Stock market boom doesn’t float everyone’s boat

Posted on March 29, 2019September 25, 2019 by j.giglio

Forgetting history is an American pastime. The current bull market that ranks among the great rallies in stock market history began 10 years ago this month, just about the time when Lady Gaga’s “Poker Face” was the number one song in America.

The stock market party has been going on for a decade, but many Americans have not been invited. The Standard & Poor’s 500 index has soared over 300 percent since March 2009, but the gains are heavily concentrated among the richest families.

The richest families are far more likely to own stocks than are middle- or working-class families. Eighty-nine percent of families with incomes over $100,000 have at least some money in the market, compared with just 21 percent of households earning $30,000 or less, according to a Gallup survey.

Overall, 62 percent of families owned stocks before 2008. That number has fallen to 54 percent, the Gallup poll found. The psychological and financial damage inflicted by the 2008 financial crisis and the subsequent Great Recession continue to weigh heavily on the average American, just as memories of the Great Depression influenced financial habits for decades.

In March 2008, the Financial Meltdown, Financial Apocalypse, Financial Collapse – call it what you will – began, with the feds arranging a shotgun marriage between Bear Stearns and JPMorgan Chase. In March 2008, Bear Stearns, the smallest of the five major Wall Street investment banks, was unable to fund its operations and was bleeding cash, having lost the confidence of the market. The feds were faced with a choice between letting the company fail or taking extraordinary steps to rescue it. They choose the latter.

Bear Stearns was sold to the JPMorgan Chase, with the Federal Reserve providing $29 billion as an inducement to the acquiring bank. Bear Stearns may have ceased to exist as an independent firm, but it continued to haunt the financial world like Marley’s Ghost for months thereafter. Its collapse signaled the real start of the financial crisis. Bear’s demise started a banking liquidity crisis in which financial institutions became unwilling to lend to each other, and credit markets seized up.

A growing number of formerly solid financial institutions were turned into basket cases. After their years of kindergarten management games, shooting up on short-term borrowings, ample use of leverage fueled by low interest rates, and binging on risky trades blew up in their faces. Freezing their lending to businesses and individuals alike caused vast portion of the nation’s business activity to grind to a halt, leading to the Great Recession.

The Financial Meltdown of 2008 was one of the most critical events in American history, a biblical-style plague tanked the stock market by nearly 60 percent in the fall of 2008, killing off other financial and credit markets in the process. Banks and firms either vanished into bankruptcy or had to be rescued by taxpayers. The financial system nearly collapsed, triggering an economic crisis.

The deepest recession in decades wiped out some $11 trillion of wealth and vaporized more than eight million American jobs by September 2009. It froze up the nation’s vast financial credit system, leaving many firms without enough cash to operate. It forced the Federal government to spend $2.8 trillion and commit another $8.2 trillion in taxpayer funds to bail out crippled corporations like General Motors, Chrysler, Citigroup, AIG and a host of other too-big-to-fail private institutions.

In addition to their jobs, it cost millions of Americans their homes, life savings, and hopes for a decent retirement. These Americans were in no position to invest in stocks and benefit from the subsequent run-up in the stock market. By contrast, the wealthy have gotten even richer.

This was a cataclysm far worse than any natural disaster the nation has experienced, and its ripples continue to be felt today.

Originally Published: March 29, 2019.

If the American Dream isn’t dead, it’s in big trouble

Posted on November 19, 2018September 25, 2019 by j.giglio

The American Dream is one of the country’s most attractive founding myths. Ask Americans what the term means and they will provide various definitions that are neither true nor false; people are free to define their core concepts as they see fit.

There is no one American Dream; there are many, based on specific circumstances. Historically, definitions have ranged from religious and political freedom to social equality and economic mobility in the hope that everyone would have an equal chance to succeed.

Sadly, the idea that anyone who really wants to can make their way to the top in the United States may be dead. The ordinary working-class individual would have to be living in a commercial to still believe in the American Dream. When you are poor, trying to get a fair share of the American pie can become a burden that only makes you angry and frustrated.

In 1931, the now obscure historian, James Truslow Adams wrote “The Epic of America,” a book that gave one of the first recorded definitions of the American Dream. He was not writing about consumption, buying things you don’t need and can’t afford with borrowed money. He focused on ideals rather than material goods. According to Adams, the American Dream was:

“That dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement. … It is not a dream of motor cars and high wages merely, but a dream of social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position”.

He was describing a society that values equality and merit are above all else; with hard work, everything is possible. It doesn’t matter where you are from, what schools you went to, or how much money your parents have. What matters is that if you work hard, you can become anything you want. Everyone in America has a chance to pursue his or her personal vision no matter who you are.

