the financial markets.

  • In the late 1920s mega-bulls Billy Durant (founder of General Motors) and John Jacob Raskob (who engineered DuPont’s purchase of a large stake in GM) mesmerized the public with investment wisdom, which turbo-charged their speculative positions. A favorite forum was the deck of an ocean liner, where Durant would regale financial reporters before he set sail for Europe. A bullish interview that Raskob gave The Lady’s Home Journal was immortalized in an article titled “Everybody Ought to Be Rich.” Unfortunately it appeared two months before the 1929 crash.
  • In the “go-go” stock market of the late 1960s, the Manhattan Fund of Gerald Tsai (rhymes with “die”) personified the “performance” mutual fund of the era, which beat the market by trading tech stocks and conglomerates.
  • The leading guru of the dismal 1970s was Henry Kaufman, “Dr. Doom.” He kicked off the great bull market in August 1982 when, as Salomon Brothers’ Chief Economist, he became more bullish on bonds.
  • The celebrity fund manager of the 1980s was Peter Lynch, the brilliant stock picker who ran Fidelity’s Magellan Fund. His approach was strictly bottom-up: “If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.”
  • A variety of strategists and fund managers became “household names” during the tech bubble of the 1990s. (Bearish strategists tended to lose their jobs.)
  • During the financial crisis, when bonds soared and stocks soured, it was all about macro insights, not stock selection. Bill Gross was a star commentator on Fed policy, bank balance sheets, the fate of the Euro, the risk of deflation, and the direction of interest rates.

As markets change, financial market celebrities who hitch their wagon to a certain phase inevitably fade into obscurity, though not poverty. Gerald Tsai parted ways with his Manhattan Fund during the bear market year 1973. Henry Kaufman eventually resigned from Salomon to start his own firm. After Peter Lynch left, Magellan Fund struggled under a succession of managers; today, few people on Wall Street are aware of who is managing that portfolio.

Dance of the Money Bees

Step back and contemplate how weird this all is.

After all, investing occurs throughout the economy, not just stocks and bonds. But there is no famous “strip mall king” or publicly celebrated “garden apartment queen” or widely quoted “elevated parking structure guru” even though there are smart people who have made oodles of money investing in those properties. Stocks and bonds are different because they constitute a participatory spectator sport—not unlike fantasy football. With just a few dollars John and Jane Q Public can participate, and the media is constantly commenting, especially these days when there are three business channels on cable TV. The media, in concert with ubiquitous gurus like Bill Gross, whip up excitement in whatever part of the market is glamorous now.

Shrewd New York investor John Train called this process, “the dance of the money bees” (the title of one of his books). By watching the coming and going of celebrity fund managers and financial gurus, we can get some sense of where markets are headed. Today’s fixation on the Gross Out shows the media is behind the times. The next generation of celebrity investors will run stock funds, not bond funds.

Copyright Thomas Doerflinger 2014. All Rights Reserved.

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Federal Reserve: Main Street Small Business Has Struggled Under Obama

President Obama likes to say the U.S. economy performs best when it grows “from the middle out.”  Unfortunately an exhaustive Federal Reserve study shows middle class entrepreneurs have struggled during this recovery, even as big business thrived. Every three years the Fed conducts a “Survey of Consumer Finances” based on detailed interviews with about 6,500 Americans. A little-noticed topic is ownership of “business equity,”— “small businesses” as distinct from largely companies whose shares are publicly traded. This represents a big chunk of the U.S. economy; about an eighth of families own this type of property, and holdings have an average value of about $1 million (although the median value is much smaller).

The Survey demonstrates that the typical small business fared poorly during the putative “economy recovery” between 2010 and 2013:

  • The percentage of families owning “business equity” plunged to 11.7% in 2013 from 13.3% in 2010. This was the biggest three-year decline on record, and 11.7% is the lowest figure on record, well below the average of 13.4% in the prior eight surveys. (The survey has been done every three years since 1989, so there are data for nine years.)
  • The median value of “Business Equity” plunged 20%, from $84,400 in 2010 to $67,500 in 2013, which was the second lowest level of the nine years—only 1995 was lower, at $45,500. The average figure for 2001, 2004, 2007, and 2010 was $93,000, or a huge 39% above the 2013 level. (All figures are in 2013 dollars.)
  • The median value declined sharply, by more than 30%, in every family income group except the top decile, where the median value rose slightly. Specifically, here is the change in the median value of business equity, from 2010 to 2013, by income group:
    • Lowest 20 percentile of family income: median value of equity fell 34.3%.
    • 20th to 40th percentile: median value fell 31.7%
    • 40th to 60th percentile: median value fell 46%
    • 60th to 80th percentile: median value fell 31%
    • 80th to 90th percentile: median value fell 37.7%
    • Top 10%: median value rose 2.5%
  • The story is different when we look at the mean value of families’ holdings of “business equity.” For all families, between 2010 and 2013 the mean value rebounded 15.3% to $973,900. This was still well below the 2007 level of $1,062,500. The mean figure has recovered while the median did not because rich people are doing quite well under President Obama.
  • Despite the overall rise in the mean value of business equity, it nevertheless declined sharply for low income groups between 2010 and 2013 even as it rose for richer folks:
    • Lowest 20 percentile of family income: mean value of equity fell 11.0%.
    • 20th to 40th percentile of family income: mean value fell 32.6%
    • 40th to 60th percentile: mean value fell 31.9%
    • 60th to 80th percentile: mean value rose 16.5%
    • 80th to 90th percentile: mean value rose 25.6%
    • Top 10%: mean value rose 13%

