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The Forgotten Man


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Frank Martin has great article up on his web site called the Forgotten Man.  It is a description of the side effects of low interest rates on the market.  It includes a description of the Forgotten Man concept that Amity Shales popularized in her book about the Depression.  A great short read.

 

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Packer, thanks a lot to bring this to us. I do not know if there is anyone who can give the case better than Mr. Martin. Marc Faber said Fed is an evil institution. This sounds now like a understatement to me.

 

I am pondering if I should buy his two books. Anyone has read that? There are annual reports from 1999 on the website. It looks like I do not need find new stuff read for a while.

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Loved this Packer!  Martin is a long term thinker and a geniune talent.

 

Midway through this administration, the Forgotten Men organized.  And when they began to speak up, the reaction from the Washington establishment was dismissal and ridicule.  Now they are being labeled as obstructionist, racist and wished to "Go to hell".  They deserve credit for forcing the topics of spending, deficits, and debt into the political discussion.  If Washington wasn't so short term orientated, they would appreciate the contribution.

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Over the past month quite a few friend that would be considered in "The Savers" category have started to put money in dividend related stocks.

 

  All of their view are the same.  Just barely keep enough for an emergency in savings and the get a better return with dividends.  Treasuries are not worth the trouble and they are tired of being robbed at their bank.

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Great article!

 

One of the unfortunate side effects of the low interest rate policy is the only way to make a return on capital nowadays is by jacking up the risk in your portfolio.  Hedging strategies that aren't easily understood by the common person are integral in this environment as to stand by and do nothing is to risk losing purchasing power to inflation.

 

The Consumer Price Index for the Canadian economy came in at 120 for the month of July 2011. The inflation rate year over year was 2.7397% (compared to 3.0981% for the previous month).

 

CD's here in Canada are the following

 

1 year 1.75%

2 year 2%

3 year 2.15%

4 year 2.3%

5 year 2.65%

 

For savers then tax is paid on that interest making yields from approx 22% to 46% less than what is seen here. Your average "C" type risk averse person has to accept then, that their real rate of return will be approx 2% less than inflation each year. 

 

Try to explain to your average elderly person that their money is at risk by going into a 5 year CD. That if inflation ticks up a bit more they may have anywhere near 5% - 15% less purchasing power in 5 years depending where inflation goes from here.

 

It's a tough day for the "C"s.

 

 

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Great article!

 

One of the unfortunate side effects of the low interest rate policy is the only way to make a return on capital nowadays is by jacking up the risk in your portfolio.  Hedging strategies that aren't easily understood by the common person are integral in this environment as to stand by and do nothing is to risk losing purchasing power to inflation.

 

The Consumer Price Index for the Canadian economy came in at 120 for the month of July 2011. The inflation rate year over year was 2.7397% (compared to 3.0981% for the previous month).

 

CD's here in Canada are the following

 

1 year 1.75%

2 year 2%

3 year 2.15%

4 year 2.3%

5 year 2.65%

 

For savers then tax is paid on that interest making yields from approx 22% to 46% less than what is seen here. Your average "C" type risk averse person has to accept then, that their real rate of return will be approx 2% less than inflation each year. 

 

Try to explain to your average elderly person that their money is at risk by going into a 5 year CD. That if inflation ticks up a bit more they may have anywhere near 5% - 15% less purchasing power in 5 years depending where inflation goes from here.

 

It's a tough day for the "C"s.

 

It has been tough for C for the last 20 years. We are also not anywhere near the end of the tunnel.

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Frank Martin's article is half-baked at best.

 

First he doesn't suggest the alternatives.

