What Now?

With Jackson Hole now history, what is front and center now?

The quick answer for me is to watch the chart of stock prices net of the negatives, which to our Climate Tech Model include: 1) average market interest rates, 2) inversion of interest rate yield curves, 3) oil prices, 4) diversion of money to gold, and 5) the dollar. The model monitors three versions, one based on monthly data, one on weekly data, and one on daily data, The one based on monthly data has pointed up since the 2009 bottom, obviously with some ups and downs in the activity. The trading version of this approach, one based on daily prices, shows the long term net stock price chart turned up in May of 2023 while the short term net stock price chart turned down in mid July 2023. So, we are locked into long term bullishness and short term bearishness from a trading standpoint. We will let you know when both time frames coincide, but for now the Climate Tech Model is leaning decisively towards the long term scenario.

In the meantime two macro fundamentals are probably things to ponder.

1. First, the question “if the U.S. economy is doing well, why do so many Americans say it is terrible ?” Article here by Judd Legum.

The leading economic indicators show the U.S. economy is performing well, but most Americans still believe economic conditions are extremely poor — as if the country was mired in a deep recession. What explains this discrepancy? 

The unemployment rate stands at 3.5%, as low as it has been since the 1960s. Over the last year, the U.S. economy has added an average of 312,000 jobs every month. Despite predictions of a recession, economic growth has been 2.0% or higher in the last four quarters. Inflation, while still elevated, is down to 3.2%. As a result, real wages have increased slightly over the last year. 

But an August survey by Quinnipiac University found that 71% of Americans describe the economy as “not so good” or “poor.” (Just 3% say the economy is excellent.) Further, despite slowing inflation and consistent job growth, a majority of Americans say the economy is getting worse. (Just 20% say the economy is improving.) A CNN poll released on August 3 similarly found that “50% of Americans say both that economic conditions are poor and that they are getting worse, 19% say it’s bad but stable, and 5% that it’s poor but improving.” (Just 15% said the economy is good and getting better.)

One factor in Americans’ pessimistic view of the economy is partisanship. A study published in The Review of Economics and Statistics in May 2023 concluded that “partisan bias exerts a significant influence on survey measures” of economic conditions, and this influence is “this bias is increasing substantially over time.” Specifically, “individuals who affiliate with the party that controls the White House have systematically more optimistic economic expectations than those who affiliate with the party not in control.” Overall, the study says, the influence of partisanship has increased fourfold between the George W. Bush administration and the Trump administration. In other words, regardless of economic conditions, more and more people will describe the economy as poor because they oppose the current president. Since Joe Biden is president, many Republicans will continue to describe the economy as poor. This is reflected in the CNN poll, where 54% of Republicans describe the economy as “very poor,” compared to just 15% of Democrats. 

But only 45% of Americans describe themselves as Republican or Republican-leaning, according to Gallup, so partisanship does not account for all the negative sentiment about the economy. 

Another piece to the puzzle is that millions of Americans are mired in low-paying jobs, struggling to make ends meet, and watching the fruits of their labor get funneled to wealthy CEOs and investors. This dynamic is captured in a new report by the Institute for Policy Studies (IPS). The IPS report, Executive Excess 2023, analyzes the 100 large public corporations with the lowest wages in 2022. The IPS report found that at these corporations, a group that includes many of the nation’s largest employers, “CEO pay averaged $15.3 million and median worker pay averaged $31,672.” That’s a ratio of 603 to 1. 

For example, at Dollar Tree — a company that employs nearly 200,000 people — the median wage is just $14,702, but its CEO, Michael Witynski, received $13.98 million in total compensation. That’s a ratio of 951-to-1. Over the last three years, the median wage of a Dollar Tree employee decreased by 4.4%. Meanwhile, over the same time period, Witynski was awarded tens of millions in Dollar Tree stock, ballooning his personal holdings “2,393 percent to $30.5 million.” The company also spent $2 billion on stock buybacks over the last three years, boosting the value of Witynski’s holdings and other major investors. 

In a May 2023 SEC filing, the company defended its employee compensation and CEO-to-employee pay ratio, stating that “we believe our compensation program and philosophy are designed to attract and retain good talent, motivate our associates and recognize individual achievements.” 

Despite Dollar Tree’s rosy rhetoric, it’s easy to see how Dollar Tree employees would have a negative view of the economy, notwithstanding positive aggregate economic data. They are performing difficult, physically demanding work for little pay and watching their labor further enrich millionaires like Witynski. And Dollar Tree is not an aberration. Millions of other workers face similar circumstances. 

The ticket to out-of-control CEO compensation

Dollar Tree does not have the highest CEO-to-employee pay ratio. That dishonor goes to Live Nation, the parent company of TicketMaster. In 2022, CEO Michael Rapino received total compensation of $139 million, while the median Live Nation employee was paid $25,673 — a ratio of 5,414-to-1. Live Nation notes that if you exclude Rapino’s $109 million stock grant and all part-time employees (neither or which is permitted under SEC rules) its CEO-to-employee pay ratio would only be 353-to-one.