Note that people who both A) own “business equity” and B) are in the top 10% of the income distribution are quite rich. The median value of their business equity is $500,000 and the average value is $2,576,000. Of course, this represents only a portion of their total assets; they also own real estate, stocks, bonds, bank accounts, vehicles, etc. Clearly they are among the “millionaires and billionaires” Obama used to vilify until that phrase became too tired and trite even for him. It’s ironic that his supposedly equalitarian policies have hurt the middle class while the rich and well-connected continue to prosper. This is a major reason why hiring has been so weak in this economic expansion.

Copyright Thomas Doerflinger 2014. All Rights Reserved.

Note on Sources: Articles on each of the Surveys of Consumer Finance (done for 1989, 1992, 1995, 1998, 2001, 2004, 2007, 2010, 2013) are available on the Web. But the most convenient source is the 2013 SCF Chartbook, which has consistent information in 2013 dollars for all nine years, including charts and data for all survey items.


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Courageous Kareem Contradicts Racial Correctness

USA Today called it a “racist e-mail.”

CNN called it a “racially charged e-mail”

In three separate articles, The New York Times called it “a racially charged memo,” “racially insensitive views,” and evidence of “deeply rooted racism.”

Sports Illustrated said it contained “a series of ignorant, racially insensitive remarks.”

Those are the types of statements basketball great Kareem Abdul-Jabbar was referring to when he wrote:

“Well, the pitchforks are already sharpened and the torches lit anyway, so rather than let them go to waste, why not drag another so-called racist before the court of public opinion and see how much ratings-bragging, head-shaking and race-shaming we can squeeze out of it? After all, the media got so much gleeful, hand-wringing mileage out of Don Sterling and Michael Brown.”

I applaud Mr. Abdul-Jabbar for courageously denouncing the paternalistic forces of racial correctness, who attacked Atlanta Hawks co-owner Bruce Levenson for writing a memo to business partners that, in fact, reveals no racist views. Quite the opposite. I refer you to Abdul-Jabbar’s incisive article in Time Magazine, where he argues Levenson’s e-mail was an “entirely reasonable” discussion of how the Atlanta Hawks franchise could increase revenue by attracting more white fans to the arena. (Google “abdul-jabbar bruce levenson email.”)

Lessons to be Learned

In the over-wrought world of political and racial correctness, actual words – what someone actually said or wrote – does not really matter. If someone “takes offense,” then the remarks are “racially charged,” ”racially insensitive” and even “racist.” Off with his head.

By no means is this always about blacks taking offense from the remarks of whites. Juan Williams (did I mention he’s black?!) lost his job at NPR because he said he got nervous when Arabs got on an airplane. Forget the 9/11 attacks, the Fort Hood massacre, the Boston Marathon bombing and dozens of other attacks by Islamic terrorists on innocents of all faiths; in NPR-land Williams’ remarks reeked of “Islamophobia.” He had to go.

What Levenson Actually Said—the Opposite of Racism

As a business historian who has read thousands of business letters (mostly by 18th century merchants), I find Levenson’s memo interesting reading. Operating in the real world of making a buck in the Atlanta entertainment market, he was simply trying to figure out how to attract more fans to Atlanta Hawks games. If you actually read what he said, as Abdul-Jabbar did and most reporters apparently did not, you can easily see he was not racist. He merely made the error of recognizing cultural and economic “facts on the ground.”

Levenson starts by observing that “from day one I have been impressed with the friendliness and professionalism of the arena staff—food vendors, ushers, ticket takers, etc.” Because the Phillips arena is in a neighborhood with a large black population, I am pretty certain many of these employees whom Levenson praised are black. No sign of racism there.

Then he considers “why our season ticket base is so small.” Speaking as a money-grubbing stock market investor, I would note that Levenson is talking here about the “Holy Grail” of running a business—recurring revenue. Every business craves it. Rain or shine, heat wave or snowstorm, winning season or cellar dwelling, the revenue of season ticket-holders rolls in.

