Posts Tagged ‘stocks’

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While Wall Street celebrates yet another stock market record—surpassing 20,000 on the Dow Jones industrial average—most Americans have little reason to cheer. That’s because they own very little stock and therefore aren’t sharing in the gains.

The only possible response is, “That’s your damn stock market, not ours,” analogous to the response about Brexit and the expected decline in GDP by a woman in Newcastle.

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It’s true, even after recent declines, about half (48.8 percent) of U.S. households hold stocks in publicly traded companies directly or indirectly (according to the most recent Survey of Current Finances [pdf]).

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But, according to Ed Wolff (pdf), the bottom 90 percent of U.S. households own only 18.6 percent of all corporate stock. The rest (81.4 percent) is in the hands of the top 10 percent.

So, while the stock market has experienced quite a turnaround from mid-February of last year (when a barrage of selling sent the Dow Jones Industrial Average to its lowest close since April 2014), especially since Donald Trump’s November victory (including more than 100 points just yesterday), most Americans continue to be left out in the cold.

Clearly, a much better alternative for American workers would be to follow Shannon Rieger’s advice and look toward a radically different model: enterprises that are owned and managed by their employees. That would give them a much better chance of sharing in the wealth they create.

They would also then be able to finally say to mainstream economists and politicians, “That’s our GDP and stock market, not yours.”

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The capitalist machine is broken—and no one seems to know how to fix it.

The machine I’m referring to is the one whereby the “capitalist” (i.e., the boards of directors of large corporations) converts the “surplus” (i.e., corporate profits) into additional “capital” (i.e., nonresidential fixed investment)—thereby preserving the pact with the devil: the capitalists are the ones who get and decide on the distribution of the surplus, and then they’re supposed to use the surplus for investment, thereby creating economic growth and well-paying jobs.

The presumption of mainstream economists and business journalists (as well as political and economic elites) is that the capitalist machine is the only possible one, and that it will work.

Except it’s not: corporate profits have been growing (the red line in the chart above) but investment has been falling (the blue line in the chart), both in the short run and in the long run. Between 2008 and 2015, corporate profits have soared (as a share of gross domestic income, from 3.9 to 6.3 percent) but investment has decreased (as a share of gross domestic product, from 13.5 to 12.4 percent). Starting from 1980, the differences are even more stark: corporate profits were lower (3.6 percent) and investment was much higher (14.5 percent).

The fact that the machine is not working—and, as a result, growth is slowing down and job-creation is not creating the much-promised rise in workers’ wages—has created a bit of a panic among mainstream economists and business journalists.

Larry Summers, for example, finds himself reaching back to Alvin Hansen and announcing we’re in a period of “secular stagnation”:

Most observers expected the unusually deep recession to be followed by an unusually rapid recovery, with output and employment returning to trend levels relatively quickly. Yet even with the U.S. Federal Reserve’s aggressive monetary policies, the recovery (both in the United States and around the globe) has fallen significantly short of predictions and has been far weaker than its predecessors. Had the American economy performed as the Congressional Budget Office fore­cast in August 2009—after the stimulus had been passed and the recovery had started—U.S. GDP today would be about $1.3 trillion higher than it is.

Clearly, the current recovery has fallen far short of expectations. But then Summers seeks to calm fears—”secular stagnation does not reveal a profound or inherent flaw in capitalism”—and suggests an easy fix: all that has to happen is an increase in government-financed infrastructure spending to raise aggregate demand and induce more private investment spending.

As if rising profitability is not enough of an incentive for capitalists.

Noah Smith, for his part, is also worried the machine isn’t working, especially since, with low interest-rates, credit for investment projects is cheap and abundant—and yet corporate investment remains low by historical standards. Contra Summers, Smith suggests the real problem is “credit rationing,” that is, small companies have been shut out of the necessary funding for their investment projects. So, he would like to see policies that promote access to capital:

That would mean encouraging venture capital, small-business lending and more effort on the part of banks to seek out promising borrowers — basically, an effort to get more businesses inside the gated community of capital abundance.

