Generation Worry

Allianz Life Insurance recently reported the results of a study of the views of Generation X toward retirement. What's interesting about their study is that while members of this generation share with Baby Boomers a skeptical and troubled view of their retirement prospects, the percentage so believing is even higher than that of the Baby Boomers. A traditional retirement is now considered a "romantic fantasy of the past", for 84% of those Generation Xers polled by Allianz. More than two-thirds of those surveyed thought that retirement savings targets were "way out of reach" and that they will "never have enough money to retire".

Many young people and even pre-retirees tend to dismiss the grim state of their own retirement funding, believing that they will simply work forever. In fact, expectations of the age of personal retirement are rising, with 37% now indicating they plan to work past age sixty-five, versus just 14% in 1995.  However, while Americans think of age sixty-five as the typical retirement age or that they might work well past this age, in practice, we retire much earlier than this, a full four years earlier on average, with early retirement often brought on by health reasons or layoffs.  

But perhaps of even greater concern for Generation X is that 89% of those polled reported difficulty saving money, while more than half of respondents claimed they "just don't think about putting money away for the future". The most troubling part of the study, however, is that while Gen X is skeptical about their prospects for retirement, 85% also report concerns about the difficulty of keeping a job. Call them Generation Worry.

The truth is, there is still much time for this generation and the millenniums to adjust their lifestyle, spending and savings habits to provide for retirement. While each generation would like to believe this day will never come, as John Lennon so famously said, "Life is what happens when we're busy making other plans". This day will come and with Social Security in desperate shape, corporate pension plans greatly diminished and public employee pension plans suffering startling under-funding, some level of personal planning and public awareness of this issue is well advised.

Our Fixation with Jobs and Employment Data

The most closely watched data point for equity and bond markets continues to be the monthly employment report. Weekly new claims is also closely followed, despite its lack of relevance with the US economy now in its sixth year of expansion. Perhaps markets simply don't know where to look for data. In their suspicion that market gains have been driven largely by Fed policy, stock and bond traders alike have focused on employment as key to the Fed's next move.

The heightened concern clearly has something to do with the lackluster growth in GDP since the recovery officially began in 2009. GDP growth has run plus or minus 2% since 2010, well below its run rate pre financial crisis. Juxtaposed against this backdrop of tepid GDP growth is the anomaly of rapid gains in employment. It doesn’t seem to quite square up. 

Some have pointed to the stubbornly low rate of labor participation and its impact in magnifying the decline in the unemployment rate, pointing to U-6 underemployment, still above 10%, as a more realistic measure of the struggling labor market. But while the quantity of jobs created has had a meaningful impact on lowering the unemployment rate, the quality of job creation may best explain this anomaly.

A report prepared by Global Insight for the US Conference of Mayors found that jobs that had been created over the past five years, on average, paid 23% less than those lost during the 2008-2009 recession. Total wages lost in the move to lower paying jobs were estimated at $93 billion. The same phenomena was observed in the recovery from the 2000-2001 recession, where the annual wage of jobs created in the period following the recession averaged $5,000 or 12% less than those lost in the same sectors in the 2000-2001 recession.

In the 2008-2009 recession, where 8.7 million jobs were lost, the annual wage of jobs lost was $61,637. In the recovery that followed, the average wage of new jobs created averaged $47,171, or $14,500 less than similar jobs held prior to the recession. While the greatest number of jobs were lost in the manufacturing and construction sectors, the highest number of new jobs created were in the relatively low paying industries of food and beverage, health care and social assistance. These workers, though employed, are taking fewer vacations, eating out at restaurants less often and spending less on clothes, health care and other essentials.

If this is in fact what is going on, then the unemployment report, the data release most closely followed by the markets, might be telling us very little about the near term direction of interest rates.

Governor Christie and the Question of Income Inequality

Governor Chris Christie of New Jersey was recently out in front of the media tagging the Federal Reserve and the Obama Administratio with the problem of growing US income inequality. While it is undeniably true that income inequality has widened over the past six years, it's highly unlikely that President Obama supports this trend or that his administration has sought to contribute to it. The case of the Federal Reserve, however, presents an entirely different set of facts.

While the Fed's intentions may have been to drive interest rates lower than any period in US history in an effort to spur borrowing and capital formation, neither of these outcomes have actually occurred. Not by a long shot. But for the Fed to believe that these policies could be continued for seven or more years without creating distortions in the economy, is beyond naive. It borders on irrational. No disrespect to Princeton, but did Bernanke actually teach there?

The Reason Foundation in 2012 found that the Fed's policy of Quantitative Easing was "fundamentally a regressive redistribution program...It is a primary driver of income inequality". Their argument, as true today as when put forward four years ago, is that low interest rates primarily serve the wealthy, thereby driving a greater percentage of income earned in the economy in their direction. We'll explain how, but first some data on what's happened to inequality since the Great Recession.

Global Insight, in a report prepared for the US Conference of Mayors in 2012, found that the share of total income gains over the period 2005 - 2012 captured by the wealthiest 20% of Americans, was in excess of 60%. The lowest 40% received just 5.5% of these gains. The reason for this disparity lies in stock wealth and ownership, a principal beneficiary of Fed policy. According to the Economic Policy Institute, roughly 60% of stock wealth is held by the top 1% of US households. Roughly 80% of stock market gains go to the top 10% of American households.

But stock wealth aside, the savings provided by low mortgage rates, in an environment of tight bank lending standards, has also shifted the benefits of mortgage refinancing to the wealthy, who have the greatest chance of qualifying. Renters, of course, have not benefited at all from lower interest rates, as landlords have not only been unwilling to pass on the benefits of refinancing, but in most markets have raised rents aggressively, as home ownership rates have declined.

Meanwhile, banks, who have been able to borrow at interest rates near zero and have paid less than 1% of interest on consumer deposits for the past six years, have held credit card rates near their all-time high. Data of the Board of Governors of the Federal Reserve in a 2012 report to Congress on trends in bank credit card pricing found that average bank rates had fallen from 14.68% in the period leading up to the recession to just 13.09% by 2011. Borrow at zero, relend at 13%. Nice work if you can get it.

But the Fed is not alone in promoting income inequality. The primary problem with the disappearing middle class is that in an era of outrageous and ever escalating political campaign financing, the middle class is becoming invisible to politicians of both parties. They are neither big pharma, nor organized labor. They are neither oil companies, nor Silicon Valley; not Wall Street, Hollywood or the Trial Lawyers Association. They are invisible, except for purposes of rhetoric. 

Want to solve income inequality in America? Put a couple of hundred million dollars in the hands of an organization lobbying for the benefit of the lower and middle classes in the 2016 elections. Make the middle class matter to Washington.