So Levenson wonders, why does the Hawks’ season ticket revenue suck, compared to other basketball teams? “I was told it was because we can’t get 35-55 white males and corporations to buy season tickets and they are the primary demo for season tickets around the league. When I pushed further, folks generally shrugged their shoulders. Then I start looking around our arena during games and notice the following:

–it’s 70 pct black

–the cheerleaders are black

–the music is hop hop

–at the bars it’s 90 pct black

–there are few fathers and sons at the games

–we are doing after game concerts that attract more fans and the concerns are either hip hop or gospel”

Levenson goes on, “My theory is that the black crowd scared away the whites and there are simply not enough affluent black fans to build a significant season ticket base. Please don’t get me wrong. There was nothing threatening going on in the arena back then. I never felt uncomfortable. But I think southern whites simply were not comfortable being in an arena or at a bar where they were in the minority. On fan sites I would read comments about how dangerous it is around Phillips [the Hawks’ arena] yet in our 9 years I don’t know of a mugging or even a pick pocket incident. This was just racist garbage. When I hear some people saying the arena is in the wrong place I think it is code for there are too many blacks at the game.”

He concludes, “This is obviously a sensitive topic, but sadly I think it is far and away the number one reason our season ticket base is so low.”

It is obvious that Levenson is not racist or even racially insensitive:

  • He is trying to attract more whites to Hawks games, which would increase the racial diversity of the audience. So he is promoting desegregation, a primary goal of the civil rights movement. No racism there; quite the opposite.
  • He denounces as “racist garbage” the suggestion that crime is high at the arena. No racism there.
  • He dismisses as “code for there being too many blacks at the game” the fact that “some people [say] the arena is in the wrong place.” No racism there; quite the opposite.
  • He observes that “southern whites” were uncomfortable going to games where a majority of the crowd was black, and entertainment extras such as the music and cheerleaders were oriented toward black tastes. Recognizing southern whites’ aversion to being a racial minority at the arena definitely does not reveal racism on Levenson’s part.
  • He acknowledges all this is a “sensitive topic” and it is sad that affluent whites are not keen to go to games where the majority of spectators are black. No racism there; quite the opposite.

So, as Abdul-Jabbar observed, there is no evidence of racist sentiments in Levenson’s e-mail. He is just recognizing on-the-ground-in-Atlanta economic and cultural realities that are depressing season ticket revenue.

What We Really Have Here is Fear of Racial Equality

The media’s rush to brand Levenson’s comments as racist actually reveals their own racial paternalism. They cannot conceive of Atlanta’s black population being treated as just another demographic segment of the market that can be discussed by a down-to-earth, real-world entrepreneur person as he or she would discuss any other market segment – fashion-conscious women, middle class homeowners, college grads in their 20s, working class Hispanics, wealthy golfers, whatever.

Copyright Thomas Doerflinger 2014. All Rights Reserved.

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Wall Street Strategists Are Disturbingly Bullish

Barron’s is out with its always interesting “back to school” early September survey of Wall Street strategists, hailing from both the buy side and sell side. Though the samples size of nine is a bit small (where are Deutsche, U BS, Credit Suisse & JPM?) it is a useful compendium of apples-to-apples figures on what strategists are telling clients.

The take of Barron’s writers on the results is that strategists are bullish, and I don’t disagree. However, if we actually scrutinize their numbers, the strategists are saying we won’t get further stock price gains this year—even though the fourth quarters of mid-term election years tend to be strong. Their average year-end 2014 price target for the S&P 500 is 2011, virtually even with the current level. Only two of the nine houses look for material gains from here (in both cases, up 5% to 2100).

Here are the raw numbers. (I use averages for the nine strategists; median figures are virtually the same.)

2014 year-end price target for S&P 500          2011

2014 S&P 500 EPS                                               117.5

2015 S&P 500 EPS                                              126.8

2014 year-end trailing PE                                 17.1

2014 year-end forward PE                                15.9

2015 S&P 500 EPS growth                                7.9%


The “Fair PE” Rises 20% in Two Years(?!)

The strategists’ idea of what is a “reasonable PE ratio” has increased a lot in two years. In early September 2012, their 2012 year-end target implied a trailing PE of 13.8x (versus 17.1x now) and a forward PE of 13.2x (versus 15.0x now). So, the strategists are using PE targets that are 20% higher than two years ago.

This is not at all surprising to me. I pointed out two years ago that “Wall Street’s strategists are using PE assumptions that are very conservative by historical standards, particularly considering that we are in a low-inflation, low-interest rate environment.” (Emphasis in original.) I argued that “Muted Expectations Could Set the Stage for a Positive Stock Market Surprise,” which was the title of my September 2012 post. (Admittedly, I was right partly for the wrong reason; I suggested a Romney Ryan victory would trigger an upward “re-rating” of equities.)

S&P 500 at 2170 Sixteen Months from Now?

If we apply the strategists’ now rather lofty PE assumptions to their 2015 EPS figures, they are looking for a 2015 year-end price target of 2170 (17.1*126.8).