Other major companies with low wages and massive CEO-to-employee pay ratios include TJX, (the parent company of Marshall’s and TJ Maxx, 2,249-to-1), Coca-Cola (1,883-to-1), Yum Brands (the parent company of Pizza Hut, Taco Bell, and KFC, 1603-to-1), Chipotle (1,073-to-1), and Walmart (933-to-1).

Buying back stocks, selling out workers

Low-wage companies are also using their profits to purchase billions of dollars of their own stock, a process known as stock buybacks. According to IPS, from January 1, 2020 to May 31, 2023, 90 low-wage companies spent $341.2 billion on stock buybacks. By reducing the number of publicly available shares, these buybacks artificially inflate stock values, benefiting CEOs (who are mostly paid in stock) and investors. 

For example, Lowe’s, the home improvement chain, spent “$34.9 billion repurchasing its own stock over the past three and a half years.” That’s enough money to give each of its 301,000 U.S. employees a bonus of $46,923. Instead, the median Lowe’s worker makes less than $30,000 per year. The buybacks enriched Lowe’s CEO Marvin Ellison, who owns $103 million in company stock, other top executives, and investors. 

Investors include members of the public, but most stock is owned by the already wealthy. According to a 2019 study by the Federal Reserve, less than half of all households own any stock at all. The study found that, for corporate equities and mutual funds, the richest 1% of households hold 53.8% of all stock. Meanwhile, the bottom 90% of households own just 11% of all stock. So stock buybacks are essentially a transfer of wealth, created by labor, to to richest Americans. 

Millions of workers being exploited by this system may have a poor view of the economy, notwithstanding leading economic indicators. 

Other low-wage companies that have spent billions on buybacks over the last three years include Home Depot ($23.9 billion), Walmart ($23.8 billion), Nike ($8.9 billion), Target ($8.9 billion), and Dollar General ($8.2 billion).

Corporate exploitation is a choice

The fact that many American companies are paying paltry wages to workers while lavishing cash on top executives and investors is no happenstance. It’s a policy choice. In the United States we have a tax and regulatory environment that rewards that behavior. We can decide to maintain the status quo or change it. 

The 2022 Inflation Reduction Act made an incremental reform, imposing a 1% excise tax on corporate stock buybacks. (Stock buybacks surged in popularity because, unlike dividends — another way to transfer profits to investors — buybacks were previously untaxed.) But the current tax on stock buybacks is likely too low to significantly change corporate behavior. Biden has proposed quadrupling the tax. 

Another proposal, known as the Tax Excessive CEO Pay Act, would impose tax penalties on corporations with huge CEO-to-worker pay ratios. The proposal would add 5 percentage points to the corporate tax rate of large companies with a CEO-to-worker pay ratio of 500-to-1 or higher. 

In the 1980s, perceptions of the economy were much more positive even though, by several objective measures, the economy was worse than it is today. In 1989, however, the average corporate CEO-to-worker pay ratio was 44-to-1. 

2. The second thing to ponder is the fact that high public debt seems to be a fact of life.

Here is an article “Living with High Public Debt Serkan Arslanalp and Barry Eichengreen”, 1 August 2023

1. Introduction, Public debts have soared to unprecedented peacetime heights. These high debts pose economic, financial and political problems.
2. Multilateral financial institutions and others have consequently laid out scenarios for bringing them back down. Our thesis in this paper is that high public debts are not going to decline significantly for the foreseeable future. Countries are going to have to live with this new reality as a semi[1]permanent state. These are not normative statements of what is desirable; they are positive statements of what is likely. First, large, persistent primary budget surpluses are not in the political cards. Over the last half century, episodes where countries have run primary surpluses of, say, 3 to 5 percent of GDP for extended periods are very much the exception to the rule. Maintaining large primary surpluses requires favorable economic conditions and a degree of political solidarity that currently do not exist. Divided government and slow growth make this route to debt consolidation even more challenging than in the past. Second, it is difficult to imagine more favorable interest-rate-growth-rate differentials (favorable interest-rate-growth-rate differentials reducing debt ratios in an accounting sense). Real interest rates have trended downward to very low levels. It is hard to foresee them falling still lower. Faster global growth is pleasant to imagine but difficult to engineer.

History suggests that the reorganization required of firms to capitalize on Generative Artificial Intelligence and other new general-purpose technologies, in ways that translate into faster aggregate growth, will take a decade and more. Third, inflation is not a sustainable route to reducing high public debts. Only unanticipated inflation has this effect. Although an anticipated increase in inflation may reduce debt ratios in the short run by raising the denominator of the debt-to-GDP ratio, in the long run it is apt to raise interest rates and shorten maturities. At both horizons, these effects are unlikely to be economically important. Fourth, statutory ceilings on interest rates and related measures of financial repression are less feasible than in the past. Investors opposed to the widespread application of repressive policies are a more powerful lobby. Financial liberalization, internal and external, is an economic fact of life. The genie is out of the bottle. All of which is to say that, for better or worse, high public debts are here to stay.