Has the stock market finally caught up with the economy?

For the past two years, many important economic indicators have pointed to the probability of a recession, either in 2019 or 2020. These include: the $9 trillion corporate debt load; almost $14 trillion in consumer debt (having risen for 16 straight quarters); an impending retail business Armageddon (we’ve seen the beginnings of this with major retail chains filing for bankruptcy), a significant slowdown in home purchases; a continuing decline in small business formation; and the yield curve coming close to inverting (when short term Treasury bills have a higher yield than long term T-bills). Call me a pessimist, but all of these trends are precursors to recessions. In fact, an inversion of the yield curve has predicted all of the recessions since the 1950s!

Now the stock market, which is on course to have the worst December since 1931 (despite a temporary reprieve), seems to have caught up with the news. Even the faux economists, employed by big business and private equity managers, have started to talk about a recession. The question at this point should be not when, but rather how bad will the recession be?

That question might well be answered by looking at the history of the post 2008 “recovery”. A few things stand out. First, the recovery was fueled by historically low interest rates (actually negative interest rates at some point) which encouraged consumers and businesses to buy, buy, buy on credit. This occurred during a period of very low inflation. Since inflation reduces debt burden (the debtors end up paying back $ that are worth less than they were when the debt was incurred), low inflation results in a greater burden of debt on consumers and businesses which eventually affects demand. BTW, banks make out like bandits under these circumstances, and as a consequence we have seen further financialization of the economy, the major source of runaway inequality.

But not to worry. A third source of demand (besides businesses and consumers) in the economy is government, and, at least at the federal level, the government has followed a policy of stimulating the economy for the past 10 years by spending more than it takes in. Lately, tax cuts under Trump, without spending reductions, have put more money into the economy (primarily in the hands of the rich. As a result the economic boost in the past year has been minimal, since tax cuts for the 1% always have generated less demand than those for the 99%.

When folks wake up to the fact that the Trump tax cuts put very little into their pockets and their wage increases (if they actually got any) are just barely keeping up with inflation, will they keep spending on the hope that their future earning are going to increase significantly? While early reports indicate that holiday shopping is up, we probably need to see what happens in the next few months, when the bills come due and anticipated tax refunds don’t necessarily materialize.

One person who has probably seen the writing on the wall is the Fed Chairman, Jerome Powell. I can only guess at his motivation, but it looks like he’s aiming for a “soft landing” with regard to the coming recession. By raising interest rates now, he hopes to curtail borrowing and keep the economic “house of cards” from collapsing all at once. 

In a sense we have all been living now on borrowing against the future. From Forbes -  “...corporate debt is now 72% of GDP. That's in addition to the government debt that is approaching (or has passed depending on how you count debt) 100% of GDP and household debt at 77% of GDP. Add in 81% financial sector debt, and the U.S. combined debt-to-GDP ratio is near 330%.” And from Market Watch – “Recalling the 2008 crisis, worriers say excessive leverage is building among U.S. firms, many of whom took advantage of low interest rates after the financial crisis to load up on cheap debt …Corporate debt levels relative to U.S. gross domestic product have pushed past the previous peak hit during the 2008 financial crisis.”

All of this, plus the petulant fool in the White House, seems to have given investors a case of the jitters. Hence the volatility of the market. Whether the market will continue its decline is a crapshoot. As a result of massive buybacks of stock and the financialization of the economy, I would argue the market is no longer the bellwether of economic crises.

But by all other measures, the US economy is overdue for a recession. Now it appears we can add the market to the growing list of warning signs.

Thank you, Lara Trump

On Saturday (12/22) the local newspaper, the Wilmington StarNews published an op/ed piece by Lara Trump, Donald's daughter-in-law. (Note: She is a native Wilmingtonian).

In the op/ed Lara extolls the "booming economy" and asks everyone to think about her father-in-law's Christmas gift to them. The following is the letter to the editor I submitted in response.

Thank you, Lara Trump, for the latest edition of fake news about America’s booming economy, which appeared in the StarNews (12/22). It is ironic that it was published at the end of the worst week for the stock market since 2008 and possibly its worst December since 1931.

Your assertion that minimum wage workers have seen their jobless rate decline seems more like a cruel joke than a real Christmas gift. A minimum wage job for a full-time worker grosses $15,000/year. They may be working, but their families are still living in poverty. It would mean something if the minimum wage were raised to $15/hr, something the grinch in the WH totally opposes.

The truth is that in this “booming economy” workers’ wages have barely kept pace with inflation. And the low unemployment rate is due, in part, to the fact that many workers have given up finding a decent paying job and dropped out of the labor force, while others work two or more part-time jobs to make ends meet. The labor participation rate (the percentage of total population working or looking for work) has actually dropped several percentage points for all age groups (18-65) since 2008.

Not that your father-in-law wasn’t very generous to your wealthy friends. But his tax cuts for the rich haven’t trickled down. And they won’t. Rather they have contributed to greater inequality, in a nation that already leads the world in the gap between the 1% and the rest of us.

