Ravengate
Partners - Stock market, economic and political commentary by Patricia Chadwick

© Copyright 2015 Patricia W. Chadwick

Service just “ain’t” what it used to be (almost).

The friendly telephone operator to whom you could speak by dialing 411 (for information) or 0 (for help with a call) has long been extinct. In fact, our millennial children most likely don’t even know what those two words strung together mean.

A more current example of the disappearance of service is the now expected experience in many department stores (with respectable names like Bloomingdales, Lord and Taylor, and on and on) where service seems to have metamorphosed into “self” service.

Gone are what once were ubiquitous salespeople, who cheerfully (or occasionally not) helped to find the dress or blouse or cooking pot you were searching for. Gone, too, are the friendly directions that would be provided if you couldn’t find a product. “Go to the far end, and it’s just there on the right.” And despite the fact that cash registers still dot the floors of fancy department stores, they now seem to sit unattended.

Retail stores seem more like mausoleums — silent tombs, laden with clothing draped on hangers or stacked on shelves, inanimate objects separated by aisles through which unspeaking human beings roam aimlessly, as if in a daze.

Perhaps they really are in a daze, thinking, “Why can’t I find anyone to help me?” Perhaps they’re also thinking, “I might as well buy my stuff online.”

And therein lies the problem. The internet is now the go-to place for shopping, which means that the stores can’t afford the luxury of keeping salespeople, and adequate inventory and perhaps even the rent they must pay. It makes one wonder how long it will be before the mall itself is extinct.

So what a surprise I had a few days ago when, twice in one day, I was the recipient of the most splendid service in a retail store.

The first was Sephora, the French chain of cosmetics stores that first came to this country in 1998, a year after being acquired by LVMH. I was on a mission: to find a particular brand and shade of lipstick, as well as organic mascara. I had barely stepped into the store, when I was approached by a smiling young woman, dressed in a snazzy black tee shirt.

“May I help you?” she asked. I was taken aback, having anticipated roaming around the store searching for two items that would seem like needles in this (beautiful) haystack of a store.

Within moments, I had what I needed. “Let me check you out,” she then said, and lickety-split, I was done. As I headed for the door, I was congratulating myself on my good fortune to have received such lovely service. But then I saw that there was, in fact, a sea of black tee-shirted young men and women, all employees of Sephora. Like cheerful butterflies, they were flitting from one needy customer to another. “Come this way,” and “Of course we can,” were the refrains.

No wonder Sephora has been such a success, I thought as I headed down the street to my next chore.

This was a far more stressful one. The hard drive on my MacBook was failing, and I needed help fast because computers that act up make me panic.

Having been to the Apple store many times, I expected to be greeted with courtesy and professionalism. But I was coming without a scheduled appointment at the Genius Bar, a no-no in the world of high tech. When I described my crisis to the cheerful greeter, she must have sensed my anxiety because, within a few minutes, I was sitting at the Genius Bar.

My “genius” truly was that, as well as thoughtful and solicitous. When it became evident that my morbidly sick hard drive was beyond the scope of Apple’s genius and his tools, he gave me the name of a company that would make things all better. And he was right. I left the Apple store far less stressed than I entered it.

The pleasure of being treated with such care and respect twice in one day was long lasting.

It’s gratifying to see that some companies have found a way to offset the convenience of online shopping with a level of service that makes you want to return.

© Copyright 2015 Patricia W. Chadwick

It’s been interesting (and gratifying) to observe that a number of the largest employers of minimum-wage workers in this country have “voluntarily” pre-empted Congress by announcing an increase in their base wages to a level that is higher than what Congress proposed in the Fair Minimum Wage Act of 2012.

For those who think that the minimum wage is paid primarily to teenagers, the statistics may be surprising. According to the U.S. Bureau of Labor Statistics, in 2013, over 75% of minimum-wage earners were older than twenty, and about one-quarter of them were above the age of forty. Fewer than 3% were over sixty-five, and women comprised 62% of minimum wage earners.

This past month, Walmart raised its starting pay to $9/hour with the promise of a further increase to $10/hour in February of 2016. Target, Gap and McDonald’s (at its 1,500 owned outlets in the U.S.) have made similar announcements.