Conversely, success is a choice. It’s your own fault if you don’t make it from rags to riches.

In the wake of the Great Recession and the 2008 financial crisis, many people believe the American Dream is dead. The issue of economic inequality has captured the attention of groups across the social and political spectrum; the general public, policy makers, business people, and academicians. Surveys show that more and more Americans believe income and wealth are distributed unfairly.

Few would deny the growing gap between rich and poor in the United States is at historic levels. Wealth and income imbalances have been documented with monotony.

The inconvenient truth is that the richest 10 percent currently own nearly 60 percent of U.S. wealth. The top 1 percent now earns about 30 percent of total income. The top 0.1 percent earns more than 10 percent. According to the Federal Reserve Board 40 percent of Americans can’t cover a $400 emergency expense.

A number of factors have been suggested as important contributors to the widening gap between the “haves” and “have nots” and the increasing concentration of income and wealth. Among them are globalization, technological advances, crony capitalism, lower taxes on the rich, and government policies and programs.

Until these causes and consequences are addressed, there is no realistic hope for dealing with unacceptable levels of economic inequality in the world’s richest country. America will continue to witness the erosion of the middle class and the creation of a permanent underclass that undermines the conceit of a democratic society in which all people have an equal and inalienable right to life, liberty and the pursuit of their own happiness.

Originally Published: November 19, 2018

Stock buybacks do nothing for most of us

Posted on July 23, 2016September 25, 2019 by j.giglio

Economic inequality in the United States is at historic levels. In the wake of the Great Recession, the issue has captured the attention of the American public, but there is little consensus about its causes. One of the causes is clearly the rise in corporate stock buybacks and short-term thinking.

In the 1980s, the top 1 percent of Americans accounted for 10 percent of the income generated in the economy; by 2012 it was approaching 20 percent. The top 1 percent controlled nearly 42 percent of the wealth, a level not seen since the roaring ’20s.

This increased inequality does not support, and even inhibits, the consumer spending that drives economic growth in the United States because it leaves the middle class with less buying power.

Those who are supposedly smart on the issue point to a range of reasons for economic inequality, such as technological change, the decline of unions, globalization and trade agreements. Often overlooked is the expansion of the financial sector and corporate America’s Ahab-like obsession with short-term thinking.

According to the Bureau of Economic Analysis, in 1970 the finance and insurance industries accounted for 4.2 percent of gross domestic product, up from 2.8 percent in 1950. By 2012, the sector represented 6.6 percent.

The story with profits is similar: In 1970, finance and insurance industry profits made up about one quarter of the profits of all sectors, up from 8 percent in 1950. Despite the after effects of the financial crisis, that number had grown to 37 percent by 2013. Yet these industries create only 4 percent of all jobs, so profits go to a small minority.

The increase in the influence of financial sector extends to public corporations that face increased pressure to make immediate investor payouts through stock buybacks. According to Research Affiliates, S&P 500 companies spent $521 billion on stock buybacks in 2013 and $634 billion in 2014. More than

$6.9 trillion has been spent on share buybacks since 2004. Not one dime of this money has gone into expanding operations, hiring more employees, increasing wages, research and development, enhancing productivity, and improving the customer experience.

An important part of the appeal of stock buybacks is their ability to increase earnings per share. In theory, buybacks tend to jack up the share price, at least in the short term, by decreasing the number of shares outstanding while increasing earnings per share. Corporations frequently finance these buy backs by issuing debt, taking advantage of the Federal Reserve holding interest rates underwater and the fact that interest expense on the debt is tax deductible.

Underlying all this are two notions. First, the only responsibility of the corporation is to maximize shareholder value as reflected in the stock price, as opposed to getting sidetracked by talk about multiple stakeholders such as employees, customers and the community.

The second is that corporate management should be compensated in stock to align their interest with those of shareholders. Since managers’ pay is tied to the firm’s stock performance even at the expense of long-term shareholder wealth, the temptation to manage earnings to meet short-term investor expectations instead of long-term shareholder value is quite strong. For example, if the choice is between repairing the roof on the factory in Toledo this quarter or missing the quarterly earnings figure, which could cause earnings per share to tumble, corporate management might decide not to make the capital investment.

Stock-based compensation has also contributed to the sharp rise in CEO compensation. Between 1978 and 2013, CEO compensation increased by nearly 10-fold while workers experienced stagnant wages and increasing job insecurity.

While corporate and finance executives live in a second gilded age, stock buybacks and short-term thinking contribute to under investing in innovation and skilled workers, and ultimately to more economic inequality. But none of this troubles the 1 percenters, and they appear to be the only ones who really matter.

Originally Published: Jul 23, 2016