Entries from January 2017 ↓

The rich & the rest

My colleague (and closet conservative, or is he a lefty?) Doug Rowat stirred the animal spirits on this barnyard blog over the weekend by writing about Trumpism and why the guy got elected. Timely. Trump’s de facto Muslim ban on Friday earned sharp criticism from CEOs of companies like Google, Bayer and BMW as well as world leaders (Merkel, May) and crowds of airport protestors. It also had stock futures heading lower Sunday.

Markets hate disruptions and surprises. It was only a matter of time before a shock-and-awe style of presidency clashed with the predictable money-making that investors want. As this blog has warned for weeks now, the Trump Bump rally that took off after November 8th and recently pushed the Dow past 20,000 is due for a healthy correction. Seriously insulting seven dangerous countries and the world’s second major religion (Islam has 1.226 billion adherents) might just bring it about sooner. We shall see.

But this is not about Trump. Rather the times that created him, plus the Occupy movement and the growing wealth chasm. We live in a society where it’s perfectly okay for a ball player or a second-rate rock star to make $20 million a year, but the guy down the street with two Mercedes and a nice house is an economic pariah. T2 came into power riding a tax-the-rich train which led to a new 29% super-tax bracket, a gutting of TFSA contributions and (soon) an attack on small business corporations. Now people making $250,000 have a 53% marginal tax rate, and are painted as an evil elite.

Brad encountered this the other day in a hospital room on Vancouver Island.

“You’ve touched upon the “Hate the Rich” meme a few times,” he wrotes. “Here’s my story from last week.

“My parents were the children of poor immigrants.  They taught me as a child to watch how rich people lived and achieved success and maybe there was a lesson to be learned.

“So I end up a 61-year-old retired 1%er sitting in Pre-Op classes at the hospital.  A wonderful young nurse is telling all of us how to prepare for hip replacement surgery.  I’m sitting beside an angry wrinkled 75-year-old and her equally angry 50-year-old daughter.   The nurse was explaining that the surgical dressing provided by the hospital could be upgraded to a speciality dressing at a “small cost”.   When the nurse said “the price is 45 dollars” there was an audible gasp of disbelief from the two.  There was a frantic and surprisingly diplomatic explanation from the nurse that the hospital supplied dressing was perfectly adequate and that the extra cost dressing was just an option the surgeons wanted their patients to be aware of.  But the stage was set.

“During a break a total shitstorm erupted after the nurse came up to me.  She said I’d have to arrange payment for my (upgraded) ceramic implant that I’d requested and that the cost was $749.  I said that was fine, that I was expecting it to be more like $2500 and $749 was a bargain.

“Well I was trying to speak softly but Prune Face exploded….. “So the rich people get better hips than us commoners!”,  PF’s daughter…………. “That’s just not fair!”,  “That’s just not right”  Other remarks followed until I suddenly realized I was expected to apologize for being successful in life. It was a long 2 hours getting these constant laser beam glares of class resentment and bitter hatred sent my way.

“So am I supposed to be embarrassed or ashamed of working my ass off and making all the sacrifices I did? “

Of course you are, Brad. And the anti-wealth, anti-success meme is exactly what helped push a person like Donald Trump into the White House, while allowing Trudeau to get elected saying he would tax the rich to lower taxes on the rest (he failed, by the way. Not enough rich).

Brad’s comments led me to do some research into Canada’s 1%ers, by income. Who are these people? How do you become one?

There are 35.16 million Canadians but just 268,000 people who qualify as being in the 1% – who get to pay Trudeau’s top tax rate, clicking in at an income around $227,000. These people average 52 years of age, are 78% guys and overwhelmingly married (82%). On average, they pay $160,000 in income tax – which means the 1% finance at least 12% of all taxes collected.

Most of the big incomes these folks collect come from working, not investing or inheritances. In fact 70% of it. So, what do they do? In general, one of three things. Either they’re business managers (30%), health professionals (15%) or engineers (11%). At the back of the pack are lawyers (7%).

When it comes to education, 90% are university grads. The top-earning groups are corporate execs ($421,000 average) and doctors ($333,600). The business guys generally have been 22 years into their careers from entry-level positions, while the docs have spent an average of 15 years studying and training.

So now you know. Most 1%ers like Brad actually earned what they have. Education. Experience. Training. Decades invested. Skills acquired. Degrees earned. Promotions won. Nary a silver spoon in sight. Meanwhile most of the 99% are obsessed with real estate. And expecting an apology.

Enjoy the hip, Brad.

