Americas Inequality Machine Is Sending the Dow Soaring

The Great Recession is a speck in the rear-view mirror for America’s financial markets. They’ve advanced far beyond pre-crisis levels. In fact, Goldman Sachs says you can go back a century before 2008, and still not find a “bull market in everything” like today’s.

If the real economy had roared back the same way, Donald Trump might not be president. Instead, it’s been a grind. While unemployment is near a two-decade low, wages have grown slowly by past standards. They’re nowhere near keeping pace with the asset-price surge.

Elected on a promise of better jobs and pay, Trump is about to pull the most powerful lever any government has for firing up the economy: fiscal policy. By slashing taxes on corporate profits, its authors say, the Republican plan will unleash the animal spirits of American business — and everyone will benefit.

A rising tide does lift all boats — but nowadays, in the U.S., not equally. Under both parties, recoveries have become increasingly lopsided. The current one has helped millions of people find work; it’s also benefited asset-owners far more than people who trade their labor for a paycheck. Income distribution, already the most unequal in the developed world, is getting worse. And that’s starting to influence everything from America’s spending habits to its elections.

“The story of our time is polarization — by party, by class and by income,” said Mark Spindel, founder and chief investment officer at Potomac River Capital in Washington, and co-author of a 2017 book about the Federal Reserve. “I don’t see anything in the tax bill to make that any better.’’

The Fed’s post-2008 toolkit included massive purchases of financial assets, which supported a liftoff on the markets but took time to trickle through to the real economy. Trump’s tax critics say his plan will have a similar effect, because companies will spend the windfall on share buybacks or dividends, instead of job-creating investments. Plenty of executives say that’s exactly what they’ll do.

Bank of America’s most recent buyback program totals $18 billion. Chairman Brian Moynihan championed the tax proposal this month. “It’s good for corporate America, and it’s good for us,” he said.

There was an echo there of one of the American business world’s classic slogans. As applied to the Trump tax cuts, it’s highly misleading, according to Nell Minow, vice chair of ValueEdge Advisors.

Good for U.S.?

This isn’t a case of “what’s good for General Motors is good for the U.S.,” said Minow, who’s dedicated her career to pushing corporations toward long-term investments in people and businesses. “In my list of the top 100 things companies should do for sustainable wealth creation, buybacks would be number 100.”

Companies in the S&P 500 Index bought $3.5 trillion of their own stock between 2010 and 2016, almost 50 percent more than in the previous expansion. The pace has slowed in the last two years. The tax bill could kickstart it.

Buybacks have fueled the stock rally (there’s disagreement about how big a part they played). And the rally’s biggest benefits go to the richest. On Twitter last week, Trump invited his followers to check their swelling retirement accounts. Only about half the country’s households have any such nest-egg.

Soaring markets helped the top 1 percent of Americans increase their slice of the national wealth to 39 percent in 2016, according to the Fed’s Survey of Consumer Finances. The bottom 90 percent of families held a one-third share in 1989; that’s now shrunk to less than one-quarter.

Republicans are gambling that they can run the economy so hot that companies will hire more workers, and eventually boost their wages. There’s a strong argument that the private sector can train them better than government programs can.

‘Benefits Everybody’

“The more growth we have, the more that benefits everybody,” said Ike Brannon, a former Bush administration Treasury official who’s now president of Capital Policy Analytics, a consulting firm. “It forces businesses to train people at the fringes.” He points to the late 1990s, when growth averaged more than 4 percent and the poorest one-fifth of households saw substantial income gains.

Looming in the background then was a technology-stocks bubble. It burst in March 2000, plunging the economy into recession. What happened next is telling — it illustrates the perverse asymmetry of bubbles. In the following three years, those poorest households saw their incomes fall more than twice as much as their richest counterparts.

The pattern was repeated after the even bigger housing crash of late 2007. Today, even after an increase of more than 9 percent over two years, incomes at the bottom are short of pre-crisis peaks, while higher earners have comfortably surpassed them.

Japan, which is also preparing corporate tax cuts, plans to make them available only to businesses that increase spending on wages and investment. In the U.S., companies are flush with cash but they’re using it to buy more customers via mergers, or reward capital through dividends, according William Spriggs, chief economist at the AFL-CIO, the country’s biggest labor union group.

American workers won’t put up with any more business cycles that yield them few gains, he says. “This is the last time they can get away with it, because the backlash is going to be huge.”

