William H. Gross Managing Director of PIMCO. Investment Analyst. William H. Gross Stamp Gallery on Smithsonian’s National Postal Museum Stamp Gallery, Author Bill Gross on Investing. Morningstar contributor. There Once Was a Time When the Super-Rich Needed a Middle Class to Be Successful - Not Any More Times have changed -- and the elites inhabit their own private economy. November 5, 2013. America is falling apart and this nations super-rich are to blame. There was once a time in America when the super-rich needed you, and me, and working-class Americans to be successful. They needed us for their roads, for their businesses, for their communications, for their transportation, as their customers, and for their overall success. The super-rich rode on the same trains as us, and flew in the same planes as us. They went to our hospitals and learned at our schools. Their success directly depended on us, and on the well-being of the nation, and they knew it. But times have changed, and the super-rich of the 21st century no longer think that you and I are needed for their continued success. And in some ways, they have given up on America, period. As Paul Buchheit brilliantly points out over at AlterNet, As they accumulate more and more wealth, the very rich have less need for society. At the same time, theyve convinced themselves that they made it on their own, and that contributing to societal needs is unfair to them. There is ample evidence that this small group of takers is giving up on the country that made it possible for them to build huge fortune. Buchheit goes on to say that, The rich have always needed the middle class to work in their factories and buy their products. With globalization this is no longer true... They dont need our infrastructure for their yachts and helicopters and submarines. They pay for private schools for their kids, private security for their homes. They have private emergency rooms to avoid the health care hassle. All they need is an assortment of servants, who might be guest workers coming to America on H2B visas, willing to work for less than a middle-class American can afford Unfortunately, these millionaires and billionaires who have given up on America and on the working class are in control of the political process in this country. They have brainwashed Republicans into thinking that the success of working-class Americans no longer matters for the future of this nation. As a result, Republicans are no longer investing in things that have traditionally made America - and the working-class - successful. Take Americas infrastructure for example - or lack thereof. According to the American Society of Civil Engineers annual report card on Americas infrastructure, Americas infrastructure is a mess. Our roads are falling apart, our transportations systems are in turmoil, and our energy and electrical systems are stuck back in the 1900s. A new graph released by investment research firm BCA shows why. Non-defense related infrastructure spending was around $325 billion per year when George W. Bush stepped foot inside of the White House. Today, its around $235 billion per year, a $90 billion drop in funding from when Bush took office. Republicans, brainwashed by Americas super-rich, have repeatedly refused to fund comprehensive infrastructure spending bills, all in the name of austerity. But cutting funding to the nations infrastructure isnt the right way to address Americans debt or spending problems. And it certainly isnt the right way to rebuild this nation. As Cardiff Garcia over at The Financial Times points out, Its also likely that much of the investment that has been forgone in the name of fiscal consolidation will have to be made eventually anyways - only it will be made when rates are higher, exacerbating the long-term fiscal outlook rather than improving it. And as Think Progress points out, continued underfunding in this arena over the coming years will cost businesses a trillion dollars in lost sales and cost the economy 3.5 million jobs. William H. Gross, author, financial manager and co-founder of investment firm Pacific Investment Management Company. PIMCO is one of the largest active global investment firms in the world, with over $2 TRILLION in assets under management in 2012. Developed economies work best when inequality of incomes are at a minimum. Wall Street Legend Admits: ‘We Got Rich Off the Backs of Workers’ Posted by: Richard Rowe in Economic Issues, Human Interest, Liberals in Action, Most Popular on AATTP, TEApublican Smack Downs November 2, 2013 People are afraid of chance, afraid of the dark. A human’s power is in his intelligence, and the nature of intelligence is that of pattern recognition; without a recognizable pattern, we’re left with chaos, powerlessness and fear. We fear the dark we can’t see into. To put order to the chaos, some people pray, others create conspiracy theories and still others grasp desperately for retroactive evidence of divine design and will. Those young and privileged by chance will often talk themselves into believing that they were granted privilege by God, or by some dint of inherent superiority. That’s the heart of Divine Right — the belief that you DESERVE whatever fate has handed you, absent of any real evidence to that effect. For some, denying chaos is the only means to defeating a fear of the dark, of grasping at the illusion of security in a frighteningly random world. For those willing and able, it is the very pattern recognition of intelligence that allows it to solve the paradox of good fortune. But the desire to solve that paradox rarely comes up, except for the self-made wealthy who in the search for wealth, have had to question if they’ll know when enough is enough. Self-made men like Warren Buffett and Bill Gates have faced that chaos, and have come to the same peace with it that did their spiritual forebear, Andrew Carnagie. These super-rich have seen the chaos for what it is, and realized that they were, more than anything else, just very, very lucky. That’s a frightening thing to face, because that realization precedes another and far fiercer emotion than fear of the dark: Fear for ones’ very humanity. Gross has been donating to charitable causes like Duke University, Doctors Without Borders and to various hospitals and medical foundations. Gross is known for his colorful memos and letters to investors, and this one may be the missive to top them all. Thanks again to Bill Gross, who among a few very respected others, shows us what great men can do when they’re not afraid of the dark. With the budget and debt ceiling crises temporarily averted, perhaps a future economic priority will be to promote economic growth; one way to do that may be via tax reform. How to proceed depends as always on the view of the observer and whether the glasses are worn by capital, labor or government interests. Having benefited