For years, we have heard that any legislated increase in the minimum wage would actually hurt workers because companies would be compelled to lay them off in droves. But it’s the employers themselves who are now upping the ante! Is this a case of: (1) “moral suasion,” (2) guilt, (3) economic reality, or (4) doing what management believes is in its own best interest?

Perhaps it’s a combination of all four.

Increasing the base pay for workers at large and profitable companies like Walmart and Target will surely translate into a happier workforce (and there are many studies that indicate a positive correlation between employee satisfaction and improved productivity). In addition, workers at retail and supermarket chains tend to do their shopping with their employer, so increasing the employees’ pay will likely lead to enhanced revenues.

It seems to me that Walmart and others have made a logical business decision, even if it took them years to get there. Now let’s hope they will stay ahead of the curve and increase that minimum wage as they continue to reap productivity increases. Remember, wage increases that don’t outstrip productivity gains will not cause inflation.

I can still hear Sam Walton (founder of Walmart) when he would discuss his growing company in the late 1980s. “Walmart is unlike any other retailer,” he’d say. “Every quarter you should see our gross profit margins fall.”

Fall? That seemed like heresy in the retail industry.

“I plan to pass on the cost savings I get from my manufacturers to the consumer,” he said over and over again. “The reward will be in my revenue growth.” He was right — that’s what made Walmart the outstanding retailer it is today.

Let’s keep an eye on the earnings growth of these companies that are leading the pack in terms of raising wages for their employees. I bet we’ll be pleasantly surprised to see that rising wages won’t hurt profits.

But there’s another side to the minimum wage debate. Many of the businesses that hire minimum wage workers are not highly profitable corporations. Rather, they are the core of what makes up middle America — myriad small enterprises that rely on temporary and relatively unskilled (and often youthful) employees. For them, the burden of a significant mandatory increase in wages could be devastating.

Going from $7.25 per hour to $10.10 (as President Obama has called on Congress to do) is a nearly 40% increase, far higher than any previous raise. Inflation (CPI) since 2009 (when the rate was last raised) has been a cumulative 10.5%. That would suggest a minimum wage of $8.

It appears that the government has a separate agenda — namely to bring minimum wage earners to the point that their income will exceed the poverty level. That sounds like a noble cause, and it may even be a sound economic one. Why should the public be funding a transfer payment to subsidize those on the minimum wage? (And if anyone today is trying to live solely on a minimum wage income, they will require welfare payments.)

On the other hand, if the minimum wage is raised too sharply, it will likely backfire. Small companies really will have to lay off workers.

The history of minimum wage increases in this country is odd, to say the least. Unlike Social Security payments, which have been indexed to inflation since the 1970s, the minimum wage, first introduced in 1938, is not. In fact, there have been ten-year gaps when it wasn’t changed at all.

Congress could mitigate the negative impact on small businesses by phasing in the change and also legislating that the minimum wage be increased in January of each new year by the CPI of the prior year (as is done with Social Security). That would treat minimum wage earners no worse than most other employees and would provide small businesses with more predictable labor costs.

After years of Congressional gridlock, it’s been gratifying to see a number of bipartisan issues be resolved since January. Congress needs to address this issue in a common-sense way. Much of the rhetoric from the right about how “any” increase in the minimum wage would have serious negative impact on the economy has been de facto refuted as the large companies have become the leaders in this round of increases.

And maybe the leadership taken by these major corporations will serve as a catalyst for other companies. At the least, the bar has been raised. Workers know that some companies will pay more than others.

© Copyright 2015 Patricia W. Chadwick

Two prominent Republicans recently came out on opposing sides of the Social Security “means testing” debate.

Governor Chris Christie (who has yet to declare himself in the 2016 Presidential race) dared to touch that “third rail” (one that most politicians fear will electrocute them) by declaring that Social Security benefits should be means tested because as it stands today, the arithmetic simply doesn’t work.

Donald Trump (who has hinted that he might throw his hat in the ring for President) took a different tack, arguing that Social Security isn’t an entitlement; it’s honoring a deal.

But if the point is to protect the beneficiaries, will be destroyed by bankruptcy?

