Tuesday, February 20, 2018

Is Economic Growth Hurting the Stock Market? No! The Enemy is Higher Interest Rates, Mr. President

Just last week President Trump tweeted that "In the old days when good news was reported the stock market would go up." He went on to say that today good news pushes the market down. He asserted this is a "big mistake." But is it?

Last week the U.S. Bureau of Labor Statistics reported that year-over-year wages advanced by a solid 2.9% compared to the post-recession growth of 2.2% or less. Good news for the worker and economy, but since that announcement all three major stock indices are down dramatically.

Instead of making a "big mistake," investors are simply assessing the likelihood of higher wages producing higher inflation, and then generating higher interest rates. Higher interest rates encourage investors to move funds from the equity, or stock market, to interest bearing accounts. If investors' fears are borne out and interest rates return to their post-2000 average, how much lower will equity markets likely fall?

Between 2000 and 2009, the ratio of the S&P stock index to corporate profits, as reported by the Bureau of Economic Analysis, was 10.6. However post-2009, the Federal Reserve's unprecedented monetary stimulus helped drive the rate on the 10-year U.S. Treasury to an average 2.44%, and the ratio of the S&P to corporate profits to 11.2.

Even after the recent market decline or correction, the ratio is still a high 11.6 on February 15. Thus, if rising inflation, the reversal of the Fed's post-recession stimuli, and the expanding federal deficit force the yield on the 10-year U.S. Treasury to its 2000-09 average of 4.48%, investors could see a decline in the S&P by 8.9%, other factors unchanged. This estimate assumes a 4.8% increase in corporate profits from Q1 of 2017 to Q1 of 2018.
Higher profit growth, and lower interest rate increases would mean a smaller fall in the S&P. On the other hand, lower profit growth and higher interest rate increases would mean a larger fall in the S&P.

The next key indicator to watch will be the wage growth number coming from the U.S. Bureau of Labor Statistics' jobs report on March 9. A year-over-year growth number above 3.0% will put a dent in the S&P stock index.

Ernie Goss

Friday, January 19, 2018

Who Benefits from the 2017 Tax Reform? Workers Gain from Rapidly Expanding Economy

Republicans argue that implementation of the recently passed tax reform bill will stimulate economic growth, which will benefit the middle class, primarily by boosting wages and salaries. Democrats, on the other hand, contend that the benefits of any growth will flow mainly to the "rich" via higher corporate profits.

Does empirical data support the Republican or Democrat position assuming that the package, as advertised, raises GDP growth from 2016's 2.1% to 3.1%, or even 4.1%?

In 2016, the U.S. economy ended the slowest eight years of economic growth since the end of the Truman Administration in 1952. During this period of slow GDP growth, wages and salaries as a share of GDP dropped from 44.5% to 43.5%, but profits as a percentage of GDP climbed from 9.4% to 11.5%. Thus, superficially during this latest time period, slow growth had more of a negative impact on workers via lower wage and salary growth.

The accompanying table lists the GDP, wage & salary, and profit growth from 1947 to 2016. During this period, when GDP growth moved from an average of 2.4% to 4.6%, wage and salary growth advanced from 4.1% to 8.2%, but profit growth fell from 6.4% to 5.1%.

Calculating correlation coefficients for the data indicate a clear positive correlation between growth rates of GDP and wages & salaries (+0.74), but a negative association between GDP growth rates and profits (-0.29).

Theoretically, this empirical finding is consistent with the likelihood that businesses are required to bid up wages during periods of rapid growth with the result of lower profits. To quote British economist David Ricardo, "There can be no rise in the value of labour without a fall of profits."

Thursday, December 28, 2017

Death and (No) Taxes for Super-Rich: Give Gains to Charitable Foundations

Recently George Soros transferred more than $18 billion of his accumulated wealth to a private foundation that he controls. By doing so, he escaped paying taxes on the appreciated value of the assets forever. Here's how it works:

The super-rich who head corporations, such as Soros and Warren Buffett, can take a reduced yearly salary and pay income tax rates equivalent to that of middle-income Americans. However, they continue to have access to corporate private jets and other tax-deductible benefits unavailable to most middle-income Americans.