enormously via the leveraging of capital since the beginning of my career and having shared a decreasing percentage of my income thanks to Presidents Reagan and Bush 43 via lower government taxes, I now find my intellectual leanings shifting to the plight of labor. He often tells his wife Sue it’s probably a Kennedy-esque type of phenomenon. Having gotten rich at the expense of labor, the guilt sets in and I begin to feel sorry for the less well-off, writing very public Investment Outlooks that “dis” the success that provided me the soapbox in the first place. If your immediate reaction is to nod up and down, then give yourself some points in this intellectual tête-à-tête. Still, I would ask the Scrooge McDucks of the world who so vehemently criticize what they consider to be counterproductive, even crippling taxation of the wealthy in the midst of historically high corporate profits and personal income, to consider this: Instead of approaching the tax reform argument from the standpoint of what an enormous percentage of the overall income taxes the top 1% pay, consider how much of the national income you’ve been privileged to make. In the United States, the share of total pre-tax income accruing to the top 1% has more than doubled from 10% in the 1970s to 20% today. Admit that you, and I and others in the magnificent “1%” grew up in a gilded age of credit, where those who borrowed money or charged fees on expanding financial assets had a much better chance of making it to the big tent than those who used their hands for a living. Yes I know many of you money people worked hard as did I, and you survived and prospered where others did not. A fair economic system should always allow for an opportunity to succeed. Congratulations. Smoke that cigar, enjoy that Chateau Lafite 1989. But (mostly you guys) acknowledge your good fortune at having been born in the ‘40s, ‘50s or ‘60s, entering the male-dominated workforce 25 years later, and having had the privilege of riding a credit wave and a credit boom for the past three decades. You did not, as President Obama averred, “build that,” you did not create that wave. You rode it. And now it’s time to kick out and share some of your good fortune by paying higher taxes or reforming them to favor economic growth and labor, as opposed to corporate profits and individual gazillions. You’ll still be able to attend those charity galas and demonstrate your benevolence and philanthropic character to your admiring public. You’ll just have to write a little bit smaller check. Scrooge McDuck would complain but then he’s swimming in it, and can afford to duck paddle to a shallower end for a while. If you’re in the privileged 1%, you should be paddling right alongside and willing to support higher taxes on carried interest, and certainly capital gains readjusted to existing marginal income tax rates. Stanley Druckenmiller and Warren Buffett have recently advocated similar proposals. The era of taxing “capital” at lower rates than “labor” should now end. There was a time in Pimcoland long, long ago; so long ago that it now seems like a fairytale – except it wasn’t. I had criticized a large Fortune 500 company about its balance sheet and use of commercial paper. It wasn’t really meant to be company-specific but more indicative of the growing amount of leverage that our credit system was accommodating. The company took it personally. Sorry about that. I mention it now in the age of the golden Scrooge McDuck because another large company – I shall name it Company X to be safe – is again representative of an excess that may haunt America’s future. X is a well-known corporation that, to put it simply, has grown earnings and earnings per share accompanied by nearly flatline revenues. This troubling trend began nearly a decade ago – sales having increased by only 9% since 2003 – barely a percentage point a year. Its most recent quarter in 2013, as a matter of fact, showed no improvement, with revenues actually declining by 1% instead of moving up. Profits, however, increased because the company cut expenses along the way. Earnings per share (EPS) did even better, because X used some of its cash flow to buy back stock instead of reinvesting much of it in new plant and equipment. What struck me was not this unmasking of company X’s secret sauce to elevate its stock price, but the similarity of this corporation to the plight of the broader U.S. and even global economy. Never have American companies sent a greater share of their sales to the bottom line. Even when S&P 500 companies have witnessed a decline in corporate earnings, as shown in Chart 1, they have still experienced EPS gains. X and many companies in the S&P 500 are remarkably similar. The U.S. economy and Company X are lookalikes as well, perhaps even twins. Revenue growth in the U.S., for instance, can best be shown by national income or its proxy, more commonly known as nominal GDP. While our annualized nominal GDP growth rate has been a tad better than the 1% that Corporation X has shown over the past 10 years, our five year moving average has slowed from nearly 7% to just above 3% in recent years and struggled to do just that, as shown in Chart 2. “Expenses” have been cut significantly as the share of wages to GDP has declined from 47% to 43% during the past decade. Before-tax profits as a percentage of GDP on the other hand have increased from 10% to 14% over the same period, mimicking what has happened with Company X. And here’s a rather incredible kicker to this theoretical comparison. The U.S. economy – thanks to the Fed – has been operating a 1 trillion dollar share buyback program nearly every year since late 2008, buying Treasuries but watching much of that money flow straight into risk assets and common stocks instead of productive plant and equipment. My goodness! If X can’t grow revenues any more, if X company’s stock has only gone up because of expense cutting and stock buybacks, what does that say about the U.S. or many other global economies? Has our prosperity been based on money printing, credit expansion and cost cutting, instead of honest-to-goodness investment in the real economy? The simple answer is that long-term growth for each company, and for all countries, depends not on balance sheet alchemy and financial wizardry, but investment and the ultimate demand for a company or a country’s “products.” In the U.S. we have had little of that, watching our investment (ex housing) as a percentage of GDP decline from 14.6% to 12.2% over the past 13 years. Similarly, our net national savings rate (total savings after depreciation) has sunk below ground zero over the past few years before rebounding recently, as shown in Chart 3. Without savings there can be no investment. Without investment there can be little growth.
Posted on: Sat, 05 Jul 2014 23:29:42 +0000
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