Capital Markets Update

By Louis S. Barnes **************Friday February 22nd, 2013**************** Interest rates, stocks, and hopes for the economy all crested in the last week; not rolled over, just flattened, without acceleration. Applications for purchase mortgages fell, starts of new homes crept up 0.8% from December, and sales of existing homes rose 9.1% from the year-ago, dead-low base. Europe is still rolling downhill, all of the weak economies (including France) falling out from under fiscal-austerity promises. Leadership throughout the zone sounds like a convention of Baghdad Bobs competing for phony optimism. (If you missed it, Muhammad al-Sahhaf became famous for his daily “There are no Americans within 100 miles of Baghdad!” while on split-screen M-1As clanked by, two blocks away). The Fed released minutes of its January meeting, which in the name of openness and clarity confused everyone. Perfesser Bernanke unlike his predecessors runs the place like the Princeton Faculty Club, letting everyone have a public say. The minutes are anonymous, describing “several” with one view, “many” with another, and “a few” over there. Each meeting includes the Chairman, six Presidentially appointed and Congressionally confirmed governors, and 12 presidents of regional Feds (five of whom rotate as voting members, but all yap). These minutes revealed a long, aimless discussion of when and at what slope the Fed will conclude QE purchases of Treasurys and MBS. Several regional presidents reflect provincial boards filled with hard-money bankers and local made-theirs. Disregard any news story containing these names, lowest regard first: Ms. George, Messrs Fisher, Bullard, Plosser, Kocherlakota, and Lacker. For now Perfesser Bernanke, the appointed governors, and the brightest of the regionals are firmly in control and of one mind: this economy is not ready to leave ICU. Instead of Fed-worry, consider a puzzle (data thanks to John Mauldin and Ankur Shah). Beginning in the late 1990s, corporate profits leaped from a 50-year normal 5%-6% of GDP to a record over 10%. From WW II through 1970s, US wages were equal to about 50% of GDP, then in the 1980s slipped to 47%, and since the late 1990s to about 44%. In that same span, union membership has collapsed from nearly 40% to about 11%, and more than half of the remainder are unionized government employees, the most secure jobs with the best benefits. I can hear my friends on the Left sputtering at predation by the 1%. Instead, glance outside that box. At least 60% of S&P500 profits are earned overseas, thus largely irrelevant to domestic wages. US labor law is as friendly to unionization as ever; if corporate oppression were the case, we would be organizing in record numbers. One hundred years ago, the 1% were predators, Rockefeller, Carnegie, Gould and all, and the US Army visited town to break strikes. From 1990 to 2008, world trade excluding energy, just merchandise and services, exploded from $4 trillion to $19 trillion. Something more than one billion Asians entered the global workforce, willing to work for a small percent of any Western worker’s pay. Modern US corporations, light on their feet, flat organization charts, co-opting unions by treating labor as valued capital, have been making a fortune via turnstiles set up in the flow of trade, especially in the emerging world. Here in the US, a Darwinian experience. If you’re tech-savvy, plugged into the world economy, competent and motivated no matter how well-educated; or on the health-care gravy train (the only sector of the US economy to add jobs every month of the Great Recession), or in higher-ed… most have not known anything has gone wrong. Not predators, just successful, which I hope still is not a dirty word. If however you faced direct competition with the global labor pool, products and services delivered, measured in, or made of electrons, you’ve been in a lot of trouble. The national what-to-do debate should focus on how to open the path to success for this half or more of our people. Clawing at the successful won’t do it. Compassion and fairness aside, we need the tax base.