Updating a post I did last year on the nation’s wealth gap, I thought the article published by the Washington Post last week was a worthy sequel.  A new study shows that wealth disparity has been accelerating. The study by the Pew Research Center underscored other data showing that the economic growth that has followed the Great Recession has benefited mainly those at the top.

Wealth inequality widened dramatically during the first two years of the economic recovery, as the upper 7 percent of American households saw their average net worth increase 28 percent while the wealth of the other 93 percent declined. The study by the Pew Research Center underscored other data showing that the economic growth that has followed the Great Recession has benefited mainly those at the top. The uneven recovery has only accelerated a decades-long trend of growing wealth inequality in the country, despite rising popular and political awareness of the dynamic.

From 2009 to 2011, the average net worth of the nation’s 8 million most affluent households jumped from an estimated $2.7 million to $3.2 million, Pew said. For the 111 million households that form the bottom 93 percent, average net worth fell 4 percent, from $140,000 to an estimated $134,000, the report said.

The changes mean that the wealth gap separating the top 7 percent and everyone else increased from 18-to-1 to 24-to-1 between 2009 and 2011. Overall, the most affluent 7 percent of households owned 63 percent of the nation’s household wealth in 2011, up from 56 percent in 2009.

The biggest difference between the most affluent group and everyone else is that the wealthiest households have their assets concentrated in stocks and other financial instruments, while others’ wealth is concentrated in their homes.  Both stock and home values were pummeled during the recession. But in the recovery, stock values have rebounded nicely and have reached new highs. Housing values — particularly for those living in nonexclusive areas — have stayed mostly flat, although there have been some stirrings of a recovery in the past year. “It has been a very good recovery for those at the upper end of the wealth distribution,” said Paul Taylor, director of the Pew Research Center and author of the report along with Richard Fry, a senior research associate. “But there has been no recovery for the lower 93, which is nearly everybody.”

Overall, the report said, the amount of wealth held by Americans increased 14 percent between 2009 and 2011, going from $298,000 to $339,000 in inflation-adjusted dollars. Still, only the 13 percent of families with a net worth of $500,000 or more saw their wealth grow, the report said. Every other wealth group saw their net worth decline.

The issue of inequality leapt to prominence in late 2011, when supporters of the Occupy Wall Street movement began setting up encampments in Washington, Lower Manhattan and elsewhere to protest the financial chasm between the wealthiest one percent of Americans and the rest. And it drew attention in the most recent presidential campaign, as President Obama railed against the growing economic divide. Although Obama won the election, many of the tax and policies aimed at addressing the complex causes of inequality have not been passed by Congress. Those that have become law so far have done little to close the gap.

I was reading one of the many newsletters I get (thanks to Tiho at the short side of long and his efforts putting the examples together) and found a piece that refreshed my memory regarding the well-known corollary regarding magazine covers being a contra-indicator. It’s really interesting and a little lighter subject matter and after this week’s action in the markets … a little something on the fun side is needed.

It’s widely known in the halls of Wall St. that more times than not that retail investors are on the wrong side of a trade.  Much of that can be explained not because the fact that they are bad investors, it’s because they usually become aware of an investment too late in the game.  They tend to enter just when the early adopters (institutional money) are looking to exit. And magazine covers, especially those that are widely distributed are a reflection of the public.  And if the public is late, then one would expect magazine covers to be late too. Not to pick on Time magazine but they have a remarkable track record.  Let’s look back at some stellar examples. Source: Time Magazine & Stock Charts (edited by Short Side of Long)

The chart above to the right shows how the 10 Year Treasury Note traded at the astonishingly high levels of 15% per annum. The fact of the matter is that interest rates had been rising since 1949, but it took Time Magazine until 1982 to publish the infamous cover of the legendary Fed Chairman Paul Volcker with the tile “Interest Rate Anguish”. In perfect manner, Time Magazine almost perfectly timed the greatest bond yield peak in history.  Source: Time Magazine & Stock Charts (edited by Short Side of Long)

