The Haiku of Finance for 12/09/15

Middle class reduced
Many fell into poor class
Harder to get rich

The Haiku of Finance for 01/17/15

Propose new rich tax
Free transfer to college kids
Middle class will pay

Americans Lulled To Sleep By Pumped Markets

I have noted for some time that Americans are oblivious to the main force driving their portfolios to the moon.  That would be central bank quantitative easing, all around the world.  One BIS report from 2013 said it all.  I'm not linking to it this time.  Go find it yourself.  Earn that knowledge with some work.

Americans typically don't save their paychecks and invest for retirement.  The poor don't have much income to save, although staying off booze and cigarettes would help.  The middle class has been instructed to believe in Social Security's mythical solvency.  That leaves the bottom four quintiles at the mercy of the top quintile.  The serf population will be quite large and desperate after the next crack-up.  I expect to have my pick of the litter as itinerant labor after I become their overlord.  This is where I would insert a sinister laugh track if I cared enough.

I do not listen to the nonsensical chatter spewing from financial advising media.  I did when I was a financial adviser from 2005-2006 and much of it made little sense to me.  I was terminated as a financial adviser because people don't want to hear the truth.  The retail salespeople attached to investment banks are riding the pump scheme for all it's worth.  I don't expect them to wake up.  The few financial advisers with sense enough to pursue independent paths can't compete with central banks determined to pump asset classes to the moon.  That's why I'm not a financial adviser.  No one wants my advice and I don't give any.

Lemmings can enjoy the wealth effect of pumped markets while it lasts.  Taking out HELOCs ended badly for many home "investors" after 2006.  Everyone has forgotten how that ended.  People are going to learn the hard way all over again.  America went to sleep after the financial crisis of 2008.  I'm not trying to wake the country up.  Other investors' pain will be my gain.  

Financial Sarcasm Roundup for 02/03/14

I'm so glad US stocks are headed down.  This is more than just an opportunity to buy assets at reduced prices.  It's another big chance to throw my sarcasm in the face of bull shills who bought in at high prices.

The US and EU are promising economic aid to Ukraine.  I do not see the point of antagonizing Russia.  This risks a retaliation if Gazprom decides to jack up natural gas prices for its European customers.  Perhaps this intervention is some kind of revenge for Russia's ascension after the Syria chemical weapons controversy last year.  Ukrainians are perfectly capable of solving their own problems.  They key to understanding what's at stake is the Russian ethnic minority in the southeastern part of the country.  The southeast is Ukraine's most economically productive region with most of the country's arable farmland.  Ukraine's viability as a political entity is doubtful without control of that region.  The only silver lining is that unrest could potentially force more hot Ukrainian women to emigrate to the US and expand my available dating pool in San Francisco.

Corporations realize that the American middle class is weakening.  The class of middle income consumers is getting smaller and its disposable income is declining.  Enterprises are adjusting their business models to accommodate this change.  I've blogged before about how mid-market retailers are toast.  Extend this change to other brands.  We'll see more low-end restaurants with fast food dollar menus and more five-star venues for rich palates with fat wallets.  If the middle class ceases to exist, class warfare will be inevitable.  Most Americans don't see it coming.  The $35,000 leather hammock I saw in a high-end Union Square shop will end up in a hedge fund manager's office, or it will be looted by a rioting mob.  That linked article said hedge fund investors want a restaurant chain to spin off its high-end properties to isolate their performance.  I think those fund managers just don't want upscale chains associated with the same corporate parent as middle-income chains.  It really is about snobbery.

Politicians can't figure out how to fix Fannie Mae and Freddie Mac.  I've known how to fix those things all along.  I'd shut them down and stiff their creditors.  That would destroy the speculative investors who bought up their stock, counting on continued government lifelines.  I don't care at all.  The housing market can't reach a sustainable long-term equilibrium until every misguided government effort to support housing prices reaches a sunset.  These GSEs' continued existence tempts activists to use them to fund disastrous social justice experiments.  Landlords will have fits during hyperinflation if the GSEs impose national rent controls as conditions for securitizing mortgages on multi-unit properties.

There is so much to be sarcastic about in the world but I only have a limited number of waking hours during the day.  Others are welcome to pick up where I leave off.  