Alternative Facts (2)

DOUG By Guest Blogger Doug Rowat

Like John Travolta’s 1970s ‘bubble boy’, the media and the investment community spent too much time, myself included, isolated from the real-world rise of Donald Trump and populism. We shielded ourselves from the discontent of the rural and middle class voters, focused on (clearly) the wrong data and were smug in our conclusions and forecasts.

I occasionally read Howard Marks’ memos from Oaktree Capital and I find his fair-minded view and willingness to avoid easy and superficial conclusions refreshing. His latest newsletter makes an interesting point:

These days the news media shows little resemblance to what it was 30, 40 or 50 years ago. Many outlets are highly biased to one side or the other and make it possible to read, watch and listen all day and never be exposed to all aspects of the issues [bolding his]…Today’s media personalities rarely express the confusion [Edward R.] Murrow did. Rather, they tend to state forecasts as certainties.

All true. And this is clearly a mistake I made as I immersed myself in the media coverage of the Trump campaign. I took for granted the conclusions of the left-leaning press, accepted these as gospel and rarely considered other viewpoints.

I need to change my approach. And, as the populist movement continues to gain traction (all eyes will now be on the French elections in April/May), so should we all.

So, some baby steps.

First, the low-hanging fruit: Meryl Streep’s Golden Globes speech. While accepting her lifetime achievement award, Streep criticized Trump and highlighted that if we don’t defend the arts we’ll have “nothing to watch but football and mixed martial arts, which are not the arts.” This made me cringe. I read Trump supporter Piers Morgan’s excellent response to Streep’s speech.

He emphasized her snobbery by noting that “tens of millions of ordinary Americans love football and the MMA and would be quite happy watching their favourite sports at the expense of the next Woody Allen film.” Streep probably never stopped to consider that some of the greatest writers of our time (Don DeLillo, Ernest Hemingway, Norman Mailer, Joyce Carol Oates, and David Remnick, long-time editor of The New Yorker, to name but a few) love sports, particularly boxing (the MMA of another generation). And anyone who has witnessed, to pick a singular moment, NFL wide receiver Odell Beckham’s breathtaking 2014 touchdown catch in his rookie season (see for yourself: https://www.youtube.com/watch?v=zxbz3DDQzHU) knows that sports can be as awe-inspiring as any film. Streep’s tone, as she gazed out at Hollywood’s super-rich, implied sports were crude and blue collar. Precisely the elitist rhetoric that so alienates vast amounts of the US population.

We know that Trump’s no gentleman or role-model husband. However, again to provide myself a fuller perspective, I read a recent Conrad Black column where he acknowledged Trump’s vulgarity, but correctly pointed out that the criticism surrounding Trump’s personal life is righteous and hypocritical given that John F. Kennedy, Bill Clinton, Franklin D. Roosevelt and Dwight D. Eisenhower had themselves less-than-stellar reputations in this area. They simply didn’t live in an era where a spotlight was constantly shone on their behaviour.

Bill Clinton was closest to, but still a bit before, our full-court-press social media age, yet his indiscretions almost ended his presidency. How would he have fared in 2016? Black also highlighted in another column that the Clintons, as with Trump, have countless conflicts of interests (“The Clintons had a net worth of zero when they left office and now they have from $150 million to $200 million. Where does anyone suppose the money came from?”).

Change In Total Employment: June 2009 to June 2016

% Rural Support For US Presidential Candidates

Source: US Bureau of Labor Statistics, NPR

Finally, the Barack Obama–driven economic recovery, which has been so applauded, was actually in many ways quite uneven. While the headline numbers are impressive—a nearly halving of the unemployment rate during his two terms, for example—the adjacent chart shows how the employment picture actually developed regionally. Note the amount of red in rural areas, including northern Florida, Pennsylvania and many parts of North Carolina—all key states the Democrats lost. In fact, for the entire eastern half of the US, if you didn’t live in an urban area, you didn’t benefit nearly as much from Obama’s job creation efforts. It shouldn’t have come as a surprise that the rural vote, which helped tip the balance of the election, continued to move meaningfully in the Republicans’ favour (see chart). But it was a surprise. The bubble boys weren’t paying attention.

Trump’s behaviour and many of his policies are offensive to me, but, as I’ve noted above, I’m plugging my nose and making an effort to read other perspectives. However, similarly, it’s time for some of the right-leaning readers of this blog to do the same. Start by picking up this Sunday’s New York Times, listening to a bit of Noam Chomsky or—God forbid—watching PBS.

I understand the pain this might cause you, but, as many Americans are about to be reminded over the next four years, life is hard.

Doug Rowat,FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.