Their earnings forecasts look reasonable. The 117.5 for 2014 looks a little low, but the 7.9% growth expected for next year is fairly bullish, given elevated profit margins, mounting wage pressure in some industries, higher stock prices that mute the benefit of buy-backs, a recessionary Europe and a strong dollar that creates currency translation headwinds and reduces energy prices. (Lower oil prices are negative for profits, because revenue is transferred from oil companies to consumers.)

Bullish Consensus Creates Potential for Negative Surprise

What I see in these numbers is a disturbingly bullish consensus, based on high PE assumptions and upbeat earnings expectations. I don’t disagree with the strategists’ assumptions; I have been saying for quite a while that stock prices would “grind higher.”

Nevertheless, in terms of “positioning” and investor psychology, we are vulnerable to negative news. In contrast to two years ago, when PE ratios were much lower, stock prices could fall pretty sharply on a nasty surprise—perhaps a terrorist attack or a political / financial spasm in Europe. When investors are bullish and valuations are high, stock prices don’t necessarily need a good reason to tumble. Investors have big profits to protect. In the first half of 1962 stocks dropped more than 23%, even though earnings rose 15% that year and the U.S. was in the midst of one of the most prosperous five-year periods in its history, comparable to the early 1830s, the late 1860s, 1898-1903 or the late 1990s. The catalyst for that drop was a confrontation between President Kennedy and U.S. Steel over steel price increases.

Investment implication: This is not the time to be particularly aggressive in the stock market. Unlike two years ago, lots of good news is priced in, and there is a decent chance the next big surprise is negative.

Copyright Thomas Doerflinger 2014. All Rights Reserved.

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New York State Needs a War on Poverty

A few months ago Arthur Levitt–Bloomberg groupie, former SEC Chairman, and quintessential Wall Street liberal—interviewed Grover Norquist, anti-tax activist and bête noire of Wall Street liberals. At the end of the interview Levitt asked “Grover, do you think it is ever appropriate for government to help poor people?” Norquist archly reminded Levitt that Obama-style liberalism had been a disaster for poor people, although government workers had made out just fine. (I can’t quote exactly because for some strange reason this part of the conversation disappeared from the podcast.)

Levitt typifies the earnest liberal for whom good intentions outweigh dismal results. Exhibit A is upstate New York, which for decades has been pauperized by Democratic politicians pandering to rich New York City liberals and Public Employee Unions. High taxes, oppressive regulation and political corruption have deindustrialized a region that once upon a time was an economic powerhouse. The Erie Canal, the most successful infrastructure project in American history, created a string of prosperous cities stretching westward from Albany—Schenectady, Utica, Rome, Syracuse, Rochester, Buffalo. For decades now, these cities have ranked near the top of lists of the fastest-shrinking cities in the U.S. Buffalo has shriveled from 580,000 in 1950 to 261,000 in 2010.

Inequality, New York Style

When liberals ponder the scourge of inequality in earnest convocations at the 92nd Street Y, they need only glance up the Hudson to find an egregious example. The five richest counties in the state, all in the New York City area, have median household incomes of $82,181, on average. That’s twice as high as the average median household income of the 18 poorest counties in the state. Where’s Thomas Piketty when we need him?

Driving this pauperization is rank corruption in Albany—so rank that Andrew Cuomo had to shut down his own anti-corruption commission when it began snooping too close to home. Where else but Albany can a politician serve in the Legislature while pulling down a six-figure salary from a law firm whose main business is–lobbying the Legislature!

Frack That

The apotheosis of New York liberals’ pauperizing pandering is Andrew Cuomo’s opposition to fracking. Albany regulators are “studying” it to death simply because it is opposed by rich liberals like “river keeper” Robert Kennedy Jr. Done properly, fracking is not risky. Tens of thousands of wells have been drilled in the U.S., and fracking has had no discernible ill effects in neighboring Pennsylvania. It would create thousands of the “good paying middle class jobs” that liberals claim to crave while reducing carbon emissions by helping to substitute clean gas for dirty coal. And it has a far more benign environmental footprint than bird-slicing windmills or solar fields blighting thousands of acres.

Having quashed fracking, Cuomo needed some economic development fig leafs to appease upstate voters ahead of the election. To create the misimpression he is “doing something” about jobs, he created a tax abatement plan called “Startup New York” with a huge in-state ad budget. And as a pathetic substitute for fracking, Cuomo is expanding casino gambling in upstate New York. He claims three or four new casinos will “serve as attractions to bring visitors to the region through tie-ins with the local tourism industry, business community and entertainment venues.”