Except, of course, banks have an abundance of money to lend—and venture capital has certainly not been sitting on the sidelines.

Profitability, in other words, is not the problem. What neither Summers nor Smith is willing to ask is what corporations are actually doing with their growing profits (not to mention cheap credit and equity funding via the stock market) if not investing them.

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We know that corporations are not paying higher taxes to the government. As a share of gross domestic income, they’re lower than they were in 2006, and much lower than they were in the 1950s and 1960s. So, the corporate tax-cuts proposed by the incoming administration are not likely to induce more investment. Corporations will just be able to retain more of the profits they get from their workers.

But corporations are distributing their profits to other uses. Dividends to shareholders have increased dramatically (as a share of gross domestic income, the green line in the chart at the top of the post): from 1.7 percent in 1980 to 4.6 percent in 2015.

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source (pdf)

Corporations are also using their profits to repurchase their own shares (thereby boosting stock indices to record levels), to finance mergers and acquisitions (which increase concentration, but not investment, and often involve cutting jobs), to raise the income and wealth of CEOs (thus further raising incomes of the top 1 percent and increasing conspicuous consumption), and to hold cash (at home and, especially, in overseas tax havens).

And that’s the current dilemma: the machine is working but only for a tiny group at the top. For everyone else, it’s not—not by a long shot.

We can expect, then, a long line of mainstream economists and business journalists who, like Summers and Smith, will suggest one or another tool to tinker with the broken machine. What they won’t do is state plainly the current machine is beyond repair—and that we need a radically different one to get things going again.

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We’ve just learned that the corporate payouts—dividends and stock buybacks—of large U.S. firms are expected to hit another record this year. At the same time, John Fernald writes for the Federal Reserve Bank of San Francisco that the “new normal” for U.S. GDP growth has dropped to between 1½ and 1¾ percent, noticeably slower than the typical postwar pace.

What’s the connection?

Fernald, as is typical of many others who have concluded the United States has entered a period of slow growth, blames the “new normal” on exogenous events like population dynamics and education.

The slowdown stems mainly from demographics and educational attainment. As baby boomers retire, employment growth shrinks. And educational attainment of the workforce has plateaued, reducing its contribution to productivity growth through labor quality. The GDP growth forecast assumes that, apart from these effects, the modest productivity growth is relatively “normal”—in line with its pace for most of the period since 1973.

What Fernald and the others never mention is that American companies’ embrace of dividends and buybacks comes at the expense of business investment, which is an important contributor to worker productivity and long-term economic growth.

In other words, what they overlook is the possibility that the current slowdown—which, “for workers, means slow growth in average wages and living standards”—may be less a product of exogenous events and more the way the U.S. economy is currently organized.

When workers produce but do not appropriate the surplus, they are victims of a social theft. And then, when a larger and larger portion of of the surplus is distributed to shareholders (both outside investors and corporate executives)—that is, the tiny group at the top who share in the booty—workers are, once again, made to pay the cost.

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One thing is clear in the current conjuncture: corporate investment in capital equipment is declining, and it’s dragging overall economic growth and labor productivity down with it.

In the second quarter of 2016, the U.S. economy grew at an annual rate of only 1.2 percent, which caught business commentators and Wall Street analysts by surprise. They expected something closer to 2.6 percent. And while consumer spending continued to increase (at at rate of 4.2 percent in the second quarter), business investment fell (at a 2.2 percent pace), and companies ran down inventories for the fifth consecutive quarter.

So,  what’s going on?

Given the centrality of business investment to capitalist growth, you’d think the business press would have a cogent, carefully elaborated analysis of why it’s declining during the current recovery.

Well, they don’t. All they can do is invoke their usual hand-waving gesture, “political uncertainty,” as the underlying cause. Political uncertainty is blamed for the slowdown in mergers and acquisitions and for sputtering business investment.