In the end, the trend toward inequality amounts to capitalist suicide, Spriggs argues. Companies need demand, which requires rising wages so that workers can afford goods and services. “Businesses can’t create themselves, they respond to general growth in income,” he said. “Inequality chokes off business development.”

Support for that kind of argument is surfacing in unlikely quarters.

The International Monetary Fund used to be so entwined with American government thinking that its preferred market-friendly recipe was known as the Washington Consensus. Now, the Fund is cautiously backing redistributive measures — falling foul of the Trump administration in the process.

In October, the IMF said rich countries can share their prosperity more evenly, without sacrificing growth, by shifting more of the tax burden onto high earners. It warned that “excessive inequality can erode social cohesion, lead to political polarization, and ultimately lower economic growth.”

‘Broken System’

The U.S. is already experiencing some of those strains.

During last year’s election campaign, both major parties effectively broke in half. In both cases, an outsider candidate scored unexpected wins by running against the party establishment, and railing at an economic system they said was rigged against ordinary Americans.

Self-described socialist Bernie Sanders surprised pundits by mounting a serious challenge in the Democratic contest. Trump won his party’s nomination and the presidency. He told voters he had experience on the buy-side of American politics, having paid for favors from both parties, and so was well-placed to fix a “broken system” dominated by corporate lobbyists.

Now, Trump is about to hand corporations — which are already making high profits by historical standards — a giant tax cut. The bill “addresses problems we don’t have, and makes existing problems worse,” said Alan Krueger, an economics professor at Princeton University. “Especially the deficit, inequality, health care, and infrastructure investment.”

If the tax changes end up helping markets most, they’ll be widening a gap noted last month by JPMorgan Chase’s chief investment strategist, Jan Loeys. There’s not much sign of “economic overheating,” which happens when companies start spending more on wages and other inputs, Loeys argued. “Financial overheating, in contrast, is well advanced,” he wrote. “It merits monitoring a lot more closely for signs of bubble-trouble.” 

Even Trump’s Treasury has flagged the danger. Last week, the Office of Financial Research made its annual report to Congress on the vulnerabilities of the financial system. It was sanguine about most of them, from inflation and bank solvency to debt levels.

But the agency, which color-codes its assessments, did see one major threat — from market risk. That gauge is at red alert.

    Read more: http://www.bloomberg.com/news/articles/2017-12-15/how-america-s-inequality-machine-is-firing-the-dow-into-orbit

    Democrats Pull Out of Trump Meeting After His Shutdown Tweet

    The top two Democratic leaders in Congress pulled out of a meeting with President Donald Trump on Tuesday after he tweeted that a budget deal with them was unlikely, raising the odds that the U.S. government will partially shut down next week.

    Trump proceeded with the meeting anyway, calling reporters into the White House Roosevelt Room to see name cards for House Minority Leader Nancy Pelosi and Senate Minority Leader Chuck Schumer at empty seats. The president was joined by House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell.

    Trump blasted the Democratic leaders as “all talk and no action” and said he wasn’t surprised they didn’t come to the session. He said he expected Pelosi and Schumer would soon meet with him, but if there’s a shutdown, “I would absolutely blame the Democrats.”

    The Democratic leaders said after Trump’s tweet that they’d skip a “show meeting” at the White House and instead ask for a meeting with Ryan and McConnell.

    “Given that the President doesn’t see a deal between Democrats and the White House, we believe the best path forward is to continue negotiating with our Republican counterparts in Congress instead,” they said in a joint statement.

    Pelosi later criticized the president on Twitter, saying he was engaging in political stunts.

    “@realDonaldTrump now knows that his verbal abuse will no longer be tolerated. His empty chair photo opp showed he’s more interested in stunts than in addressing the needs of the American people. Poor Ryan and McConnell relegated to props. Sad!,” Pelosi tweeted.

    Trump sparked the dispute Tuesday morning.

    “Meeting with ‘Chuck and Nancy’ today about keeping government open and working,” Trump said on Twitter. “Problem is they want illegal immigrants flooding into our Country unchecked, are weak on Crime and want to substantially RAISE Taxes. I don’t see a deal!”

    ‘Urgent Issues’

    “It’s disappointing that Senator Schumer and Leader Pelosi are refusing to come to the table and discuss urgent issues,” White House Press Secretary Sarah Huckabee Sanders said in a statement. “The President’s invitation to the Democrat leaders still stands and he encourages them to put aside their pettiness, stop the political grandstanding, show up and get to work. These issues are too important.”