Cuomo’s casino timing could not be worse. This is 2014, not 1980. There are already several hundred casinos in the U.S. including dozens in the Northeast. The glut is so bad that three casinos will close in Atlantic City this month. If they are ever built, Cuomo’s casinos can hire experienced employees recently laid off in AC.  Only a political aristocrat with zero private economy experience—apart from pressuring Fannie and Freddie to buy more sub-prime mortgages, when Cuomo ran HUD in the 1990s—could come up with such a dumb “job creation” plan.

A New War on Poverty?

There is a solution to Cuomo’s venal incompetence—a new “war on poverty” led by free-market conservatives from Sunbelt states. In the 1960s condescending northern liberals, many funded by elite outfits such as the Ford Foundation, descended on southern states such as Mississippi, Alabama and the Carolinas to “fight poverty.” To the extent they were fighting racial discrimination, they did much good. When it came to actually “fighting poverty” they were of little or negative value, because they were all about income redistribution, not economic growth and job creation.

Anyhow, it is time for the Sunbelt to return the favor. Capitalistic activists from Texas, Oklahoma, Arizon, Louisiana and Florida should invade the “Empire State” and stage a “freedom from poverty summer” to fight remorseless pauperization by King Cuomo and New York City liberals. Rick Perry should lead the fight; the Koch Brothers should fund it. The campaign should push for lower taxes, public employee pension reform, and a pro fracking energy policy that would create jobs and cut carbon emissions.

At the end of the campaign, Arthur Levitt could invite Rick Perry onto his radio show to explain how he saved average hard-working New Yorkers from the depredations of Albany and New York City.  Hopefully NPR’s “Brian Lehrer Show”—which has an abiding interest in inequality and anti-poverty programs—will also host Governor Perry. NPR listeners would learn a lot, if they didn’t faint first.

Copyright Thomas Doerflinger 2014. All Rights Reserved.

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Fed Survey: Obamacare Impedes Hiring, Curbs Wage Gains

Although Chair Yellen is still mum on the topic, Federal Reserve economists have belatedly started to study the impact of Obamacare on employment and wages. Economists in three regions (San Francisco, Philadelphia, New York) used identical questions to survey employers in the manufacturing sector. Results for all six questions were negative for full-time employment and wage increases. Here are the average responses, across the three regions, for the six questions:

  • Effect of Obamacare on number of workers you employ: 22% said fewer workers employed, just 3% said more workers.
  • Percent of your workers that are part-time or temporary: 4% said fewer workers would be part-time, 18% said more workers would be part-time.
  • Amount of work outsourced to other firms: 3% said less work would be outsourced, 17% said more work would be outsourced.
  • Wage and salary compensation per worker: 19% said the ACA would lead to lower wages, 14% said it would lead to higher compensation.
  • Effect of ACA on “other benefits, including retirement:” 20% said the ACA would reduce other benefits, just 3% said it would increase other benefits.
  • Effect of ACA on prices you charge customers: 20% said they would raise prices, only 3% said they would cut prices.

The bad news is that these results prove what common sense would suggest: The ACA is undermining the traditional employer-employee relationship, where workers get a full-time job and wages rise over time. As Chair Yellen noted at Jackson Hole, part-time employment has surged. This is a disaster for low-skilled workers entering the workforce, who need to work two jobs to get a full weekly pay-check.

More bad news: these results would be even worse if the Fed had surveyed service firms rather than manufacturing firms. Wages are higher in manufacturing because productivity per worker is much higher than in services, partly because capital investment per worker is higher. For example, the 11.8 million people in “food preparation and serving related occupations” had an average hourly wage of $10.38 in 2013, versus $16.79 for the 8.8 million people in “production occupations.” Therefore, the added costs from Obamacare are a lower percentage of wages for manufacturing firms than service firms.


Social: Obamacare makes it even harder for low-skilled workers to get a foothold in the labor market. Thanks to the ACA, hundreds of thousands of young, able-bodied Americans will have lavish health plans they don’t need, but no job.

Economic:   To the extent it retards employment growth Obamacare slows economic growth, which makes it harder to fund Social Security, Medicare, etc.

Political:  Republicans should be the optimistic party of growth and opportunity—not the anti-Obama party. Obama is old news, damaged goods. Because the ACA has been a social and economic disaster—particularly for poor people and middle class entrepreneurs –repealing and replacing it should be a top priority of the GOP.

Equity Investment:  Obamacare increases consumption of healthcare at the expense of other products. It is no coincidence that in Q2 2014 the healthcare sector had by far the best earnings and revenue growth. Because the ACA hinders hiring and wage gains, consumer-oriented industries, such as retailers, packaged foods, restaurants, and household products are struggling. (To be sure, there are other factors at work, such as the impact of Amazon, firms’ exposure to Europe, and consumers shopping at auto showrooms rather than malls.) By increasing labor costs the ACA also increases demand for labor-saving capital equipment, particularly in the service sector.

Copyright Thomas Doerflinger 2014. All Rights Reserved.