Time published this cover in 2000. Forget the old economy, mining, shipping and agriculture. Forget Crude Oil at $10 per barrel, Soybeans at $4.30 and Gold at $280 per ounce. In June 2000, Time Magazine’s cover almost perfectly timed the greatest stock market bubble and subsequent crash since black Friday in 1929. Seeing a trend yet? If you would have done just the opposite of what Time Magazine cover was implying, you would have been handsomely rewarded. Source: Time Magazine & Calculated Risk (edited by Short Side of Long)

Next in line after the tech crash? Why yes, it’s of course, housing. Time’s headline? “Home Sweet Home” in June 2006. This was published right at the generational grand top of US housing prices. Time does it again.  Source: Time Magazine & Stock Charts (edited by Short Side of Long)

In October 2008 Time’s cover was implying the Great Depression 2.0. However, the stock market had already crashed and discounted the majority of the bad news. Sure, small further downside was experienced and lingered for another 6 months or so but the bulk of the losses were already booked by the time this issue was released. The SP500 at 800 (the bottom was 666) was, in retrospect, a true bargain. But this was truly a reflection of what the public was feeling.

So, let’s take a look at Time’s latest cover.  Uh, oh!

Source: Time Magazine & Short Side of Long

Is this the death nail for US manufacturing or will Time get this one right?

From the Examiner.com

The recently increased unemployment numbers, as bad as they are, may actually be significantly worse than reported.

The use—or abuse– of Social Security Disability Insurance (SSDI) may mask a large number of individuals who would otherwise be among those who are counted as out of work. According to Forbes, there is now one individual collecting disability for every twelve in the workforce.

The Social Security Disability Insurance program, established in the 1950s, was intended to provide support and medical care for those incapable of working due to injury or disease.

According to figures released by the Social Security Administration, 8,827,795 people were receiving SSDI in 2012, a significant increase over the 7,427,203 in 2008, the year before the current administration took office. The government spent $132 billion on the program in 2011, over twice as much as it did just about a decade ago.

The relationship between the devastated U.S. economy and the rise in disability claims is not coincidental. According to the Business Insider publication, “Since mid-2010, precisely the time millions of U.S. citizens used up all of their 99 weeks of unemployment insurance, disability claims have risen by 2.2 million. Those on disability are not counted in the workforce and are not considered unemployed.”

The rise in SSDI beneficiaries also clears up another mystery, according to the National Center for Policy Analysis. “The population is growing, yet the work force is shrinking. In 2000, the civilian labor force participation rate peaked at more than 67%. In may [of 2012] it stands at 63.8 percent…Social Security Disability claims may be having an impact…Since the beginning of 2009, more than 5 million people have applied for social security disability. About one and one-half million have started receiving benefits. In 1980, about 2.8 million workers were receiving disability, along with about 1.8 million of their dependents. By 2010, those numbers had increased to 8.2 million workers and 2.1 million dependents (not including adult disabled children.). To put this in context, in 1980 about 3% of the working age population (ages 18 to 65) received disability payments. In 2010, more than 5 percent of the working age population received disability payments.”

Investors.com notes that “since the recession ended in June of 2009, the number of new enrollees to the Social Security Disability program is twice the job growth figure. …the big factor in the recent surge is the slow pace of the economic recovery…the number of applicants was up 24% compared with 2008.”

The Brookings Institute’s Gary Burtless, notes that “disability is a fuzzy legal concept. Large numbers of jobless workers manage to meet the legal standard when work prospects are poor to nil…Sadly, once workers are enrolled in the SSDI program, few ever return to work.”

The “fuzzy legal concept” of disability is described by the Organization for Economic Cooperation and Development. Mental disorders such as depression and anxiety have increased by more than three times from the 10% of awards thirty years ago to thirty-three percent currently. The study found that “less stringent screening procedures, more attractive benefits and a waning need for less-skilled workers have bolstered SSDI claims.”