Students Should Rise Above Without Debt After Education

I attended the Commonwealth Club again today to hear about how education breaks the cycle of poverty.  Students Rising Above (SRA) pitched the success stories of their intensive mentoring for low-income students bound for college.  I'm all about harvesting the unheralded talents of students from disadvantaged socioeconomic backgrounds.  Sociologist E. Digby Baltzell built a lifetime of research on the premise that ruling elites must recruit talent from upwardly mobile underclasses if civilization is to endure.  SRA is doing the right thing.  The rest of society should do a lot more.

The first obstacle society places in the path of the upwardly mobile is the difficulty of discharging student loan debt in bankruptcy.  The official Federal Student Aid guidelines on loan forgiveness, cancellation, and discharge describe strict conditions under which a bankruptcy court will discharge a student loan.  It's not impossible but it will require financial hardship.

The next obstacle I've observed is more nebulous.  The snobbery of students raised in elite households is real and very prevalent at top American universities.  I encountered this firsthand in the early 1990s and it has worsened along with income inequality.  The low-income students who are lucky enough to attend top-ranked universities will never truly find social acceptance from the vast majority of very privileged students they meet.  Class distinctions are hardening in America and having a brand-name degree is no longer a path to upward mobility.  I noted that SRA played two video studies of their best clients.  I found it telling that one became a teacher and the other became a non-profit worker after graduation.  Those are low-income, low-prestige occupations with zero upward mobility.  That's what the ruling class wants now for its non-pedigreed graduates.  We should do better.

The final obstacle I've noticed in society lies in the financial condition of the entities sponsoring financial aid.  The federal government cannot run persistent budget deficits forever and it will eventually try to destroy its unfunded liabilities with hyperinflation.  This will in turn destroy its ability to fund Pell grants and underwrite student loans.  Private sources of aid will fare no better.  The 2008 financial crisis devastated the endowment portfolios of Harvard, Yale, and other schools that had just made strong commitments to merit-based financial aid for low-income students.  I fully expect a repeat of that episode, with no recovery.  Private aid will have to fill the gap if private sources can survive hyperinflation.

Clark Kerr's California Master Plan for Higher Education defined clear roles for each tier of the state's post-secondary education system.  Changes in our society's structure are destroying this plan's ability to deliver value.  The junior colleges were intended to provide instruction in skilled trades for less intellectual students.  They have become feeder schools pushing academically unprepared students into four-year universities.  It should come as no surprise that college dropout rates are higher than ever.  A feeder system that encourages academically unskilled students to take on debt for degrees they cannot complete is a broken system.  Low interest rates have fed the student loan bubble but that will pop once the Federal Reserve loses control of the yield curve.  The crash in funding sources - any way it happens - will further destroy the sustainability of California's publicly funded university system.

I was pleased to hear SRA discuss the potential of MOOCs as course offerings for students who can't join their mentoring program.  MOOCs have the potential to completely blow away traditional resident universities in all academic subjects.  I believe we won't even recognize the educational landscape a generation from now once a critical mass of middle class and poor parents figure out that their kids can train themselves for any career online at their own pace for free.  No snobby brat can tell a poor kid they don't deserve a university education if the equivalent of that education is available on the Internet at no charge.  The rise of MOOCs is a free-market update to the Clark Kerr plan's noble goal of providing affordable education appropriate to all skill levels.

I will suggest one way forward.  I have written before on the potential for public option banks to address the financial needs of low-income citizens.  I think they can also address the needs of disadvantaged students.  If every state had a public bank, low-income students receiving financial aid through any government channels would be required to hold their money in this bank's no-fee checking accounts.  The banks could also be conduits for financial literacy education.  This ties together the delivery of aid and the maturation of the recipient.

My own merit-based scholarships to the University of Notre Dame and the University of San Francisco never benefited me.  Maybe SRA's clients will have better luck, especially with MOOCs.  They can rise above poverty without debt, or else they'll sink below into dead-end careers.  I made a career for myself anyway, as per my LinkedIn profile.  Poor kids can do it too.  

San Franciscans Misunderstand Middle Class Erosion at Commonwealth Club

I really like being a member of the Commonwealth Club of California but sometimes the people who attend lectures there need to be smacked upside their stupid little heads.  Today I attended a noontime panel on the danger facing America from a skewed allocation of wealth.  I'm pretty sure there was more collective intelligence among the three panelists than among everyone in the audience (minus me, of course, because my intellect reigns supreme).