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Stock Prices Will Grind Higher

After being long and wrong in 2007 and 2008, I have been correctly bullish on stocks for the last few years, arguing they would scale the proverbial wall of worry. Bonds, on the other hand, have looked to me to be vulnerable to an eventual correction. The stock call still looks correct; the bond call may turn out OK eventually, but not for a while. Here are the key macro headlines:

  • The U.S. economy is strengthening, particularly profit-relevant metrics such as—ISM Manufacturing, Industrial Production, Capacity Utilization.
  • S&P Profits will be around $120 this year, higher than many estimates. (If they fall short of this figure, it will be due to the government shake-down fines on JPM, BAC, etc.—not macro drivers.)
  • As expected, Europe is stagnant, not rebounding as many expected. Socialism, bank deleveraging, EU dysfunction and stagnant populations are tough obstacles to overcome.
  • Emerging markets are weak and won’t improve quickly. China is not a disaster but growth will be ham-strung by persistently weak real estate.
  • Therefore, central banks’ monetary policy will be super-easy, depressing bond yields. The German 10-year yield is well under 1%; Spain and Italy are around 2.5%.
  • Fed policy is “behind the curve”—far too easy for the 6th year of recovery. (See the illuminating analysis by Drew Matus of UBS.) Eventually, as Chair Yellen admits, rapid and “disruptive” rate increases may be needed to address inflation. But not now. With bond yields so low in Europe, even an inflation scare may not push U.S. bond yields to levels that are ruinous for stocks.
  • In this weird environment, as strategist Jason Trennert noted in Barron’s, it’s all about TINA: There Is No Alternative to stocks. Stock prices will grind higher, barring an exogenous shock.
  • Stagnant Europe / improving U.S. = stronger dollar. The strong greenback and unfavorable oil market fundamentals (abundant supply / weak demand) are weighing on oil prices. Both a strong dollar and weak oil are positive for real GDP growth because they restrain inflation. But they are both headwinds for S&P profits, which are measured in nominal not real terms.

The main problem with these views is that they are close to consensus. But there are some bearish misconceptions about the macro picture. Some “Big Picture” thinkers such as Mohammed El-Erian seem to believe investors are recklessly bidding up stocks despite bad fundamentals. Actually, the PE of the market has not increased materially this year. If the S&P 500 is at 1995 by the end of September, the trailing PE on pro forma earnings will be about the same as year-end 2013 (17.1x vs. 16.8x). Another misconception is that stocks are being driven higher by buy-backs; they are only adding 1-2% to S&P 500 earnings growth.

You Heard It Here First

We shamelessly “point with pride” to some prescient observations:

Part-time America:  We have been babbling for years about how Obamacare would increase part-time employment. Now a famous labor economist has highlighted the unusually “elevated number of workers who are employed part time but desire full-time work (those classified as ‘part time for economic reasons’). At nearly 5 percent of the labor force, the number of such workers is notably larger, relative to the unemployment rate, than has been typical historically.” But though she recognizes the part-time America phenomenon (a calamity for many low-income workers who must commute between two jobs every day) Janet Yellen still can’t bring herself to connect it to Obamacare, even though some recent Fed surveys have done so.

Costly CAPE. We explained why Robert Shiller’s widely followed valuation metric is useless, flashing a “red light” to equity investors for all but a few years since 1990, while stock prices sextupled. Much to his credit, Shiller admitted as much in a NYT article. But I see little evidence he understands the accounting and fundamental factors (FAS 142, lower transaction costs, less stock market fraud, better corporate governance since 2002, etc.) that justify a PE well above the average since1871. He points to low bond yields (fair enough; see above) and investor psychology.

Hedge Fund Madness. On July 5, 2013, we observed, “Hedge funds have several serious flaws that are gradually becoming recognized.” Now big pension funds and college endowments are belatedly taking notice. Writes the WSJ: “Public pensions from California to Ohio are backing away from hedge funds because of concerns about high fees and lackluster returns. Those having second thoughts include officials at the largest public pension fund in the U.S., the California Public Employees’ Retirement System, or Calpers. . . . The retreat comes after many pension funds poured money into hedge funds in recent years in hopes of making up huge shortfalls.”  What we are seeing is the unwinding of the “stock avoidance syndrome” I highlighted in December 2012.  Now that they have doubled, stocks seem safer to asset allocation committees.  Go figure.

Krugman belatedly brushes up on bond math. About a month ago he revealed to NYT readers that conservatives hate easy monetary policy because they are greedy. You see, easy money reduces their interest income. As we pointed out, he forgot that declining interest rates boosted bond prices, generating huge capital gains for bond holders, greedy conservatives and enlightened progressives alike. Apparently a colleague took Krugman aside and explained to him that when yields fall, prices rise. Or maybe he read this blog. Anyhow, last Friday Krugman admitted “Yes, low interest rates mean low long-term returns for bondholders (who are generally wealthy), but they also mean short-term capital gains for those same bondholders.” (Emphasis mine.)