Over the weekend, I did a simple analysis by going online to my own social security account (www.ssa.gov/myaccount). You can do it too; when you go to the site, simply click on “Sign In” and set up your own account. You will be able to see year by year your FICA and Medicare wages, and there is a summary of what you and your employer(s) have contributed since your first day of work.

I have already reached the age at which I can collect social security, but I have chosen not to take it yet because I am still working and don’t need it.

BUT and this is a HUGE BUT,

I am eligible, by virtue of the fact that I have turned 66, to receive (and have in fact elected to do so) a monthly payment that is equal to half of what my husband currently gets. Note that this is in addition to what he receives and my current Social Security income does not tap into my future benefits. In fact, my future benefits will increase because I have chosen to receive them at a later date.

Had I chosen to take my normal Social Security payments at age 67, the amount that I (and my employers over the years) had accumulated would have lasted nine years. That’s right. I would have used up all the money associated with my earnings by the time I was 75. But my life expectancy at 67 is another 18.62 years!!!  That means from the time I reach 75 until I die (and if I live till 75, my life expectancy is another 12.77 years or nearly 88 years of age) I will be receiving Social Security money that I never contributed.  Even a third grader can make that calculation.

So Governor Chris Christie is right. The arithmetic simply doesn’t work and it never will, particularly now that the 76 million baby boomers are retiring at the rate of 10,000 per day!

In large measure the numbers no longer add up because longevity has so vastly improved since Social Security was instituted during the Depression in 1935. Back then, life expectancy at birth was 67 years for men and 73 years for women.  Contrast that with today – 76 years for men and 81 for women. And it goes without saying that trend will continue – the older you get, the longer you will live.

Means testing is the only way today to make a dent in the Social Security deficit. In fact the very concept of “SOCIAL SECURITY” implies a benefit for someone in need, as so many were during the dark days of the Great Depression.

Retirees who have been fortunate enough to accumulate significant assets by the time they retire are not in need of that security. But is there anyone in Congress who is bold enough to touch that “third rail” with a logical, sensible and viable formula for means testing? Is anyone principled and courageous enough to take a short term political risk in order to tackle a serious long term problem? Sadly, I doubt it.

Donald Trump is right on one thing: his recommendation that individuals be allowed to dedicate a portion of their own payroll taxes to a personal Social Security account that they could invest is spot on.

Today the money you have deducted from your wages to fund Social Security is not yours; it’s the Government’s money. And if you die prematurely, it is not part of your estate. A personal Social Security savings account would be yours.

For those who fear that private social security accounts run the risk of being subject to the vagaries of the markets, there are plenty of safeguards that could be installed to minimize those risks. The value of compounding returns to monthly contributions is monumental. But that will be the subject of another blog in the near future.

© Copyright 2015 Patricia W. Chadwick

The employment numbers are up and then down. Consumer spending is strong and then weak. Student loans are up, and they never go down. What does this mean for the prospects for economic growth in the U.S.?

One thing is for sure — without vibrant consumers, our economy will not grow at a robust rate. And without a decent level of earnings and rising wages, there will not be vibrant consumers.

So what to do? Here’s one suggestion — cut income taxes for the middle class! They’re the ones who are responsible for the vast majority of the day-to-day consumer spending in the country. They’re the ones who need to save month in and month out for their own retirement. They’re the ones who are burdened by the albatross of educational loans.

All we seem to hear about is how the tax rate for corporations is too high, and capital gains tax rates need to be cut. Nonsense!

Let’s look at the economy in three parts: the corporations, the 1% and all the rest.

During the Great Recession, Congress, as part of its enactment of the stimulus package, gave a special tax break to the corporate sector, in the form of what was called “bonus depreciation.” It was meant to entice companies to engage in capital spending projects that they might not otherwise have made. Frankly, that was a bit of a silly notion. Companies do not (and should not) make long-term investments based on depreciation schedules.

Furthermore, if it was meant to help an economy in dire straits, why is that tax break still in effect seven years later, when corporate profits are at an all-time high? For each of the last several years, Congress has deliberately allowed this benefit (call it “corporate welfare”) to stay on the books, enabling many giant and highly profitable companies to reduce their federal income taxes. It was an ill-fated idea that has been a boon to corporate cash flows and a bane to the coffers of the U.S. Treasury.