    McConnell and Ryan echoed the White House in a joint statement.

    “We have important work to do,” they said. “There is a meeting at the White House this afternoon, and if Democrats want to reach an agreement on these issues, they will be there.”

    If Democrats and Republicans do not reach a deal on spending by Dec. 8, the federal government could face a partial shutdown.

    Investors’ response to the dispute was muted. The dollar dipped after the Democrats’ statement and Treasuries extended gains, with the 10-year yield reaching the 2.31 percent level, signaling some movement to safety. But the U.S. stock market’s benchmark Standard & Poor’s 500 index continued to rise as investors placed greater emphasis on remarks made by Federal Reserve Chairman nominee Jerome Powell which analysts interpreted as favorable to bank stocks.

    ‘Dreamers’ Deal

    Some Democrats have called for any year-end spending deal to include legislation to codify an Obama administration policy protecting from deportation young undocumented immigrants brought to the country as children. Trump, who announced in September he was ending the Obama program, has said any deal protecting the so-called “Dreamers” should be paired with funding for a border wall and legislation that would reduce legal immigration.

    The Dec. 8 deadline was set in a deal Schumer and Pelosi struck with Trump — against the wishes of Ryan and McConnell — to avoid a government shutdown and debt default in September. They agreed to fund the government at current levels and suspend the debt limit for three months.

    Since that deal was struck, Congress has focused mostly on a tax overhaul and has made little progress reaching a spending deal to keep the government open. Other issues have also piled up, including the fate of cost-sharing subsidies that help defray deductibles and co-payments for low-income people with Obamacare insurance policies. Trump has stopped reimbursing insurers for the subsidies.

    The negotiations also include efforts to lift legislative caps on military spending, raise the debt limit, provide more funding for disaster assistance, and extend a children’s health insurance program and an intelligence surveillance program.

    Several of those issues face year-end deadlines and may end up in a huge spending plan requiring votes from both Republicans and Democrats.

    Congressional Talks

    The Trump administration does not want to include immigration as part of the year-end spending deal to keep the government open, White House spokeswoman Sarah Huckabee Sanders said on Monday.

    “We hope that the Democrats aren’t going to put our service members abroad at risk by trying to hold the government hostage over partisan politics, and attaching that,” Sanders told reporters on Monday.

    A Senate Democratic leadership aide said that Democratic leaders were able to reach a deal on a spending plan in April with Republicans in Congress and not the White House. They are looking to do that again.

    In recent talks on a year-end budget deal, Democrats and Republicans in Congress have discussed a possible agreement to lift budget caps established under an Obama-era debt deal. The agreement would add $200 billion in spending above the caps over two years. However, the two sides haven’t agreed to divide the money equally between defense and non-defense programs, which Democrats want. Republicans are pushing for more defense spending than domestic spending.

      Read more: http://www.bloomberg.com/news/articles/2017-11-28/trump-tweets-i-don-t-see-a-deal-to-keep-government-open

      U.S. Growth at Above-Forecast 3% on Consumers and Businesses

      The U.S. economy expanded at a faster pace than forecast in the third quarter, indicating resilient demand from consumers and businesses even with the hit from hurricanes Harvey and Irma, Commerce Department data showed Friday.

      Key Takeaways

      While GDP grew more than anticipated, analysts look to another key measure to assess the true health of the economy. Final sales to domestic purchasers, which strip out trade and inventories — the two most volatile components of the GDP calculation — climbed 1.8 percent, the slowest since early 2016, after rising 2.7 percent in prior quarter.

      The fallout from the hurricanes was mixed, probably depressing some figures while lifting others. The storms inflicted extensive damage on parts of Texas and Florida, though the effect is likely to be transitory as economic activity is expected to rebound amid rebuilding efforts.

      Consumer spending, which accounts for about 70 percent of the economy, added 1.6 percentage point to growth last quarter. That was driven by motor vehicles, as Americans replaced cars damaged by the storms, while services spending slowed to the weakest pace since 2013. Even so, a steady job market, contained inflation and low borrowing costs are expected to provide the wherewithal for households to sustain their spending.