French Funk. In the summer of 2012 we highlighted “seven new reasons not to create jobs in France”—specifically, seven tax hikes imposed by President Holland. Since then the over-taxed, over-regulated French economy has slipped from first gear into neutral, even as the conservatively managed economy across the English channel shifted into third gear. Evidently socialism works no better in Paris than Moscow.

Copyright Thomas Doerflinger 2014. All Rights Reserved.

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The “Philadelphia Negro,” Then and Now

In 1896 a brilliant scholar who received his PhD from Harvard and went on to study in Europe with such luminaries as Max Weber was engaged by wealthy philanthropists to prepare a sociological study of Philadelphia’s black population. Their motives were suspect; he believed they were operating on the “theory” that “this great, rich, and famous municipality was going to the dogs because of the crime and venality of its Negro citizens, who lived largely centered in the slum at the lower end of the seventh ward” near Lombard and South Streets. Despite his misgivings, W.E.B. DuBois prepared a remarkably detailed analysis of the city’s black population—an exhaustive study with dozens of tables and charts illuminating all aspects of Negro life, including income, occupations, wealth, education, literacy, religion, social classes, crime, rents, amusements and housing. Just the chapter on crime had thirty charts and tables. DuBois ended his study with a prescient meditation on the “Duty of the Negroes” and the “Duty of the Whites.” Concerning the former, he wrote,

“Against prejudice, injustice and wrong the Negro ought to protest energetically and continuously, but he must never forget that he protests because those things hinder his own efforts, and that those efforts are the key to his future. . . . In Philadelphia those efforts should first be directed toward a lessening of Negro crime; . . . . Efforts to stop this crime must commence in the Negro homes; they must cease to be, as they often are, breeders of idleness and extravagance and complaint. Work, continuous and intensive; work, although it be menial and poorly rewarded; work, though done in travail of soul and sweat of brow, must be so impressed upon Negro children as the road to salvation, that a child would feel it a greater disgrace to be idle than to do the humblest labor. . . . “

As for the duty of the whites, DuBois observed:

“There is no doubt that in Philadelphia the centre and kernel of the Negro problem so far as the white people are concerned is the narrow opportunities afforded Negroes for earning a decent living. Such discrimination is morally wrong, politically dangerous, industrially wasteful, and socially silly. It is the duty of the whites to stop it, and to do so primarily for their own sakes. Industrial freedom of opportunity has by long experience been proven to be generally best for all. Moreover the cost of crime and pauperism, the growth of slums, and the pernicious influences of idleness and lewdness, cost the public far more than would the hurt to the feelings of a carpenter to work beside a black man, or a shop girl to stand beside a darker mate.”

Unfortunately, DuBois sound advice was not followed by whites; Philadelphia’s major companies hired very few blacks in the first half of the twentieth century.

On the Run in West Philly

Fast-forward to the present, and we have another fascinating study of Philadelphia blacks, On the Run: Fugitive Life in an American City, by sociologist Alice Goffman. As a student at the University of Pennsylvania and later Princeton, Goffman fell in with a group of West Philadelphians who were involved in drug dealing, robbery, gun play and occasionally murder. While certainly not representative of all low-income black males in the city, they were not exceptional either; 60% of black males who do not finish high school go to prison by their mid-thirties. What stands out in Goffman’s account is the perpetual entanglement of poor crime-prone black families with an expansive criminal-judicial-penal-industrial-complex. While middle class kids, white or black, go to grammar school, middle school, high school and college, these folks graduate from juvenile detention to jail to prison, with innumerable dealings along the way with street cops, detectives, parole officers, warrant officers, judges, etc.

Black males are almost constantly “on the run” because they are seldom “clean.” Perhaps there is a “body warrant” for a crime they allegedly committed, or a “bench warrant” because they missed a court date, failed to pay court fees, or violated their parole. They are ever on the lookout for cops, planning their next escape if a squad car pulls up in front of their row house. When they get shot or beat up, they do not go to a hospital for fear of arrest. They drive cars without a license, because it is too difficult and risky for them to get ID. The same goes for bank accounts. They are, in effect, “undocumented” citizens. Constant legal entanglements make it tough to get a job; frequent trips to court make it tough to keep one. None of the people Goffman hung out with held a job for long, let alone developed a career. (She mentions only one individual who worked in a company owned by his family—not surprising, because fathers were scarce in the community.) Income from short stints working at a fast food joint or a warehouse were supplemented by dealing drugs. Which was dangerous: Most of the men in Goffman’s group were eventually murdered, maimed, committed suicide, or went to prison for long stretches.