Quantitative easing by the Federal Reserve has been a stimulus to the stock market, allowing the already well-to-do (call them the 1%) to become even wealthier. But relative to the vast population as a whole, the uber wealthy can’t spend enough money to impact the economy. Sure they can buy $100 million pieces of art and more private planes and make worthwhile contributions of appreciated stock to good causes, but most of their wealth is invested and turns into even more wealth. I’m not saying that this is evil, but it certainly lacks as a meaningful stimulus to the economy.

Since the Great Recession, the vast middle-class population of this country has found itself squeezed between meager salary increases and rising costs for a wide array of items that somehow don’t seem to be reflected in the CPI — rising co-pays for doctors and medicines, insurance premiums, real estate taxes (based on the increasing value of a house they have no intention of selling), sales taxes, airfares, water and on and on. The one bright spot has been the fall in the price of energy, but who knows how long that will last?

So let’s get to the point. How about a massive income tax cut for the middle class? Something that would hit their pocketbooks in a real and positive way right now? Let’s start with eliminating all federal income taxes on the first $30,000 of wages. According to the tax form calculator (www.taxformcalculator.com), that would provide an additional $2,493 of spending money each year to every wage earner.

Given that there are about 77 million wage earners in this country, that would put an additional $200 billion in consumers’ pockets, or 1.2% of our nearly $17 trillion GDP.

If someone complains that the government can’t afford to lose that $200 billion transfer from its coffers into the hands of consumers, my advice would be to end the bonus depreciation for capital spending; then the spigot from corporate taxes will start to flow once again into the U.S. Treasury.

We are entering the silly season — political gamesmanship for the throngs who think they want to become president in 2016. Let’s see if any one of them addresses this issue of such economic and social importance. If one candidate is bold enough to tackle this issue in a constructive and comprehensive way, I’ll vote for him or her.

Last Friday’s employment figures sounded like good news. Total employment increased by 295,000 during February, and the U.S. unemployment rate declined to 5.5%. But there’s another side to the employment story, and it has to do with middle-class workers’ wages.

During the Great Recession of 2008 and in the several years following, many corporations — large and small, public and private — found it necessary to pare their employment costs through layoffs, as well as by cutting benefits to their remaining workforce. For some companies, the measures taken were essential to survive; for others, it helped to alleviate significant declines in profits. That’s the real world of business.

The cost-cutting measures included slashing or eliminating bonuses. I’m not referring to C-suite bonuses that run in the seven figures, but the small ones — the $500, $1000 and maybe $2,500 given to the rank and file employees as a goodwill gesture.

Another money-saving tactic utilized during that period was to reduce, or even do away with, the corporate match for employees’ retirement plans. That “free” return on employees’ 401(k) plans was a valuable asset in building a nest egg for later years.

Health care costs also came under sharp scrutiny. Companies were able to negotiate lower premiums with insurers by raising deductibles and co-pays for employees. In many cases, both the employer and the insurer benefited from reduced costs, while the employee was saddled with higher out-of-pocket expenses.

Now, nearly eight years later, the economy has improved significantly. GDP is at an all-time high, as are corporate profits. That should be great news for workers — solid, profitable growth ought to imply that salaries are increasing, previously cut benefits have been restored and bonuses are once again being paid.

But in fact, it seems that many companies have conveniently forgotten the fact that they took benefits away from their employees when times were tough.

From 2000 through 2013, (a period that includes both a robust economy and the Great Recession) corporate profits increased by 132% (a 6.7% annualized growth rate), while wages and salaries grew by only 47%, or the equivalent of 3% per year. The graph below shows how profits (blue line) are becoming a larger share of the economic pie at the expense of wages (red line).

Source: U.S. Bureau of Economic Analysis

To some extent, the divergence in those two lines is a function of cheap capital replacing more expensive labor. But importantly, it is also the result of productivity gains, and one of the advantages of productivity is that it allows employers to increase wages and benefits without an inflationary impact. Unfortunately, that doesn’t seem to be happening to any major degree in the U.S.

With a mere 3% annual increase in salaries and wages barely outpacing inflation, together with rising out-of-pocket expenditures for health care, it is no wonder that the middle class feels trapped.