      The first reading of GDP, the value of all goods and services produced, also showed continued strength in business investment, indicating growth is broadening out to more sources beyond household consumption. Companies are upbeat about the outlook and overseas markets are improving, which may help boost exports and contain the trade deficit.

      At the same time, the details of business investment showed a mixed picture. The decline in investment in structures probably reflects the hit from Hurricane Harvey, especially on oil and gas drilling.

      Residential investment remained a weak spot. Builders are up against a shortage of qualified labor and ready-to-build lots at the same time sales are being held back by a shortage of available properties that’s driving up prices.

      Price data in the GDP report showed inflation picked up while still lagging behind the Federal Reserve’s 2 percent goal. Excluding food and energy, the Fed’s preferred price index — which is tied to personal spending — rose at a 1.3 percent annualized rate last quarter, following a 0.9 percent gain.

      Fed policy makers can point to evidence that growth is steady enough to allow them to keep raising interest rates, with investors expecting a quarter-point increase in December.

      While the economy is probably on solid footing in the ninth year of this expansion, the central bank and many economists expect GDP growth to slow beyond 2018, moving closer to 2 percent rather than the sustained 3 percent pace that the Trump administration says will happen if its tax plan is enacted.

      Economist Views

      “It’s hard to confidently discern the hurricane effects in this report, but the economy seems to be on pretty solid ground,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “The details are reasonably solid. Consumers stepped down a little from the second quarter but their spending still expanded at a decent pace.”

      The gain in equipment investment shows “businesses may be getting a little more confident about the expansion, both here in the U.S. and abroad,” he said. Overall, the report “probably gives a little more confidence to the Fed to hike rates before year-end, but I don’t think it’s a game-changer.”

      Other Details

      • Nonresidential investment — which includes spending on equipment, structures and intellectual property — increased 3.9 percent and added 0.49 percentage point to growth
      • Equipment investment jumped 8.6 percent for a fourth quarter of growth, longest streak since 2014
      • Residential investment fell at a 6 percent rate after 7.3 percent drop, worst two-quarter performance since 2010
      • Net exports added 0.41 percentage point to growth as exports rose, imports fell; inventories added 0.73 point, most since 2016
      • Government spending fell at a 0.1 percent rate; the figures reflected 1.1 percent in federal spending, driven by defense, while state and local outlays dropped 0.9 percent
      • After-tax incomes adjusted for inflation increased at a 0.6 percent annual pace, down from the previous quarter’s 3.3 percent; saving rate fell to 3.4 percent from 3.8 percent
      • GDP report is the first of three estimates for the quarter; the other two are due in November and December as more data become available

        Highlights of Third-Quarter GDP (First Estimate)

        • Gross domestic product grew at a 3% annualized rate (est. 2.6%) following a 3.1% gain in 2Q, best back-to-back quarters since 2014
        • Consumer spending, biggest part of the economy, grew 2.4% (est. 2.1%) after 3.3% in 2Q
        • Business fixed investment rose 1.5%, adding 0.25 ppt to growth; spending on nonresidential structures fell, equipment and intellectual property gained, residential dropped
        • Trade, inventories added a combined 1.14 ppt to growth
        • Commerce Dept. said it can’t estimate hurricanes’ impact on GDP; disaster losses on fixed assets, private and public, totaled about $131.4b

        Read more: http://www.bloomberg.com/news/articles/2017-10-27/u-s-growth-at-above-forecast-3-on-consumer-business-spending

        Banks Pine for Loan Growth as Clients Wait on Trumps Promises

        President Donald Trump’s pledges to overhaul taxes, trade, infrastructure and health care may thrill some corporate leaders, but it’s causing many to delay expansions. That’s bad for banks.

        Lending growth probably decelerated for a fourth straight quarter in the three months ended Sept. 30 across more than a dozen of the biggest U.S. banks, according to Royal Bank of Canada analysts and Bloomberg calculations. Their total loans may have ticked up just 1.8 percent, the smallest increase in more than two years, as commercial and industrial customers held off on buying equipment and building plants.

        Executives are “hesitant to borrow in the face of uncertainty,” said Jason Goldberg, an analyst at Barclays Plc. “Whether it’s potential tax reform, health-care uncertainties, or they’re unclear what infrastructure spending is going to look like, you’ve definitely seen corporates take a pause.”

