Inequality Archives - Page 2 of 2 - the patient investor

May 21, 2014

Is the market overpriced? Episode IV

In my last post I said that, with interest rates, tax rates and real wages at historic lows, corporations are likely to make fat profits over the next few years and stocks remain reasonably buoyant. But at least one of these factors can be expected to change.

Recovery of the housing market would cause the Fed to lift interest rates;
Revision of the tax code by a President who can work with both sides of the House; or
A dramatic fall in exchange rates placing upward pressure on wages as manufacturers regain export markets.

What I did not emphasize is that none of the above are likely to occur without a strong economic recovery — and the net effect of any change could well be a boost to corporate earnings.

What also dawned on me after reading The Inequality Puzzle by Larry Summers is that there may be a common thread. The impact of new technologies over the last two decades and access to cheap labor through increased globalization may have created a sustainable increase in corporate profits as a percentage of GNP. Could this time really be different? Only time will tell. I will be watching sales growth and profit margins over the next few years with interest.

July 4, 2013

What’s wrong with inequality?

Robert Douglas summarizes the argument against inequality presented by Andrew Leigh, economist and (Labour) parliamentarian, in his book Battlers and Billionaires:

Leigh sees inequality as a socially corrosive force undermining the egalitarian spirit that has been one of the positive defining characteristics of Australian society. He argues that unequal wealth demands attention from our political system and that there are a variety of ways in which it can be addressed.

There has been much hand-wringing from the left about rising inequality, but I believe this is an attempt to frame the political debate along class lines — the rich against the rest — as Barack Obama succeeded in doing, with the able assistance of Mitt Romney, in 2012. Framing the debate in relative terms is shrewd politics. An attempt to distract voters from the real issues:

Is poverty rising or falling?
Is general health, as reflected by life expectancy, improving or deteriorating?

Poverty is a subjective concept, as Thomas Sowell points out:

Most Americans with incomes below the official poverty level have air-conditioning, television, own a motor vehicle and, far from being hungry, are more likely than other Americans to be overweight.

Life expectancy, however, is difficult to fudge.

Inequality, as I said earlier, is relative: we can have declining poverty and rising life expectancy while inequality is growing. In fact when the economy is booming and employment rising, inequality is also likely to be growing. Do we really want to kill the goose that lays the golden eggs? Raising taxes to discourage new entrepreneurs? That is what targeting inequality can succeed in doing: harming the welfare of all rather than improving the welfare of the poor at the expense of the rich.

Instead we should focus on job creation and health improvements. And if that means creating incentives to encourage entrepreneurs, so be it, provided we all benefit.

The fact that inequality rose after the GFC is an anomaly that is unlikely to persist in the long term. The wealth of the masses are predominantly represented by real estate, while the rich hold a far higher percentage of their wealth in financial assets: stocks and bonds. Housing was hardest hit by the GFC and has taken longest to recover, causing a surge in inequality readings. That is not the fault of the rich — apart from a few investment bankers — and in fact we should learn from their experience. Real estate investment may have served us well in the past, but that is likely to change with the end of the credit super-cycle. We will need to concentrate a far higher percentage of our investment in stocks and bonds.