Meanwhile, the value of their shares of their companies grows. But instead of selling the appreciated shares and incurring capital gains taxes, the super-rich give the shares to private foundations and the income is forever untaxed.

For example, in 2017, Buffett donated 18.63 million Berkshire "B" shares valued at $170.25 per share with a tax basis of roughly $58.71 to the Gates Foundation. As a result, in 2017 alone, Buffett will avoid paying capital gains taxes of $141 million to Nebraska, and $463 million to the federal government. In the end, Mr. Buffett intends to donate more than $50 billion in appreciated stock to private foundations.

Buffett has ridiculed the current tax system, which taxes his secretary at a higher rate that what he pays. To rectify this injustice, he proposed that the capital gains tax be raised to 50%. But elevating the rate would have no tax impact on his accumulated stock wealth.

In the end, the current U.S. tax law allows death with (almost) no taxes for the super-rich. A potential remedy is to limit the amount of appreciated stock that may be gifted without taxes.

As stated by novelist F. Scott Fitzgerald to fellow writer Ernest Hemingway, "You know Ernest, the rich are different from you and me." To which Hemingway responded, "Yes they have more money." To be an even bigger wiseacre, Hemingway might have added "and the ability to die without taxes, Scott."
Ernie Goss

Tuesday, October 17, 2017

Is Trump's Tax Reform for the Rich? Top 1% Pay Seven Times the Rate of Bottom 50%

In September, President Trump unveiled his tax reform plan to a chorus of boos from the big government tax and spend devotees.

For example, New York Democrat Senator Schumer, Grand Poobah of the big spenders, tweeted, ""GOP #TaxReform plan & what @SpeakerRyan says about it are 2 diff things. Says plan is for middle class but 80% is for wealthy-Get real Paul."

According to the Tax Foundation, the latest income tax data show that the top 50% of income earners paid 97.3% of income taxes, with the bottom half of income earners paying only 2.7%.

Furthermore, the top 1% of income earners paid an individual income tax rate of 27.1%, which was more than seven times higher than that of the bottom 50% who paid an income tax rate of only 3.5%. Thus, a tax reform package that differentially supports low and middle income taxpayers would further distort a tax system that already punishes educational achievement, innovation, and entrepreneurship, all of which lead to income growth.

On top of this, the element of the President's tax reform package garnering the most criticism from supposed defenders of low and middle income taxpayers is the elimination of the deduction for state and local income taxes. Currently the benefits of this deduction go largely to high income earners, and it encourages state and local taxing units to raise taxes. Eliminating this deduction would cost taxpayers with incomes over $200,000 an average of $7,000, but an average of only $100 for taxpayers making less than $200,000.

To bolster passage of his plan, Trump might channel Nobel prize winning economist Milton Friedman who said, "I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible."
Ernie Goss

Thursday, September 21, 2017

Could A Stock Market Swoon Damage Your Retirement Plans? Baby Boomers At Risk

Nine years of record low interest rates, an improving economy, and few high yielding investment alternatives, have propelled the U.S. stock market to record highs. For example, the current price-earnings (P/E) ratio of the Standard & Poor's 500 (S&P) stocks collectively is 24.5. This indicates that stock investors are paying $24.50 for each dollar of earnings, which is well above the average P/E ratio since 1950 of 17.85. If the S&P were to decline to its 1950-2017average P/E, S&P stock prices would plummet by 27.2%.

However for long-term investors, it is almost a certainty that the S&P would rebound to its old high. But how long will it take? Should the S&P P/E ratio drop to its 1950-2017 average, retired baby boomers who will be age 70.5 and older in 2018, and other retirees in need of funds for living, would be required to withdraw funds from their non-Roth retirement accounts at these low stock prices. The question then becomes, how long will it take for the S&P to return to its 2017 record high level?