The panelists correctly identified the risk of social instability from the erosion of the middle class, which in many societies throughout history has prevented open class conflict between the proletariat and plutocratic classes.  They noted that a majority of the US's GDP growth is now generated in a minority of its metropolitan statistical areas.  They also noted that the gap between rich and poor cities is increasing and persistent, with some cities becoming permanent enclaves of wealth and innovation.  It should go without saying that high-tech sectors generate a wealth multiplier effect that supports skilled service trades but the idiots protesting outside Twitter will never figure that out.

One economist on the panel was kind enough to identify some key factors that drive commercial real estate investment.  We've all heard the mantra about location, location, location for retail outlets.  Large commercial projects take it further into six factors:  income levels in a region; types of jobs available (especially high-skill, high-income); quality and availability of skilled labor; education; civic infrastructure; and the regulatory environment for business.  She noted that the US is falling behind other countries in middle-class job creation, infrastructure investment, and economic mobility.

It pays well to have expert panelists correctly diagnose a problem only if the audience members can absorb the lessons.  Sadly, that may be asking too much of the average San Franciscan.  The audience's questions expressed desires to redistribute wealth and raise taxes to spend more on public education.  That is the kind of failed statist thinking that has contributed to the destruction of the middle class.  Centrally planned redistribution has brought middle class entitlement programs to the brink of insolvency.  The public education model no longer delivers increased value for marginal increases in spending.  Putting more money into either of these failed paradigms will only exacerbate the middle class's woes with more taxes and less benefit.

The panelists knew the way ahead but the audience could see neither the forest nor the trees.  One panelist cited San Francisco's restrictive housing ordinances and "inclusive zoning" as a hindrance to development.  Competitive housing markets allow development and attract affordable housing.  The difficulty I see with getting from problem to solution was right there in the room.  The audience members from San Francisco love rent control and the quaint character of neighborhoods frozen in time.  No way are they ever going to vote for politicians who can give The City the policy reform it needs to make affordable development happen.  Just look at the anti-Twitter loudmouths on the street.  Try telling them that gentrification moves lower-income renters into areas where developers will meet their demand for low-income housing.  They won't understand and neither will most educated San Franciscans.

The cognitive dissonance the audience members expressed was amusing.  One guy asked what it would take to fill the high vacancy rate among East Bay and South Bay commercial properties with "high-paying jobs" (I think he meant business tenants, but he was an idiot).  A panelist later said that many urban areas would have to undergo a prolonged period of contraction to a sustainable level of concentration, starting with Detroit.  I may have been one of a few people in the room who saw the connection.  Read my own blog posts on Detroit.  Those vacant offices and stores in the Bay Area will remain vacant because their regions were overbuilt, and now they must be unbuilt.  No amount of job training will fix it until unused office space becomes farmland.

I would have started laughing in people's faces if this seminar had lasted one minute longer.  None of these idiots have a clue about why society is falling apart.  They need to read the panelists' works (specifically Dr. Enrico Moretti's The New Geography of Jobs, Dr. Claude Gruen's New Urban Development,  and Dr. Asieh Mansour's research) but I'm pretty sure they won't.  If they do, they won't learn anything that will change their minds.  I know exactly how to solve the middle class crisis and it won't be pretty.  Here it comes.  Entrepreneurs spawning MOOCs will cut the cost of education and eliminate the debt burden preventing young college graduates from saving for a home or starting a family.  The public education establishment and its union drones will fight that tooth and nail until they earn the public's wrath.  Smart urban growth will favor multi-use urban infill development that civic infrastructure can serve efficiently.  The enemies of common sense will close ranks to defend rent control and inclusionary zoning until municipalities that do favor those reforms attract all of the wealth creators away from San Francisco.  Only then, when all looks lost, will common sense return to the city by the bay after all of our current foolishness has been discredited.

I've always liked one of the quotes from T.R. Fehrenbach's This Kind of War that says something about how most human beings abhor competition, and that is why most people are acted upon by history instead of being the actors.  I will act upon these audience members as much as my will to power will allow and they will like it.  I took as many chocolate chip cookies as I could on the way out of the Gold Room because I didn't want them going to waste among anti-development fools.  Much of the knowledge available at the Commonwealth Club is similarly wasted on people who won't use it.  