This holiday season, my heart and money go out to those who have been left behind, shut out, tear gassed and locked up by the Trump administration. My Christmas present to them is to continue to fight for equality and justice for ALL.

More on the "booming economy" in a future post.

Book Review - "The Color of Law" - Part 1

My decompression from the election has given me a chance to get back to reading and hopefully writing. This week I resumed reading a book given to me by a friend, The Color of Law, by Richard Rothstein and decided it was certainly worth an extended post.

Rothstein’s thesis is captured by the book’s subtitle “A Forgotten History of How Our Government Segregated America”. Rothstein argues that the national, state and local governments throughout the country (the vast majority of his examples are from areas outside the South) created a segregated society in the US, starting with the end of Reconstruction and down through the 1960s.

The resulting division of American society is thus almost entirely due to de jure segregation and not a product of individual choice, that is de facto segregation. The ramifications of this conclusion for public policy are immense. It puts to rest the arguments of conservatives that the government has no business actively dismantling segregation or legislating reparations for past injustices to the African American (and other minority) communities.

Rothstein begins by dissecting, with “surgical precision”, 20^th Century housing policy in the US. For example, he traces the development of public housing during the New Deal and WW II. In many cases, legally segregated public house projects built under the Public Works Administration, replaced urban communities that had been integrated. Even during WW II, temporary housing for war workers was either segregated or for whites only, resulting in African American workers living in overcrowded inner-city slums. Following the war, the Truman administration, bowing to pressure from Southern Democrats, rejected amendments to the 1949 Housing Act that would have prohibited segregation and discrimination in public housing.

But by that time the die was also cast in terms of the private housing sector. In the post WW II era, zoning laws, although no longer explicitly “race biased”, had effectively segregated most urban areas and excluded most black families from middle class suburbs. With origins going back to WW I and extending into the Depression, WW II and beyond, a new form of exclusion came into play. Policies adopted by government agencies, the Home Owner’s Loan Corporation (HOLC), the Fair Housing Administration (FHA) and the Veterans’ Administration (VA), under the general rubric of “red-lining”, denied approval of low-down payment, low interest mortgages for African Americans and to developments that failed to explicitly exclude blacks. Thus, in the 1950s and 60s, the “American Dream” of owning a home of your own in the suburbs was, by government action, guaranteed to remain for whites only. Even middle-class blacks were, for the most part, confined (sic) to urban ghettos.

Rothstein also looks at how the courts willingly enforced restrictive covenants, which were written into deeds, preventing the sale or rental of properties to any but members if the Caucasian race. He documents how FHA policies directly contributed to “white flight” and how local governments used their power to prevent developers who planned to open their developments to African Americans. Furthermore, to shift “African Americans away from downtown business districts so that white commuters, shoppers and business elites would not be exposed to black people”, slum clearance projects were developed. By tearing down African American residential areas and failing to rebuild them with new, affordable housing, these projects furthered the impoverishment of blacks and reinforced segregation.

Rothstein also focuses on the failure of the local and state government to protect blacks who, during the 1950s and 60s moved into previously all white neighborhoods, from racist violence. He further documents how federal, state and local policies suppressed the incomes of African Americans, thus preventing them from being able to accumulate enough money to make down payments on a house. The benefits of Social Security, minimum wage protections and union recognition excluded occupations where African Americans and other minorities predominated. Under the New Deal and during WW II, discrimination against black workers was rampant, even when it was technically illegal. Confined to low wage classifications, blacks had little opportunity to move into middle class neighborhoods, even after fair housing laws were passed.

The author concludes his analysis by comparing efforts to end racial discrimination in several different areas of society. In some cases, such as public accommodations, it is possible to overturn discrimination by addressing the future – that is, requiring non-discrimination is an adequate remedy. In these aspects of society, there is no “structural legacy” (although I think the author may overstate the case) that continues to affect opportunity once the laws are passed and effectively implemented. Not so for housing segregation (and I would argue for school segregation, since the latter is based on housing segregation). Housing segregation requires affirmative actions to undo the history of de jure segregation!

For several reasons, race neutral policies do not offer real remedies with regard to housing segregation. Among them are the lack of social mobility which has become more pronounced since the 1960s; general economic decline in areas where African Americans live which; the lack of educational opportunity due to underfunded schools in segregated areas with large African American populations (inner cities and rural areas); tax code benefits to white homeowners which did not accrue to black renters; and so on.

The past continues to replicate itself in the barriers to home ownership for African Americans. The incredible medium wealth gap between white and blacks (more than 10 to 1 and growing) is largely a consequence of the lack of opportunity to accumulate “home equity” resulting from segregation. Note that home equity represents about 2/3rds of wealth for middle class families. Race neutral policies will do nothing to overcome this legacy of segregation and often end up exacerbating it.

As the author points out, blacks, as a result of de jure segregation, missed out on the great middle-class prosperity of the 1950s and 60s, when white families were “moving on up”. And the situation continues to get worse. The subprime lending crash of 2008 disproportionally affected minority home owners, and if current trends continue, median black family wealth may well approach $0 in a few decades.

The $64.000 question remains. How can we fix this? The author has some suggestions. More on that in my next post.