 

For a moment lets do what he suggests; increase rates. What will happen? The C who got $ will benefit. Many millions will get moved from C to Jobless. The market will plunge with GDP dropping off a cliff. Then what? you'd have 30% unemployment rate, there'll be long lines to soup kitchen, people will be selling apples for 10 cents, you'll deal with law and order situation with increasing robbery,... not to mention race riots, xenophobia etc

 

The fact of the matter is, A, B, & C are soaking in the same pool and B may manage to make it a cesspool time and again. it is easy to comment. what we've here is a complex situation. To give you an example, it costs 300K for a student to become a physician in US, where as in India, it costs maybe around 20K. How can an American citizen in bottom run compete with a chinese worker who is paid 10c/hr? Now you'll say educate them. where are they going to get the $ from? only a fraction go to colleges in US. (you can easily apply this to other developed countries as well). Look at the unemployment rate for graduates in US. it is hardly 4% or less. you are not having an issue.

 

This unemployment issue for uneducated has been in making for a long time, only the .com & housing bubble masked it for too long. It has to pop up finally. The boat A, B & C is rocked by tough global forces and it punishes the uneducated, illiterate, & the clueless. The boat was in calmer waters for too long and has entered the rough global seas. There is no turning back.

 

The C may complain all they want, but remember that C is enjoying cheap chinese goods (thanks to pegging). C is enjoying a good job. Now C can't have it both ways (cheap goods and high savings). Something got to give. FYI, i'm part of C too.

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Frank Martin's article is half-baked at best.

 

First he doesn't suggest the alternatives.

 

For a moment lets do what he suggests; increase rates. What will happen? The C who got $ will benefit. Many millions will get moved from C to Jobless. The market will plunge with GDP dropping off a cliff. Then what? you'd have 30% unemployment rate, there'll be long lines to soup kitchen, people will be selling apples for 10 cents, you'll deal with law and order situation with increasing robbery,... not to mention race riots, xenophobia etc

 

 

Isn't his point that artificial intervention (i.e. supressing interest rates) doesn't work anyway in balance sheet recessions (as we have seen in Japan and in the US more recently). Therefore, the Fed should not use this policy so freely under the guise that it costs nothing and hurts no one.

 

The more important implication is that such policies create the unintended consequence of encouraging financial leverage and speculation in the reach for yield. Without such policies the housing bubble and the subsequent financial collapse would not have reached such gargantuan proportions.

 

It may not be too far-fetched to consider that such wealth transfers, if practised often and long enough, create disincentives to the A's to invest in their education and skills. I cannot quote any studies to support this view but I believe it is instructive to look at the Asian focus on education. Why do Asian families place so much emphasis on education? Because, in societies with woefully inadequate social support structures, people realise that education is their only route out of poverty.

 

I am not against wealth transfers but think it should dished out more judiciously and only to the truly needy. It is interesting that people are very quick to support wealth transfers from the rich to the poor based on the principle that the fortunate should help the unfortunate.

 

I wonder what people's reaction would be if, using the same principle, we adopted similar policies in education. Why not have a progressive grading system where we transfer grades from the stronger students to the weaker to level the playing field for college entrance and employment? If you worked your butt out to get your CFA, what would your reaction be to being asked to give away one of your levels to someone less fortunate so that he needs only to pass 2 levels and you have to pass 4?

 

I am totally in favour of wealth transfers to the truly deserving. However, I feel most of these decisions are best left to the C's themselves to make. Bill Gates is an example of a C who is making these decisions in ways that are much more thoughtful and productive than decisions that any B person can make.

 

I suspect if you ask the average man in the street in China or India, he will tell you that he is better off with less government today compared to when the Bs made all the decicions for the As and Cs back in the 1960s and 1970s.

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I wonder what people's reaction would be if, using the same principle, we adopted similar policies in education. Why not have a progressive grading system where we transfer grades from the stronger students to the weaker to level the playing field for college entrance and employment? If you worked your butt out to get your CFA, what would your reaction be to being asked to give away one of your levels to someone less fortunate so that he needs only to pass 2 levels and you have to pass 4?

 

Oec2000, here is your answer!

 

http://www.youtube.com/watch?v=lOyaJ2UI7Ss

 

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I wonder what people's reaction would be if, using the same principle, we adopted similar policies in education. Why not have a progressive grading system where we transfer grades from the stronger students to the weaker to level the playing field for college entrance and employment? If you worked your butt out to get your CFA, what would your reaction be to being asked to give away one of your levels to someone less fortunate so that he needs only to pass 2 levels and you have to pass 4?

