Weekly Comment - August 27, 2018

Aug 27, 2018 | Nick Foglietta


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For this final “summer weekly comment” I want to stay away from specific market data and share with you a paragraph from When Money Dies: The Nightmare of the Weimar Collapse by Adam Fergusson.

Getting Ready for Hockey Season

Growing up in a hockey family, July always felt like the last month of summer because August meant hockey season was just around the corner and it was time to get back on ice. 

The mix of summer heat and cool arena is one of my fondest memories about playing hockey.  The scrimmages were light-hearted but high intensity.  The best part was you got to play with lots of other players who were not on your everyday team and hang out with them too.

Now, since my hockey playing ended a few years ago, late August reminds me that after Labour Day it will be back to the normal routine.  As much as I enjoy the summer break from the usual grind, I must admit I look forward to September and the regular schedule again!

September also brings my last “big picture” investment summary for the year, which looks at the investment climate that stretches out into the end of December. I have started writing this report already and will publish after the September long weekend.

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For this final “summer weekly comment” I want to stay away from specific market data and share with you a paragraph from When Money Dies: The Nightmare of the Weimar Collapse by Adam Fergusson.

The book depicts the classic history of what happens when a nation’s currency depreciates beyond recovery.

In 1923, with its currency effectively worthless (the exchange rate in December of that year was one dollar to 4,200,000,000,000 marks), the German republic was all but reduced to a barter economy.

“Expensive cigars, artworks, and jewels were routinely exchanged for staples such as bread; a cinema ticket could be bought for a lump of coal; and a bottle of paraffin for a silk shirt. People watched helplessly as their life savings disappeared and their loved ones starved. Germany’s finances descended into chaos, with severe social unrest in its wake.”

My intention is not to say Canada or the U.S. are going to devolve into a hyperinflation.  My goal is to use the Weimar currency debasement as an extreme example of what happens in times of growing wealth inequality which is exactly what we are presently experiencing.

Below is the paragraph from When Money Dies:

Our military defeat was due to the fact that for every 1000 men we had in the trenches, double that number of deserters and embusques remained at home. These deserters were activated less by military than economic motives.

The rise in prices was mainly responsible for the poverty of the families of the enlisted men … The first to suffer had to be those who did not share in the general increase in paper revenue, the soldiers who did not participate in the increase in wages, trading profits and war industries … they realized that their situation and that of their families would be hopeless after the war. Hence the dull, often dismal attitude of soldiers on furlough from the front during the latter years of the war.

Now, instead of reading that paragraph with the word “enlisted men” change it to “minimum wage workers” or “working poor.”  For an even clearer vision of this idea try to envision A.L.I.C.E. 

Here is the connection I see when I substitute the protagonist.

A.L.I.C.E. is an acronym for families that are Asset Limited, Income Constrained, and Employed.  The key to understanding the plight of ALICE is to understand that asset price increases have far outpaced wages for the past 25 years. 

Therefore, ALICE families have found their cost of living has risen much faster than their income WITHOUT the benefit of a higher net worth via higher asset prices. 

Of course, the members of our present day society that fall into the ALICE socio-economic category are not war deserters, they are the service sector workers. What they have experienced is while they work at jobs that keep the fabric of our economy operating smoothly for all of us to enjoy, their personal situations have grown more hopeless over time as their relative incomes are shrunk due to higher living costs on basic shelter, food, and needs.

Look at this long term chart of inflation in the United States.

Notice how the rate of inflation changed dramatically once the Federal Reserve and fractional reserve banking were created.  The second major event was in 1971, when Richard Nixon closed the convertibility “window” of US dollars into gold bullion. 

Maybe this point is better visualized in the form of the purchasing power of the US dollar.

Since the Federal Reserve was created in 1913, the purchasing power of $1.00 US has declined to $0.027 in 2015 (present day it is estimated at $0.022).

The bottom line is simply this; wages for the bottom 70% of have not been able to keep up with the large increase in inflation.  But at least those with modest assets have seen an offset to their wage’s purchasing power deterioration. The ALICE demographic has been the socio-economic group feeling the most pain.

I hear some of you saying:  Ok, thanks for pointing all of this out Nick.  Hey, I’ve seen this issue first hand in my children’s and grandchildren’s lives.  I hate that it is happening, but you are beating a dead horse talking about it again.

Actually, that might be true but I am going to use the data to shine a slightly different light on where the evils of wage and net worth inequality show up in society.

Politics…

The graphic below shows how the US political ideology has shifted since 1994 where “the masses were in the middle” to a bimodal skew with only a “remnant left in the moderate center.”

Do you think a series of graphics depicting “wealth inequality” might rhyme with the graphic above?

Hmmm?  Interesting thought… 

Please remember two things about the chart above:

  1. This is not a politically biased observation and, no, Donald Trump did not cause this to happen. Actually, it is likely the other way around…Donald Trump happened because of a bimodal American electorate!
  2. The bimodal distribution is not all of the rich people on one side of the chart and the poor people all on the other. The polarization, in fact, is simply a partial function of a mindset that takes hold when wealth inequality becomes more pronounced.   

But here is the question we all must reconcile. In the bimodal political reality of 2017/18, how does any “moderate candidate” ever stand a chance of winning an election in the US ever again?

No matter which side of the political spectrum you fall, a return to the center right or center left seems to me to be a politically desirable future outcome. 

I would love to hear from anyone who has a positive thought or opinion on these topics.  And enjoy the rest of your summer.  

The weekly comment will return after Labour Day.