Bottom Line: W.E.B. Dubois exhortation to blacks to “Work!” is not operative for many (though not all) poor black males in Philadelphia. This conclusion is confirmed by official data; the employment population ratio for black males in the U.S. is 60.4% versus 68.8% for white males. This is a disaster for all concerned; poor blacks stay poor while tax payers of all races pay immense sums to maintain the criminal-judicial-penal-industrial-complex.

Racial Correctness  Is Part of the Problem

Finding solutions is impeded by liberal race-mongering. When Congressman Paul Ryan correctly observed that many men in inner cities were not connected to the labor market, Paul Krugman accused him of racism. On “Meet the Press” the ever-repulsive David Gregory subtly leveled the same charge at Ryan.   But what do you expect from racially correct white liberals? More troubling to me was the response of Fox News’ Juan Williams to Newt Gingrich’s suggestion that kids in inner city schools should learn about work by getting paid to do janitorial work. This was a constructive suggestion that would save money and introduce teenagers to workplace norms—showing up on time, dealing with a boss, and getting a paycheck. Williams opined that this idea was “insulting to all Americans but particularly black Americans.” Huh? How can it be “insulting” for a teenager, of whatever race, to do work previously done by an adult? (Memo to Juan: As an undergraduate at a fancy college, I did not find it demeaning to perform “janitorial work” such as wiping table tops, sweeping floors, serving food and putting out the garbage.)


What should be Republicans’ approach to the problem? First, go on offense. Blame Democrats for failed policies that inhibit hiring and poverty reduction. Philadelphia is a Democratic city in a Democratic state; taxes are through the roof; only 3 of the 15 biggest employers are private firms. Democrats there, as in other big cities, are more interested in enriching public employees than promoting economic growth. As for specific policy suggestions, here are four: 1) push for school vouchers for inner city parents; 2) Embrace reforms suggested by Rand Paul, such as reducing sentences for having small amounts of marijuana; 3) Reform entitlement programs that phase out with higher incomes; they impose enormous marginal “tax rates”—the more you earn, the less you keep of the incremental dollar, because you lose benefits. 4) Encourage job growth with such reforms as repealing Obamacare, corporate tax reform, and an “all of the above” energy policy that creates jobs and lowers energy costs.

Copyright Thomas Doerflinger 2014. All Rights Reserved.

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Bloomberg Befuddled by Racial Incorrectness

It’s not often I have money-making advice for Mike Bloomberg, but here’s a suggestion: You could improve the ratings of Bloomberg Radio/TV by finding one or two conservatives to spice up the conversation, as Joe Kernen and Rick Santelli do on CNBC. Some spirited disagreement would elevate both the entertainment value and the intellectual level.  We might even occasionally hear the words “Obamacare” and “structural unemployment” in the same sentence. Right now, Bloomberg TV’s notion of political diversity is to balance a Manhattan liberal from the upper west side with a Manhattan liberal from the lower east side—perhaps leavened with a couple of West Coast liberals.  It gets kind of boring . . . . except when the on-air liberals have to contend with – eeek – a real, live conservative.

A case in point is “The Hays Advantage” with Kathleen Hays and Vonnie Quinn. Much to their credit, they invited as a guest the WSJ’s Jason Riley, to talk about his new book Please Stop Helping Us. Riley—did I mention he’s black!—argues liberals are doing far more harm than good by “helping” blacks with supposedly well-intentioned measures like affirmative action and raising the minimum wage. These initiatives harm the average black person while empowering paternalistic liberal elites that pretend to be protecting downtrodden blacks from racist conservatives—despite the manifest failure of liberal policies to improve the lot of poor blacks. Because they find this anti-racist posturing so personally satisfying and politically expedient, Riley argued, liberals try to destroy any black opponent of racial paternalism by labeling them an “Uncle Tom.” Which is why Riley was very courageous to write the book.

Riley told Hays and Quinn that what poor blacks need to get ahead is not more “help” from liberal elites but, rather, embracing traditional habits of self-help – finish school, get a job, get married, take care of your kids, save some money. Too many blacks dismiss such behavior, Riley said more than once, as “acting white.”

Alarm bells sounded in the liberal brains of Hays and Quinn. Despite their best efforts to play it cool, you could hear the consternation and confusion in their voices as they probed and challenged this wayward black conservative. “Aren’t the behaviors you describe also characteristic of other poor people?” Quinn wanted to know. Late in the interview, Kathleen Hays asked the standard liberal question: “What should Washington do?” To which Riley answered “Stop! Stop trying to help us.” What blacks need is self-help, not help.

Riley ended with a searing indictment of liberals’ cynical opposition to school choice: “President Obama has never found a public school good enough for his own children, not before he was president, not since he became president. Yet since the day he entered the oval office, he has been trying to shut down school voucher programs right there in Washington DC that would give the black poor the same educational options that his own children have.”

You don’t hear conservative common sense like that on Bloomberg very often.

Copyright Thomas Doerflinger 2014. All Rights Reserved.

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