Good corporate stewardship entails dealing fairly with all stakeholders — owners, employees, customers and vendors. Many companies in this country embrace that responsibility; however, many more tend to act as though the only stakeholder that matters is the owner (private or public).

Now is the time for companies that are thriving to restore to their employees the benefits that were curtailed or eliminated during the recession. The goodwill created among the workforce should be reward enough, but we all know that the reason for the anemic recovery from the Great Recession has been weak consumer spending. A robust expansion depends on strong consumer expenditures. We need higher real wages to take the economy to the next level.

The housing market, while still under water and providing little contribution to economic growth, is at least seeing light at the end of the tunnel. That is because mortgage rates are now at a fifty year low, providing significant economic incentive for buyers to enter the marketplace. The excess supply of homes is slowly dwindling.

However, just as the housing market appears to be coming out of its depression, the country faces another threat. It is an insidious economic cancer that threatens to sap potential growth for decades to come. This cancer is none other than STUDENT LOANS!

An entire generation of twenty somethings who were not privileged enough to be provided higher education by their parents is entering the work force with a giant noose around its collective neck. And that noose is in the form of huge student loans they were required to take out in order to get an education that would give them a competitive entrée in the work place. It is the magnitude of the debt that is frightening. In many cases, their middle class parents are broke and now they are starting their careers broke as well. By some measures, the total student debt outstanding is over $1 trillion, according to an article in the Wall Street Journal on March 23, 2012.

The economic impact of this scenario is scary. Today’s young college graduates should be the trailblazers for the continuation of the American dream. Their energy, stamina, creativity and appetite for risk are the ingredients for entrepreneurship. It has been that way in this country for decades and even centuries. But now suddenly that ability to dream big and take risk is being choked off by the crushingly high level of debt they must repay. They cannot afford to take risk or to invest. They can barely afford to spend on discretionary items because they have so little money left each month after paying their student loans.

Student loans have long been a part of the American way of life. I had such a loan myself for seven or eight years. But there is a huge difference today. When I paid my student loan, it was in the late 1970s, a period of extraordinarily high inflation and consequently high interest rates. However, the interest on my student loan was a manageable 5.5% and the loan carried simple interest.

Today, with interest rates under 2% on the 10 year Government note, student loans carry rates of 6% at a minimum and as high as 11%, most of them under a Federal Government program. And to add insult to injury, the interest on many of these loans is amortized. The newly minted graduate, assuming he/she gets that far, is racing just to service the debt without paying down the principal.

I recently spoke to a young woman who put herself through college and graduate school with no financial support from her family. Upon graduation, her eleven separate Federal loans totaled $135,000. She currently earns nearly $65,000 annually by working a full week and one day on the weekend. Since she started working, she has paid more than the monthly minimum required on her loans and after nearly two years of payments that have totaled $26,000 her balance today has grown to $141,560! She is deeper in debt than at graduation because some of the loans are paying down no principal at all. She is caught in a vise that will make home ownership an impossible dream for decades. She called Sallie Mae, the company that services the vast majority of Federal student loans, to inquire about consolidating her many loans the possibility of getting a lower rate. The Sallie Mae employee said that the company was willing to consolidate but would give her no break on the interest rate. And when she inquired as to why no one at Sallie Mae reached out to her, she was told that policy prohibits such action. If that is true, that policy is criminally negligent.

Another young woman, the daughter of a friend of mine, has a $42,000 private student loan with Discover carrying an 11% interest rate. When her father contacted Discover in an attempt to negotiate a lower interest rate, the (evidently naïve) employee said there was nothing that could be done. In further conversation, she admitted that the student loan business was Discover’s most profitable and that employees were provided incentive compensation based on how successful they were in ‘selling’ loans to students. Again, if true, such a corporate ethic is moral turpitude. And Discover’s website advertises student loans for “as low as 6.79% APR”.

These stories are far from unique. They are repeated hundreds of thousands of times in this country. The lenders decry the fact that student default rates are high. Well of course they are high when the interest rates are so onerous. The system is downright Dickensian.