In August 2000 with the S&P at 1517.7, the stock index plummeted 31.4% over the next 13 months. It then took the S&P 81 months to climb back to its August 2000 level. And six months later in November 2007, the S&P once again began falling ultimately slumping to 735.1 by February 2009. Thus, between August 2000 and February 2009, or 102 months, the S&P fell by 51.6%. During this bear or down market, individuals that made mandatory or voluntary withdrawals from their retirement accounts dominated by stocks likely suffered significant financial hits.

With U.S. stock prices at current record highs, recent empirical evidence indicates those required to make significant withdrawals from their retirement accounts over a short-time horizon should evaluate re-balancing their investment portfolio to be less dependent on stock prices. As investment guru Ben Graham advised, "Diversify, Diversify!"
Ernie Goss

Thursday, August 17, 2017

Marijuana Legalization's Impact on the Mile High State: Munchie Industry Soars, Others Not So Much

Since 2013, when marijuana was legalized in the state, Coloradans have toked up, tuned in, and chowed down. Between 2013 and 2017, Colorado has increased employment by 9.2%, well above the nation's 6.4%. On the other hand, since 2013 Colorado wages expanded at approximately three percentage points less than that of the U.S.

Two factors contribute to Colorado's stronger job growth, but weaker wage growth. First, Colorado added jobs in lower wage industries. Second, Coloradans cut their average work week. For the two years following legalization, per capita spending in the low wage food and beverage industry expanded by 3.4% for the U.S., but almost double that for Colorado at 6.7%. Additionally between 2013 and 2017, the average hourly work week fell by 3.9% for Colorado, but climbed by 1.5% for the U.S.

To support greater spending on food and beverages with fewer work hours and lower wage growth after the state legalized marijuana, per capita welfare benefits in Colorado climbed by almost 10% versus 7.8% for the U.S.

But Colorado's growth in tax revenues from the pot trade from $52.6 million the year after legalization, to $85.3 million in 2015, to $120 million in 2016 is likely to encourage even more states, beyond the current eight, to make recreational use of cannabis lawful even with potentially mixed economic impacts.
Ernie Goss

Wednesday, July 26, 2017

U.S. Economy Rebounds, Wages & Salaries Do Not: 10 of 23 Occupations Lost Ground

In Nebraska, a state with a 3.0% unemployment rate, Bryan Health, a Lincoln non-profit hospital, recently posted 200 job openings for cafeteria workers to respiratory therapists. On the same day the U.S. Bureau of Labor Statistics announced that the nation's unemployment rate sank below 5.1% for the 22nd straight month. Surprisingly, this "white hot" labor market, has yet to push wage growth above a snail's pace.

The U.S. economy exited the 2007-09 recession in July 2009. Since then, U.S. workers, on average, have only increased their inflation-adjusted salaries by $1,000, slightly less than 2%. Notably, wages and salaries of American workers, adjusted for inflation, have actually declined for 10 of 23 occupations.

Who were the big losers?
Between 2009 and 2016 annual inflation adjusted pay fell for:
**Architects and engineers by$6,074 or 7.4%.
**Lawyers by $8,578 or 5.9%.
**Social workers by $2,976 or 5.9%.
Who were the big winners?
**Between 2009 and 2016 yearly inflation adjusted pay climbed for:
**Computer programmers by $10,483 or 14.0%
**Welders by $5,824 or 16.0%.
**Registered nurses by $5,636 or 8.4%.

More Vocational Skills Needed
Between 2001 and 2009, compounded annually, worker productivity, or output per hour, expanded yearly by 2.6% and wages climbed by 3.1%. From 2009 to 2016, productivity growth dropped to an annual compound rate of 0.9% and wage growth fell to an annual compound rate of 1.9%.

In order to expand wages at an acceptable pace, workers and industry need an increase in vocational skill levels. Whether it is truck driving, welding or plumbing, a higher percentage of American workers and industry need to upgrade their skill levels obtainable with on-the-job training or community college classes.
Ernie Goss