 

Oec2000, here is your answer!

 

http://www.youtube.com/watch?v=lOyaJ2UI7Ss

 

We don't have to stop at education. Imagine the possibilities: We could extend this to sports and, best of all, politics. Would love to see politicians' reactions to the idea that someone else be given the power to transfer some of their votes and campaign funds to less fortunate candidates!

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Sorry to interrupt but that's just a stupid video. There are better arguments then this dumb comparison.

 

Care to share your arguments on what's wrong with the concept and why it cannot be extended to all fields of human endeavour?

 

Instead of letting Tiger Woods earn $50(?)m a year and the 1000th ranked golfer earn $100k(?)m and then trying to tax Woods more to redress the imbalance (which Tiger might be able to avoid by using smart tax professionals), we could provide the solution at the source by handicapping Tiger's scores and limiting his earnings. Or, to use a more extreme example, why shouldn't we level the playing field for someone who had the misfortune to be born with a physical handicap?

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Im sure you can see the weakness in the analogy you just dont agree with it. You can reference some of them in the video / youtube comment section or just pull up any Buffett interview over the last 5 years.  The 2 items simple arent very comparable which makes the video .....  Me typing for 20 minutes wont help with that inmo

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The daily ticker has a few interviews with a Fed Govern who is against more action. He slightly addresses the forgotten man in one of the interviews. I tend to agree with him, that its up to Washington / the Markets.

 

http://finance.yahoo.com/blogs/daily-ticker/;_ylt=Ahwsg.v5xHM3BNUfi7qx4uO7YWsA;_ylu=X3oDMTFjMnRndGtzBHBvcwMxBHNlYwNGUERhaWx5VGlja2VyQmxvZwRzbGsDdGhlZGFpbHl0aWNr

 

Also another interview based on P&Gs new Strategy, They are moving towards an hourglass strategy because the middle is being hollowed out. Interesting.

 

As America’s Middle Class Shrinks, P&G Adopts “Hourglass” Strategy

 

http://finance.yahoo.com/blogs/daily-ticker/america-middle-class-shrinks-p-g-adopts-hourglass-145429009.html;_ylt=AinPSEJ2h1RO2JSs8FaQMnUp2YdG;_ylu=X3oDMTE2N2FuNWpsBG1pdANEVCBJbmRleARwb3MDMjIEc2VjA01lZGlhQmxvZ0luZGV4;_ylg=X3oDMTFvcGs0cnBnBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANibG9nBHB0A3NlY3Rpb25zBHRlc3QD;_ylv=3

 

The shrinking of America's middle class and rise of a two-class society has been well documented. (See: America's Middle Class Crisis: The Sobering Facts)

The statistics are grim but bear repeating:

The top 1% of Americans control nearly a quarter of all the country's income, the highest share controlled by the top 1% since 1928, according to The Stanford Center for the Study of Poverty and Inequality.

The U.S. ranks #3 among all the advanced economies in the amount of income inequality.

In 2007, the top 10% of American earners pulled in 49.7% of total wages, the highest since 1917.

The top 5% of Americans by income account for 37% of all consumer outlays, according to Citigroup.

 

On Tuesday, the Census Bureau reported the U.S. poverty rate rose to 15.1% in 2010, up from 14.3% in 2009 and its highest level since 1993. In addition, real median household income fell 2.3% last year to $49,445.

 

I could go on, but you get the picture and sometimes.

 

----

 

Of course 15% in poverty is not enough, lets stop redistributing grades.....  In the interest of self preservation as someone in the middle and hopes to join the top, I just think its a dumb argument at some point the scale will tip. Financial Darwinism, will be proceeded at some point by actual Darwinism. Us finance types usually arent too fit. The video is a kid using a dumb analogy about a serious issue. I dont have the answers but this guy doesnt even know what the problem is......