The recently passed bill signed by President Obama unfortunately will not relieve the interest rate burden on the generation of young graduates who are drowning in debt, although it does alleviate conditions from getting even worse for some students. In response to the new law, Sallie Mae and other student debt servicing companies have bemoaned the fact that they will be forced to lay off employees. But I argue that those layoffs are nothing compared to the negative impact on the economy from a generation of workers who have diminished resources to buy basic goods and services, much less to take on economic risk.
So what is to be done? How can this cancer be cured?

A complete overhaul of the student loan industry is essential. For one, the business should be tightly regulated, in much the same way that utilities are. I am sure this concept is anathema to many, and I myself abhor overregulation, but the abuse that is being heaped on the vulnerable (i.e. young, desperate students) warrants such a response.

And something must be done about the cost of higher education, which has spiraled out of control. There are many studies that show that the cost of college tuition has increased at multiples of the rate of inflation. When an asset (college education) is priced to become a liability (it bankrupts the buyer) the price must fall. That is simply an economic fact of life.

Ruminate on these statistics for a moment or two.
CONFISCATORY STUDENT LOANS
Tuition Per Annum 1960 1960 (in 2008 $) 2008 Actual
Harvard $1,520 $10,147 $33,709
University of Texas $100 $695 $7,530
Michigan State $279 $1,939 $8,843
Source: ClearPictureOnline.com

Is it no wonder that parents can no longer afford to provide a college education for their children? But without such higher education, the outlook for gainful and fulfilling employment is miserable.

The debt being incurred by the young in this country has reached the level of a national crisis. We had better address it now before this it takes on the proportion of our Federal Government’s debt.

Patricia W Chadwick
President
Ravengate Partners LLC

It is not often that low mortgage rates coincide with low house prices – the condition that exists today in this country. When mortgage rates are high, they tend to keep house prices from rising because it becomes too financially onerous to finance the house. When interest rates are low, it tends to stimulate demand for houses, pushing up the prices.

But we are in an unusual situation today. The housing bubble which burst in 2008 caused not only a massive oversupply of homes across nearly the entire country, but it also precipitated the worst recession in over fifty years. The Federal Reserve, in response, cut interest rates sharply and despite the fact that the recession has officially been over for two years, it continues to keep rates low. It is trying to allow homeowners to refinance their mortgages at more favorable rates. However, the issue is complicated by the fact that many homeowners now have mortgages that exceed the value of their homes.

The Fed has stated that it will keep rates low for at least another 18 – 24 months, hoping that time as well as a resolution to thorny banking regulation issues will result in existing mortgage owners lowering the carrying costs of their debt.

Regarding the prices for homes, you can see from the chart below (courtesy of JP’s Real Estate Charts) that the price bubble in housing has truly been burst. Both the nominal and the inflation-adjusted house price in the United States has returned to its long term trend line. That is good news over all, but I hasten to point out that the data show an average for the country as whole. There are still significant pockets of oversupply and prices in those areas are likely to remain under pressure for some time. But the shape of the graph is very good news.

All of which gets me to the point of my title. If you are in the market to buy a house, this is as good a time as you may find in the next twenty years to do so. Mortgage rates are lower than they have been in well over fifty years. House prices appear to have ceased falling (for the most part) but have not yet started to regain any significant momentum.

This window of opportunity will not likely be around for more than a year or two. That may seem a long time, but once rates start to creep up again, this golden moment will be gone for years, maybe even decades. And while it may seem counterintuitive, when rates start to rise again in the next two years, so will house prices. The bursting of the housing inflation bubble resulted in damaging deflation, but as the economy rights itself, and employment improves, so too will house prices.

On a thirty year mortgage of $200,000, the difference between an interest rate of 3.5% (what one can get today) and 6.0% (the rate that is more like what it would be without the Fed’s intervention) is a total of $108,364!!! That is more than 50% of the value of the house.

The saying goes, “Don’t look a gift horse in the mouth”. But in this case, I would not only look this gift horse in the eye, I would saddle it up and gallop into the future with the gift of a lifetime. I am particularly thinking of you twenty somethings and thirty somethings who may be thinking that real estate prices still have a long way to fall or that the current mortgage rates might be the new norm. Neither is the case.

Happy Shopping.

January 22, 2012