Saturday, August 22, 2009

Will we see more income equality?

Economic data should show, if it isn't already, that the ridiculously rich have gotten considerably poorer in the Great Recession. The super wealthy have not been immune to the collapse in asset prices.

Perhaps the broadest question is what a hit to the wealthy would mean for the middle class and the poor. The best-known data on the rich comes from an analysis of Internal Revenue Service returns by Thomas Piketty and Emmanuel Saez, two economists. Their work shows that in the late 1970s, the cutoff to qualify for the highest-earning one ten-thousandth of households was roughly $2 million, in inflation-adjusted, pretax terms. By 2007, it had jumped to $11.5 million.

The gains for the merely affluent were also big, if not quite huge. The cutoff to be in the top 1 percent doubled since the late 1970s, to roughly $400,000.

By contrast, pay at the median — which was about $50,000 in 2007 — rose less than 20 percent, Census data shows. Near the bottom of the income distribution, the increase was about 12 percent.

Some economists say they believe that the contrasting trends are unrelated. If anything, these economists say, any problems the wealthy have will trickle down, in the form of less charitable giving and less consumer spending. Over the last century, the worst years for the rich were the early 1930s, the heart of the Great Depression.

Other economists say the recent explosion of incomes at the top did hurt everyone else, by concentrating economic and political power among a relatively small group.

The whole article is an interesting read. It brings forward (data) points such as:
  • The Mei-Moses index, which tracks art prices, has fallen 32% in the last 6 months
  • Income distribution was relatively flat in the U.S. in the 1950s and 1960s
  • For the super-rich to return to their old levels of wealth quickly would likely require another asset bubble
  • Incomes of the wealthiest Americans rose the most during the stock market bull markets
  • "Since 1980, tax rates on the affluent have fallen more than rates on any other group"
The article also weaves the tale of John McAffee, of McAffee anti-virus software fame, into the overall article. So if you're interested in what's happened to him, now you can find out.

What about the recession's effect on the mass affluent? Well, the original article authors did a follow-up blog post responding to a comment one of the orignla article's readers asked. Their argument is that the upper middle class will fare relatively better than other income groups, and bring up a better unemployment rate for the managerial and professional class and favorable tax policy as supporting points.

Monday, August 10, 2009

Let's not forget about Social Security

Allan Sloan has done another first-rate job trying to focus Americans' attentions on the cluster that is Social Security. He's cut through all the tripe that we keep hearing from our leaders and pundits that says Social Security is fine for another 20 or 30 years and even then it will still be able to to pay 80% of benefits. Do yourself a favor and take 10 or 15 minutes to read the whole story. I'll give you the money 'grafs.

Just last year Social Security was projecting a cash surplus of $87 billion this year and $88 billion next year. These were to be the peak cash-generating years, followed by a cash-flow decline, followed by cash outlays exceeding inflows starting in 2017.

But in this year's Social Security trustees report, the cash flow projections for 2009 and 2010 have shrunk by almost 80%, to $19 billion and $18 billion, respectively. How did $138 billion of projected cash go missing in just one year? Stephen Goss, Social Security's chief actuary, says the major reason is that the recession has cost millions of jobs, reducing Social Security's tax income below projections.

But $18 billion is still a surplus. Why do I say Social Security could go cash-negative this year? Because unemployment is far worse than Social Security projected. It assumed that unemployment would rise gradually this year and peak at 9% in 2010. Now, of course, the rate is 9.5% and rising -- and we're still in 2009.

Sloan does more than call attention to the issues. He offers honest to goodness thoughtful (and dare I say non-partisan) solutions. If we don't start paying attention to these generational accounting problems, we will be on our own and have to suffer tax increases.

Sunday, August 9, 2009

Luxury homes at auction

Homes that were valued in the multi-million dollar range just a few years ago being auctioned off for an order of magnitude less in some cases. Bankruptcy is sometimes the culprit behind the auction.

Mr. Warner, 61, bought his house and an adjacent property that once had a trailer park on Little Torch Key, north of Key West, in 1993. It was appraised at nearly $14 million just two years ago. But after losing a large amount of money, he liquidated his construction business in Elkhart, Ind. Last year, another company he owned, Lucky’s Landing, which essentially owned his Florida real estate, filed for bankruptcy protection and its assets came under court oversight.

When no buyer emerged at the listing price of $5.9 million, Mr. Warner asked the United States Bankruptcy Court in Miami to approve the property’s sale at auction. He had a lot riding on the request. To avoid personal bankruptcy, he said, the sale had to generate more than $3 million, roughly the remaining amount of the mortgages.


Stacy Kirk, who together with her mother co-founded Grand Estates Auction Company in 1999 to handle multimillion-dollar homes exclusively, said her business had grown to 30 homes last year, from 20 homes sold in 2005. “We have been receiving more inquiries from homeowners in the $1.5 million and up price range,” she said. “And we are talking to banks for the first time about whether we can help sell similarly priced homes that are headed for foreclosure.”

'Creating an anchor' investing strategy

Here's an investing strategy for emerging markets that claims it will generate 75% of a 'fully invested' strategy, but with half the volatility.

Emerging markets investors worried about a pullback can do what Bob Phillips, a managing partner at Spectrum Management Group in Indianapolis, calls "creating an anchor." That means taking 50% of the money you've earmarked for emerging markets and putting it into cash. The other half goes into an emerging-market index fund or exchange-traded fund. Every month the allocation should be rebalanced back to a 50-50 split. Over time, Phillips says, that strategy has produced 75% of the returns with half the volatility.
Read the full article for ideas on an alternative to the 50% cash portion of the allocation.

I did a quick search on 'creating an anchor investment strategy', '50 50 investment plan', '50-50 reallocation' and a few other terms. Unfortunately, I couldn't find any other published data on this strategy.