Defining The American Lumpenproletariat

Every civilization is ultimately defined by the goals and cohesion of its ruling class.  Their lives and deeds become the stuff of legend and their visages are fit for monuments.  Let's not forget the lower orders, who get no monuments.  The term "lumpenproletariat" has a bad reputation.  Forget its Marxist origins.  Karl Marx was wrong about collectivism replacing capitalism but his class definitions are still convenient descriptions of society.  George Orwell's proles actually existed in his day.  America has its own prole class.

The low-information voter is a prole.  These are the folks who vote for politicians based on charm, dress, hobbies, and family image.  They don't have time to read position papers or party platforms because some ball game or reality show is on TV.  They don't read news commentary because they're too busy clicking "like" on some Photoshopped meme going around.  Political operatives generate memes that supplant critical thinking and the best memes win elections by swaying the low-information voter.

The welfare queen is a prole.  This part of the American caste system has grown by several orders of magnitude in my lifetime thanks to SNAP/EBT, SSI, and other forms of the dole.  Their planning horizon extends precisely to the collection date of their next benefit, no farther.  They may be goaded into performing marginally useful labor from time to time if benefit collection is conditioned on said performance.  Some of their number are habitual criminals and must always be monitored.  The rest are a source of amusement.

Unsophisticated country folk are proles.  I won't repeat their more derogatory synonyms here.  They escape the attention of the bi-coastal ruling elite because they inhabit the farms, woods, and mountains of this great country of ours.  Most of them grow our food and fix our machines.  The best of them have given us American roots music and other styles of entertainment.

I for one am grateful that the proles exist.  Someone has to do the hard work and mindless consumption in society and it might as well be the unfortunate folks at the low IQ end of the bell curve.  Automation may change that within a generation.  Elites need to start thinking up something for all these proles to do to keep them occupied.  Social safety nets are insurance against the proles' revolt but their lack of class consciousness is their primary inhibiting factor, as George Orwell correctly assessed.  

"Strong" Estate Tax Targets Middle Class And Ignores Super-Rich

Warren Buffett wants a strong estate tax.  This has a populist, common sense appeal in light of his advocacy for higher income taxes and generous charitable giving pledge.  Uncle Warren's argument is that plutocratic-enabling tax policies harm democracy.  Let's consider the circumstances of today's plutocracy to determine whether any changes in tax policy will really weaken their hold on power.

The estate tax plan from United for a Fair Economy, which Mr. Buffett has endorsed, reduces the estate tax exemption threshold from $10M to $4M.  This will harm the middle class and those who try to raise their status into the upper middle class more than it will harm billionaires.  The ultra-rich who signed up for Mr. Buffett's big giving pledge have already structured their estates to pass into tax-free foundations and giving vehicles they control through trust agreements.  George Lucas' designation of the proceeds from Lucasfilm's sale to a charity he favors is a classic example of how the ultra-rich can always avoid estate taxes.  Giving your own money to a non-profit you control is a legal way to continue paying your living expenses.  The aspirational middle class may not have access to the same kinds of estate-preservation strategies unless they can afford very competent wealth managers and tax attorneys.  This is why the proposed policy's endorsement of a strong graduated tax on larger estates is meaningless.

True estate tax reform would begin with the elimination of the tax deductibility of charitable contributions.  That won't happen, of course.  Non-profit executives who derive their funding from endowed foundations would lobby against it and so would wealthy donors who fund political campaigns.

I'll give you a plan for real, comprehensive tax reform.  Have the U.S. Treasury study the history of tax collection in the U.S. and identify the point on the Laffer Curve that maximizes gross revenue.  I suspect it's somewhere between 16% and 19%, which means Warren Buffett probably isn't undertaxed at all if he pays 17.4%.  Once we've identified that optimal point, make that the flat tax rate for all income with no deductions, exemptions, or carry-overs for any reason.  Taxing earned income, unearned income, capital gains, and estates at that one rate will enormously simplify the government's operations.  It will also render redundant the hordes of accountants and attorneys who perform little productive work.  Tax planners represent as much of an overhead burden for the economy as tax collectors.  I know the federal government will never adopt my plan because I can't bundle as many campaign contributions as Warren Buffett.