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The sports analogy is a particularly weak one, because there are mechanisms in many sports that favor the underperformers and punish success. Ever hear of drafts? The worst teams get the first picks of the best new players, and the championship winner gets last pick.

 

Those dirty socialists.

 

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The sports analogy is a particularly weak one, because there are mechanisms in many sports that favor the underperformers and punish success. Ever hear of drafts? The worst teams get the first picks of the best new players, and the championship winner gets last pick.

 

Those dirty socialists.

 

Afaik drafts (not a subject I am particularly familiar with) operate only in a few team sports in the US. In any case, it does not appear that such systems operate to effectively hold back the great athletes (nor help the bad ones), income or achievement-wise.

 

The vast majority of international sports do not have any levelling mechanisms. The only sport I can think of in which there is a formal system to handicap competitors consistently is one in which the competitors can't complain and don't get paid - horse racing. If they can weigh down faster horses, why can't they do the same to Usain Bolt? ;D

 

Using Buffett as an analogy, do you not think that being born in the US significantly boosts the prospects of a child who shows promise as an athlete compared to a similarly talented child in Mongolia or Somalia?

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I'm all about "fairness." I have no idea how anyone could think the current tax structure is fair. Seriously.

 

Furthermore, the success in the class room is predicated primarily on your effort. There are some other factors to consider, too. However, your success in life is based also on effort, but much, much more towards luck.

 

Read "Outliers" and you'll have a better idea how that works. 

 

How is it fair that wealthy are taxed so little and they do so little to move us forward? For instance, we can pay a hedge fund manager a billion dollars a year and he provides...not a whole lot of benefits to society. We can pay a teacher $35,000 a year and he/she makes a huge impact.

 

If you look at standards of living (not stock market growth) after Carter, the middle class is getting crushed. We are becoming a nation of halves and have-nots. It's a real shame. The power of this country is based on the middle class. If we take a bit more from the guys making several million a year and hire teachers and cops, etc. I see how that does nothing but good things for all of us.

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The drafts aren't about the players they are about the teams. They hold back the good teams and propel the bad teams very much. The Chicago Bulls (basketball) were one of the worst teams in the league until they got the top pick and picked Derek Rose, and had the best record last year.

 

 

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Myth,

 

You confuse my opposition to broad-based knee-jerk policies of wealth transfer determined by people who are not paying the bill (the Bs) to a total opposition to wealth transfers. I share your concerns about the growing wealth disparity in the US, am aware of Buffett's criticisms of the tax system and have said earlier that wealth transfers are OK if done judiciously.

 

However, I do not share your view that the solution is to blame the evil bankers or the richest 1% of the population. Neither is the solution as simple Obama's prescription to tax everyone earning more than $250k.

 

My original comments were made in relation to misguided central bank policies that transfer wealth from savers to borrowers without proper consideration of the unseen costs (Martin's point). The US has run current account deficits for decades because the nation suffers from a deficit of savings. When you use every opportunity to push interest rates down, you incentivise people to spend rather than save; to speculate rather than invest; and you penalise the prudent (savers) and reward the irresponsible (spenders).

 

Instead of trying to understand and address the root causes of the growing wealth disparity (no, it is not because bankers are evil; they are normal people who are simply responding to the power of incentives), too many people blindly jump on the class warfare bandwagon. The wealth disparity may have occurred for reasons we do not understand well (even though I have read explanations that it is a result of the US's change to a service economy and the globalisation of manufacturing). It is not just on evil Wall Street that these disparities have widened. It is happening in sports, in the arts and even in liberal Hollywood.

 

While conservative tax policies may have contributed to it, the globalisation of production brought on by economic liberalisation in China and India may have played a larger role in the income distribution problem here. It was inevitable that the lower income groups performing less skilled jobs here would be the first to be affected by competition from China.

 

The issues and solutions are a lot more complex than simply taxing the rich more (even though this should be part of the solution) and more thoughful responses are required than the ones either Obama or the Democrats have advanced.