Most CEOs will be risk-averse and conservative with their balance sheets until they see signs of a growth rebound, even though they’re sitting atop piles of cash and the cost of capital is at all-time lows. They will also hold off investing until they have a better sense of the future tax and regulatory burdens they are likely to face next year.

Yes, there is a high degree of political uncertainty (in the United States, the United Kingdom, and elsewhere). But that doesn’t explain corporate behavior, especially their investment decisions.

One can just as easily reverse the argument: Political realities have to respond to corporate decisions (especially when growth is slowing). And the slowing of economic growth itself is a consequence of the corporate decisions to curtail private nonresidential fixed investment.

The alternative explanation is that corporations are responding quite certainly to their own market signals. First, they’re choosing to substitute labor for capital, given depressed wage growth around the globe.

“Instead of buying an expensive piece of machinery, businesses are hiring really cheap workers they can fire whenever they want,” said Megan Greene, chief economist at Manulife Asset Management.

And they’re reacting to the decline in their own index of success and failure, the corporate profit rate (which, as one can see in the chart of the top of the post, has been falling during the last two years).

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It’s not that corporations are doing nothing: they are engaged in massive mergers and acquisitions (just not at the same pace of 2015) and they’re using the profits they’ve accumulated since the recovery began to increase dividends, buy back stock, and reward their top managers.

So, is capital on strike? The Wall Street Journal suggests it is: “The investment plunge is a signal that business is on strike.”

And, given the way the economy is currently organized, the rest of us are forced to endure the consequences of capital’s decision to do whatever is necessary to restore its profitability.

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We have, by all accounts, a capitalist economic system.* But who are the capitalists?

It’s one of the questions I ask my students. And they always get the answer wrong. So, in my experience, do most other people.

But it’s a key issue. If we’re going to figure out how capitalism works—and, perhaps even more important, how to change it—we need to know who the capitalists are.

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Well, for starters, they’re not the “top 1 percent” or the “billionaire class”—although many capitalists are in fact members. Those groups, which have become part of our lexicon after Occupy Wall Street and the Bernie Sanders campaign, are defined by how large their incomes are. They’re clearly at the top of the pile in terms of the size of their incomes (and, even more, wealth) but they’re able to capture (and, via low tax rates, to keep) that money not by virtue of being capitalists, but by other means. They own stocks, bonds, and property (and receive dividends, capital gains, interest, and rent) and they are often chief executives of large corporations (and receive more equity share in addition to very high salaries). They benefit from capitalism but they’re not necessarily capitalists.

To put it differently, those who belong to the “top 1 percent” or the “billionaire class” receive large shares of the surplus created within capitalism but they don’t necessarily appropriate the surplus. They don’t “share in the booty” as capitalists; instead, a portion of the surplus is distributed to them by the group of people who are the real capitalists.

So, stockholders are not capitalists. They buy (or receive as compensation) shares in capitalist enterprises, and receive a part of the surplus in the form of dividends and capital gains. Nor are CEOs (and, for that matter, CIOs, CFOs, and other top executives). They’re hired to run the corporations on a daily basis, and often receive a cut of the surplus in the form of exorbitant salaries, benefits, stocks, and golden parachutes.

My students think that shareholders or chief executives are the capitalists but they’re wrong.

So, who are the capitalists?

As we often do with students, I answer that question with another question: who today occupies the position that is constituted—economically, politically, legally, and culturally—as the representative of “capital”?

And the answer is: the corporate boards of directors. The members of the boards of directors of corporations (say, of Standard & Poor’s 500 companies) are the ones who sit at the top and are ultimately responsible for the enterprises. They are the people who, during occasional meetings of the boards (for which they receive a small fee), decide the general direction of the corporation, hire and oversee top executives, and fend off crises. In other words, they occupy the position of capital and appropriate the surplus created by the workers within those entperprises.