        Washington’s inaction has been frustrating bankers for months, a sentiment that may surface anew when they start posting quarterly results this week. During the last round in July, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon lashed out, saying, “There would be much stronger growth if there were more intelligent decisions and less gridlock.” In June, Bank of America Corp. Chief Operating Officer Thomas Montag said corporate clients need clarity to make big investment decisions.

        Trump and his top economic adviser, Gary Cohn, have said they expect the financial industry to help fund growth. But instead, a dearth of progress on big legislation has stymied that business.

        Congressional Republicans spent much of September trying to resurrect a failed health-care bill. Then Trump told lawmakers his $1 trillion infrastructure plan may not rely on public-private partnerships, potentially throwing a wrench into a key priority. The president also released a tax plan that many analysts consider unlikely to win support until designers can prove it won’t balloon the federal deficit.

        For banks, the uncertainties are compounding challenges in lending, which also is being constrained by tighter regulation and slower-than-expected interest-rate hikes — factors that have crimped trading revenue too. Low yields have encouraged firms to issue bonds and use the proceeds to repay bank loans, said Alison Williams, an analyst at Bloomberg Intelligence. U.S. Bancorp CEO Andrew Cecere addressed the challenges at an investor conference last month.

        “With the low yield curve, there was a lot of debt issuance, and that debt issuance was used to pay down some bank lending,” he said. In addition, “there was some more uncertainty that entered the market because of some of the slowdown in the perceived timing of tax policy and trade policy and regulation,” slowing companies’ capital expenditures.

        ‘Mental Signal’

        Corporate executives’ outlook for the next six to 12 months deteriorated in July and August, with some respondents citing heightened policy uncertainty, the Federal Reserve Bank of Chicago said last month. The number of workers on U.S. payrolls declined in September for the first time since 2010, reflecting major disruptions from hurricanes Harvey and Irma.

        For now, bank investors are willing to look beyond that. The 24-company KBW Bank Index surged more than 30 percent from the November election to early March on optimism that Trump’s administration will eventually ease bank regulation, reignite inflation and drive up interest rates. The rally resumed in September as attention shifted to taxes.

        “People were underweight financials for a long time,” said Chris Whalen, an independent analyst and consultant. “When Trump got elected that was a mental signal for these guys that we should increase our allocation.”

        Investors continue to see reasons for optimism. Trump’s plan to cut corporate tax rates would be particularly beneficial for banks, whose burdens are often elevated by a lack of deductions. The six largest U.S. banks could see net income rise $6.4 billion under the administration’s proposal. And lenders still produce big profits. JPMorgan generated $26.5 billion in the 12 months through June, a record for any U.S. bank.

        Mortgage, Autos

        Yet expectations for the third quarter are measured. JPMorgan, the nation’s largest bank, may say Oct. 12 that adjusted profit rose 2 percent to $5.89 billion, according to analysts surveyed by Bloomberg. At Citigroup Inc., set to report the same day, profit probably slipped 1 percent to $3.57 billion.

        Wells Fargo & Co. and Bank of America report the following day and Goldman Sachs Group Inc. and Morgan Stanley release earnings next week.

        There are other reasons for concern. While consumers are still borrowing more, there’s mounting evidence they’re becoming less reliable, potentially ending a period in which losses were low. Credit cards face heightened competition, while an overheated auto market has led some lenders like Wells Fargo to pull back.

        And for mortgage lending, a big driver for banks in the run-up to the 2008 financial crisis, new rules have made it more difficult to make money. Survivors have been buying loans from smaller “correspondent” lenders, a strategy that’s started to run out of room.

        “You will see some pain this quarter,” Whalen said. “JPMorgan and Wells Fargo have been bidding aggressively.”

        Trading Declines

        Trading also is expected to be down, in part because the lack of congressional action has left clients with few reasons to buy or sell. Executives from JPMorgan, Citigroup and Bank of America told investors last month to expect declines ranging from 15 percent to 20 percent in the third quarter from the same period a year ago.

        That may leave investors and analysts looking past this quarter’s results to the end of the year, when lawmakers may have more progress to show on tax policy and other priorities.

        “Banks tend to be more optimistic looking out than they are in the current quarter, so we’ll see,” Barclays’s Goldberg said. “Pipelines are good. At the end of the day though, loan growth is a reflection of the economy and economic growth has been a little bit more subdued than desired.”

          Read more: https://www.bloomberg.com/news/articles/2017-10-09/banks-pine-for-loan-growth-as-clients-wait-on-trump-s-promises