 

To quote Lincoln: "You cannot strengthen the weak by weakening the strong. You cannot help small men by tearing down big men. You cannot help the poor by destroying the rich."

 

I believe that the best solution for the vast majority of disadvantaged people is to give them incentives and access to opportunities to improve their lot. This what is transforming China and India where people would prefer opportunities to prove themselves rather than receive handouts. The education and sports analogies are apt because these are areas where we provide suppport for the underdogs by providing them encouragement and opportunity (college scholarships and draft picks) rather than giving them free points. No matter what the system, we will always have winners and losers but it seems clear that a system that rewards winners produces the best overall results for the team. Is it any surprise that a country that rewards consumption and penalises savings ends up as a debtor nation?

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Furthermore, the success in the class room is predicated primarily on your effort. There are some other factors to consider, too. However, your success in life is based also on effort, but much, much more towards luck.

 

 

You really think that success in the classroom is very different from success in life? Do you really think George W Bush would have gone to Yale and HBS if he had been born as Bill Clinton or Barack Obama?

 

And, I'm sure all of us have come across people who excelled in school despite working less hard than others; and, people who put in intense effort but somehow never seemed to do very well.

 

Success in the classroom is as dependent on luck (innate skills, socioeconomic class, ability to afford tutors, quality of school and teachers etc).

 

I'm all for fairness and progressive taxation. All I am saying is that causes and solutions are more complicated. Hedge fund manager taxation is a great example. Everyone knows it is ridiculous that they pay capital gains tax rates on their carried interest. Why is this allowed to persist? Is the problem with the tax code or is it with the rules on lobbying or campaign finance?

 

As for the benefits that a billionaire hedge fund manager brings to society, the argument is no different for millionaire/billionaire showbiz or sports celebrities. Is it a legislative problem? No. It is simply a reflection of the values of a particular society at a particular time and you cannot legislate that away.

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Instead of trying to understand and address the root causes of the growing wealth disparity (no, it is not because bankers are evil; they are normal people who are simply responding to the power of incentives), too many people blindly jump on the class warfare bandwagon. The wealth disparity may have occurred for reasons we do not understand well (even though I have read explanations that it is a result of the US's change to a service economy and the globalisation of manufacturing). It is not just on evil Wall Street that these disparities have widened. It is happening in sports, in the arts and even in liberal Hollywood.

 

oec,

 

Some very thoughtful and well reasoned ideas in your comments.  The paragraph above reminded me of a quote, which I've dug up, from Kurt Vonnegut (1922 - 2007):

 

"Moderate giftedness has been made worthless by the printing press and radio and television and satellites and all that.  A moderately gifted person who would have been a community treasure a thousand years ago has to give up, has to go into some other line of work, since modern communications put him or her into daily competition with nothing but world's champions."

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I stated that the idiot Libertarian with the camera is an idiot. He is against progressive taxation and wealth transfers of all types that was the point of his lame video. My main comment was his video was idiotic, because he is comparing two things that are not equal in any sense. Its like me asking you to share your wife with a man with no wife, and then when you say no saying well thats what our tax system does.

 

Sorry to interrupt but that's just a stupid video. There are better arguments then this dumb comparison.

 

Also I have never said the richest 1% or the evil bankers are to blame. I simple stated that at some point things will go loopsided and their may be a revolt. As I said prior, I dont have all the answers but this guy doesnt even know the question. You are probably right though Globalization has turned our society to a winner take most type of society - The same has happened in sports, media (books, movies, art), and all types of things.

 

My point is that the losers will demand a fair share at some point, and there are millions and millions of them. You can give up a little to maintain a pretty nice situation or risk it all going for broke. Im in the give up a little camp (I believe this is what Buffett is thinking, but thats my guess), but many want to see how far this can go due to ideology. Also the middle class has spent silly trying to keep up (mostly with the Jones). This has come without a pay raise in 40 years, and due to leverage. As they stop spending and start deleveraging we will be in for an interesting time, especially when the Government joins them.

 

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