All eyes are once again fixed on Washington but instead of the Presidential election this time everyone is looking for signs of life as we fast approach “fiscal cliff”. This self-caused folly has been made into one of the most divisive, class warfare items I have ever seen used to split our nation. In an attempt to avoid politics and rail on the hypocrisy of it all I want to just provide some facts that aren’t being provided by the mainstream media so you can determine for yourself if the Bush tax cuts really did (originally) benefit the rich and if they are repealed who might be the real winners and losers (hint: it may not be who you think)

According to official IRS data, the top 1% of income earners paid $84 billion more in federal income taxes in 2007 than in 2000 before the Bush tax cuts were passed, 23% more. 

The share of total federal income taxes paid by the top 1% rose from 37% in 2000, before the Bush tax cuts, to 40% in 2007, after the tax cuts.

The bottom half of income earners paid $6 billion less in federal income taxes in 2007 than in 2000, a decline of 16%.  The share of federal income taxes paid by the bottom 50% declined from 3.9% in 2000 to 2.9% in 2007.

The Bush tax cuts also included a doubling of the child tax credit from $500 per child to $1,000 per child.  Because of that, and the 33% cut in the bottom tax rate, nearly 8 million more people dropped off the federal income tax rolls entirely, paying zero federal income taxes. 

Under the Bush tax cuts, the bottom 40% of all income earners not only paid no federal income taxes, as a group on net.  By 2009, they were being paid cash by the IRS equal to 10% of all federal income taxes

By 2007, the Bush deficit was down to $160 billion, less than 15% of the current administration deficits today.  Total federal revenues soared from $793.7 billion in 2003, when the last of the Bush tax cuts were enacted, to $1.16 trillion in 2007, a 47% increase.  Capital gains revenues had doubled by 2005, despite the 25% capital gains rate cut adopted in 2003.  Federal revenues rose to 18.5% of GDP by 2007, above the long term, postwar, historical average over the prior 60 years. 

Over the past 45 years, every time the capital gains tax rate has been increased, capital gains revenues have declined rather than increased

The Labor Department delivered some decent news Friday, reporting that the nation’s employers added 171,000 jobs in October, plus 84,000 more jobs in August and September than initially estimated. The unemployment ticked up a bit to 7.9 percent from 7.8 percent, but that’s because more people decided to join the labor force and so were newly counted as unemployed.

Job gains were widespread across the private sector, led by professional and business services, health care and retail.  But employment still has a long way to go before returning to its pre-recession level.

The chart above shows job changes in this last recession and recovery compared with other recent ones; the black line represents the current cycle. Since the downturn began in December 2007, the economy has had a net decline of about 3 percent in its non-farm payroll jobs. And that does not even account for the fact that the working-age population has continued to grow, meaning that if the economy were healthy we should have more jobs today than we had before the recession.

Getting the economy to 5 percent unemployment within two years — a return to the rate that prevailed when the recession began — would require job growth of closer to 280,000 per month.

There are now 12.3 million workers looking for work who cannot find it. The tally of those who are “underemployed” — that is, adding in those workers who are part time but want to be employed full time, and workers who want to work but are not looking — is an even larger 23 million.

As bad as all these figures are, it’s worth remembering that while we struggling, most of Europe is much worse off that we are.

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This week we will have the opportunity to define our future by selecting the person we want to be our next President and Chief Commanding Officer. The importance of voting in America cannot be overstated. The United States is a constitutional republic. Americans democratically elect their leaders, who in turn represent them in the legislative, judicial and executive branches of government. Some of our leaders also have the power to appoint other leaders to certain offices. Our leaders make, enforce and judge laws that impact our health, religion, money and freedoms. It is therefore critical to vote to have your say about what happens to you.

 Now more than ever the people are responsible for the character of their Congress. If that body be ignorant, reckless, and corrupt, it is because the people tolerate ignorance, recklessness, and corruption. If it be intelligent, brave, and pure, it is because the people demand these high qualities to represent them in the national legislature. . . . If the next centennial does not find us a great nation . . . it will be because those who represent the enterprise, the culture, and the morality of the nation do not aid in controlling the political forces. – James Garfield

Certainly one of the main stories of the summer was the U.S. drought and its impact on grain production, specifically corn and soybeans. In 2011, the U.S. reaped a corn harvest of some 314 million tons. In 2012, the USDA has estimated a harvest of 274 million tons – a shortfall of 40 million tons – despite record acreage being planted.