To be clear, that doesn’t mean the capitalists get to keep the surplus they appropriate. Some of it is retained within the enterprise to hire more workers and to invest in new software and equipment (or, increasingly these days, to be kept as cash). Another portion of it is distributed to the management, to make sure the surplus continues to be produced by the workers, and as dividends to shareholders. And still another portion is distributed outside the firm—in the form of interest payments to banks, taxes to the government, and so on.

Within contemporary capitalism, then, capitalists are members of corporate boards of directors. And it’s a tiny group. Given that boards are made up of 10-15 members, we’re talking about (for the leading, S&P 500 companies) only 6250 individuals. Even less (closer to 4500), if we subtract interlocking directorates, that is, individuals who sit on more than one board.

For all kinds of reasons, capitalists are also members of the top 1 percent, the billionaire  class, stock owners, and chief executives. But, as capitalists, as appropriators of the surplus and the personification of capital, they’re a much smaller group.

The answer therefore is: in the United States today, the capitalists are members of the tiny group of people who form the boards of directors of the nation’s largest corporations.

 

*Well, to be accurate, the economic system in the United States is not entirely or exclusively capitalist. There are all kinds of forms of noncapitalism that form the economic iceberg hidden from view below the water line. I’m thinking of things like cooperatives and worker-owned enterprises, gift exchanges and volunteering, modern forms of slavery, feudal indentured servitude, and so on. None of those can very well be described as capitalist

STOCK, n.

Posted: 19 November 2015 in Uncategorized
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Stock, according to Jason Zweig’s new book, The Devil’s Financial Dictionary, is defined as

The right to own a fraction of a business, regarded by most investors as the right to play a video game.

The word “stock” is rooted in the Old Teutonic stukko, a stick, trunk, or log—an ancient metaphor largely forgotten as television and the Internet have reduced the idea of a stock to a TICKER SYMBOL and a stream of prices flickering on a screen. A tree trunk is a solid foundation for many branches bearing green foliage and grows higher unless it is trimmed back, in which case it sprouts new growth. The history of the word stock thus expresses what most investors want from a stock itself—but seldom get, because they treat it like a weed rather than like a tree.

As early as AD 862, it appeared in Old English as stocca or stocce. One of its earliest meanings, by analogy to a tree trunk that generates many smaller branches, was as the source of a line of descent. That sense is still used, as in “She comes from good stock.” In another early nuance, stocke meant a stem in which a graft, or transplanted twig, is inserted.

Early on, stokke referred to the wooden chopping blocks on which butchers and fishmongers hacked up their merchandise. In 1282, a “stokkes market” was built in the heart of the City of London; it survived until Dickens’s day. A city chronicle recorded, “This yere [1450] the stokkes was dividid bitweene fishmongers and bochers [butchers].” Because London’s securities market later sprang up in the same district, it is conceivable that the term stock market originated in this haggling, open outcry, and bloody chopping of goods into little pieces for resale.

A stoke or stocke of money appeared in English by the fifteenth century to describe a sum set aside to fund future expenses. Soon, the image of a deeply rooted core or trunk led stock to mean the total wealth of an individual or nation.

In 1729, for instance, Jonathan Swift’s “A Modest Proposal” satirically claimed that if the Irish raised babies for food, “the Nation’s Stock will be thereby encreased Fifty Thousand Pounds per annum.”

Stock was first used to describe the funds available for a company’s operations in the early seventeenth century. “Many…put in different summes, which all together made up six hundred thousand pound, the first stock upon which this Company has built its prodigious Encrease,” a historian of the East India Company wrote in 1669. Individual shares of that total were called stock as well, as were what today we call bonds.

Instead of playing with stocks as if they were blips in an electronic game, investors would be far better off planting them like trees.

Keep calm?!

Posted: 24 August 2015 in Uncategorized
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All the advice today—as the the Dow Jones Industrial Average fell by 1,089 points in the morning and, at this writing, remains almost 450 points below the opening—has been the same: keep calm and carry on investing.

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Ron Lieber is typical:

The impulse when the stock market falls hard for a few days in a row is to do something. Anything. Our life savings are often on the line, after all.

But that’s just the thing: Stocks are most useful for long-term goals. So unless those goals have changed in the last few days, it probably doesn’t make much sense to overhaul an investment strategy based on a blip of market activity. . .

One final point for new investors (and their parents and grandparents, who ought to be counseling them right about now): This is what markets do. There is absolutely nothing abnormal about what is going on here.

Most of us have to save somewhere, and history suggests that stocks are the most accessible route to get the returns you’ll need to retire someday. It would take decades of systemic economic erosion to prove otherwise, and a few days of market declines do not suggest that anything like that is upon us.

It’s true: many of us have been forced to have the freedom to keep our retirement funds in the stock market, as our employers in recent decades have gotten rid of defined-benefit plans and replaced them with defined-contribution plans. Thus, they’ve managed to shift the risk from themselves to us.

But the ownership of stocks remains profoundly unequal—and the responses to downturns are similarly unequal.

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According to the Wall Street Journal, from the 1980s to the peak of the dot-com bubble, families of all income levels were increasingly likely to own stocks, either directly or through retirement accounts. From 2001 to today, however, ownership of stocks has only increased among the top 10 percent of families; families at all other income levels have been getting out of the market entirely. Thus, as of 2013, nearly 50 percent of stocks and mutual funds were owned by the wealthiest 1 percent of Americans and an additional 41 percent were held by the next 9 percent. Meanwhile, the bottom 90 percent of U.S. families owned only about 9 percent of stocks and mutual funds.

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Not only are the ownership patterns different between a small group at the top and everyone else; the people in those groups also behave differently.

According to Josh Zumbrun,

The Fed’s Survey of Consumer Finances shows that among the bottom 90% of households by wealth, families bailed out of the stock market between 2007 and 2010—the central bank’s study is conducted every three years—and between 2010 and 2013. The total share with stockholdings declined by 4.4 percentage points. That’s the equivalent of 5.4 million households selling stocks, even as the market rebounded. Only households in the top 10% have been increasingly likely to own stocks.

In other words, the ownership of stocks both reflects and contributes to the profound inequalities of U.S. capitalism.

“We haven’t come up with the solution to prevent people from doing it yet,” said Shai Akabas, an economist at the Bipartisan Policy Center in Washington who works on the center’s Personal Savings Initiative.

“But there certainly is a widening gap there in terms of the return that higher-income people are receiving in the market,” said Mr. Akabas. “Lower- to middle-income people aren’t privy to those gains. That’s exacerbated by the fact that many of them have taken their money out of the stock market.”

“Keep calm and carry on investing” is really only a rule those at the top can follow. The rest of us are caught between the Scylla of investing in the stock market (in order, someday, to be able to retire) and the Charybdis of getting out (so as to limit our losses on days like today).

Update

You have to appreciate the language of some stock market observers, such as Valentijn van Nieuwenhuijzen, head of multiasset strategy at NN Investment Partners:

The selloff has developed a momentum of its own, says Mr. van Nieuwenhuijzen. “It comes against the backdrop of some fundamental reasons. Most obviously this is about China and the risk of a financial system crisis there. But sometimes the market organism takes over and develops a logic of its own,” he says. “We are at our most cautious positioning in the last few years,” with more cash in the firm’s portfolios that at any time in roughly the last four years, Mr. van Nieuwenhuijzen adds. [emphasis added]

And Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management LLC:

“Investors need to decide whether the recent moves are a sickness unto death, or just a bad hangover,” says Mr. Jacobsen. He says that he personally think that this is “just a hangover and requires time, perhaps in the form of a nap, to work-off.”