While in the United States, the most severe, widespread drought in half a century has wreaked havoc mostly on the corn and soybean crops, in Russia, Ukraine and Kazakhstan, wheat crops have been badly damaged.

Since it takes time for those price hikes to work through the system, it will not be until 2013 sometime that we really begin to feel it in the U.S. And for the rest of the world that lives more directly on grains? They’re not as lucky. The price hikes hit them almost immediately.

Global food prices have leapt by 10% in the month of July, raising fears of soaring prices for the planet’s poorest, the World Bank has warned. The bank said that a US heat wave and drought in parts of Eastern Europe were partly to blame for the rising costs. The price of key grains such as corn, wheat and soybean saw the most dramatic increases, described by the World Bank president as “historic”. The bank warned countries importing grains will be particularly vulnerable.

The World Bank said that the use of corn to produce ethanol biofuel – which represents 40% of US corn production – was also a key factor in the sharp rise in the US maize price. In addition to food price increases drivers already have seen fuel costs climb because of higher prices for ethanol. The drought also has reignited the debate over whether ethanol production is a drain on global food supplies

‘Lifetime of perils’

“We cannot allow these historic price hikes to turn into a lifetime of perils as families take their children out of school and eat less nutritious food to compensate for the high prices,” World Bank President Jim Yong Kim said. He said countries in North and Sub-Saharan Africa and the Middle East were among those most exposed to such price increases because much of their food was imported and food bills make up a large proportion of average household spending.

Already, the bank said, maize prices had increased by 113% over the past quarter in Mozambique, while sorghum had risen 220% in South Sudan. Although the bank said that it did not foresee the kind of price increases which led to riots in many countries in 2008 there were, it said, other potential risks which could push grain prices higher.

Farmers across the world have begun a mass slaughter of their pig and cattle herds because they cannot afford the cost of feed, which has soared following the worst US drought in living memory. The mass slaughter of millions of farm animals across the world is expected to push food prices to their highest ever levels. Experts at Rabobank warn that the mass “herd liquidation” will contribute to a 14% jump in the price of the average basket of food by next summer. The slaughter of millions of pigs has already led to a 31% increase in the price of pork and the costs of other meats are also expected to soar as “US livestock herds are likely to be liquidated at an accelerating pace in the first half of 2013″.“There will be an initial glut in meat availability as people slaughter their animals to reduce their feed bills. But by next year herds will be so reduced that there won’t be enough animals to meet expected demand and prices will soar.”

Mike Yoder’s herd of dairy cattle are living the sweet life. With corn feed scarcer and costlier than ever, Yoder increasingly is looking for cheaper alternatives — and this summer he found a good deal on ice cream sprinkles.

“It’s a pretty colorful load,” said Yoder, who operates about 450 dairy cows on his farm in northern Indiana. “Anything that keeps the feed costs down.”

As the worst drought in half a century has ravaged this year’s U.S. corn crop and driven corn prices sky high, the market for alternative feed rations for beef and dairy cows has also skyrocketed. Brokers are gathering up discarded food products and putting them out for the highest bid to feed lot operators and dairy producers, who are scrambling to keep their animals fed.

In the mix are cookies, gummy worms, marshmallows, fruit loops, orange peels, even dried cranberries. Cattlemen are feeding virtually anything they can get their hands on that will replace the starchy sugar content traditionally delivered to the animals through corn.

To end on a brighter note (said with tongue firmly planted in cheek) …

While the food price spike is likely to lead to an increase in starvation and malnutrition across the world, global food traders are expecting bumper profits. The multimillionaire head of Glencore (the Swiss multinational commodity trading company) has said the US drought will be “good” for the commodities trader because it will lead to opportunities to exploit soaring prices.