Income Inequality: So What?

[bpr]

Re: Income Inequality: So What?

https://www.marketwatch.com/amp/stor...mpression=true

The employment cost index rose 0.6% in the second quarter, a tick below the MarketWatch estimate of 0.7%.
More important, the cost of worker compensation in the form of pay and benefits edged up to 2.8%...

When I look at the FRED chart of wages, it looks like an $0.18 increase from $26.80 to $26.98 in the second quarter, which is in line with the 0.6% wage growth. (FRED Average Hourly Earnings, Seasonally Adjusted: https://fred.stlouisfed.org/series/CES0500000003)

Hidden in the details is:

The big increase was in benefits: They jumped 0.9% to mark the largest advance in four years.

That's an increase in benefits as a cost, benefiting only one sector (the one raising premiums).

So, actually wages were up 0.6%, but the CPI was up 1.03%, so another way to write this headline would be something like: "Real Wages Decrease for Three-hundredth* Consecutive Quarter."
CPI:
https://fred.stlouisfed.org/series/CPALTT01USQ657N

*hyperbole, but, so is the agitprop on Marketwatch.

EDIT: Then there's this:
https://ftalphaville.ft.com/2018/07/...-wage-growth-/

[dcarrigg]

Re: Income Inequality: So What?

When I look at the FRED chart of wages, it looks like an $0.18 increase from $26.80 to $26.98 in the second quarter, which is in line with the 0.6% wage growth. (FRED Average Hourly Earnings, Seasonally Adjusted: https://fred.stlouisfed.org/series/CES0500000003)

Hidden in the details is:


That's an increase in benefits as a cost, benefiting only one sector (the one raising premiums).

So, actually wages were up 0.6%, but the CPI was up 1.03%, so another way to write this headline would be something like: "Real Wages Decrease for Three-hundredth* Consecutive Quarter."
CPI:
https://fred.stlouisfed.org/series/CPALTT01USQ657N

*hyperbole, but, so is the agitprop on Marketwatch.

EDIT: Then there's this:
https://ftalphaville.ft.com/2018/07/...-wage-growth-/

Bingo!

[dcarrigg]

Re: Income Inequality: So What?

Somehow I suspect the end of WWI, Henry Ford, fast and loose financing, the onset of refrigeration and farm machinery, and fast and loose credit leading to the biggest equities bubble in US history probably had more to do with what made the 20s roar than Harding or Coolidge's tax cuts. But if the days of prohibition and Al Capone and ubiquitous exploitative child labor with no minimum wages and segregation and know nothings and one of the lowest homeownership rates in history of the US and Big Bill Haywood fighting in the streets for a 54 hour work week are your idea of a great economic boom, then I suppose everything today must look like it's heading in the right direction.

Everything's going great. Nothing to see here:

[jk]

Re: Income Inequality: So What?

i think all these graphs are eloquent with the exception of homeownership. w made a big deal out of home ownership rates, and we know sub-prime and ninja lending led to a lot of purchases that should never have happened.

as i've been saying for years, i believe we are recapitulating the 1930's, with the curent fed now repeating the fed's 1937 premature tightening. inequality was very high back then, too. kind of like it is now.

http://savemedicare.org/is-medicare-...-class-wealth/

https://www.upi.com/Top_News/US/2014...9311413321765/

and




the real question is whether we can change course without a major war.

[dcarrigg]

Re: Income Inequality: So What?

Re home ownership, think of it like this: we've managed to reflate and excede the bubble in many markets, this time with far more concentrated ownership. I'm not sure what's worse, when thousands of small fries with liars loans get foreclosed on, or when one institution goes belly up and floods the market with thousands of homes? Either way, if and when the music stops, a chair is gonna get pulled out. I remain pretty convinced that you can't have landlords eating 50 cents of every dollar while healthcare and taxes are eating another 30 and debt service and fines and fees another 10. You can paper over it with hot markets and easy credit for a while. But you can only have people spending a dollar twenty on the dollar they earn for so long before the whole thing gets overheated. And the shitty little 1970s split level that appraised at $100k in 2003 but now lists for $500k isn't actually something the 1 percent want in the end of the day, even if it has relative proximity to a venture capital office. Raising rates are going to make that obvious.

Things exist today that didn't in the last bubble. Not just hedge funds owning and renting out tens of thousands of single family homes each. But micro investments from unaccredited investors in buy-flip schemes--as little as hundreds to buy in online.for.promised.returns often of 10 or 14 percent on the year. So not quite Madoff promises of 19. But not far off. Then there's the weird warehouse capital schemes. This time it's different. More targeted. More lumpy. Fewer players. Still, we've got multi million person metros where even at twice median income, if you didn't buy in before.the last bubble, it's totally unaffordable now.

Naiive, but well-meaning people call that supply and demand and think if you just build enough luxury condos in city centers eventually prices will come.down. But they are blinded by faith in The Market first and secondarily by their faith that most people want to be yuppy urbanists like them. They can't see the obvious evidence right in front of their faces: that real estate markets are neither efficient nor driven by a commodity demand for shelter. They are an investment vehicle driven by returns and wanton speculation. That's why over 80% of new housing units built in major metros since the last crash have been luxury units defined as in the top 90% of prices for market sales in their locality. Now, these same well-meaning people believe that today's luxury home is tomorrow's working class home. But that's usually a product.of west coast naiivity. Those of us who live in older places know. The mansions stay mansions. The brownstones stay brownstones. The large federal period homes are still owned by wealthy families, just as they ever were. They don't trickle down. They may turn to museums of lose value and fall into disrepair. But either way a middle class home owner cannot afford to own and operate them. And besides, once upon a Time not long ago, when people listened to CDs and took life slow, most new construction was middle income construction. So something very much changed in the world of developer financing between the 1990s and the 2010s. And you have to admit that plain fact even if you believe The Market is perfectly efficient and the obvious solution is just to build more luxury condos high rises. Because it's true.

And now that I've rambled on through this little rant, let me get back to the point at hand and connect the dots: when 3 people have more wealth than the bottom 200 million and they don't really know where to put it all, isn't it just possible that developers sense this and build to garner their investment seeking a return rather than build to cater to the actual shelter demand of those 200,000 million working class souls? And if that's the case, then they have to sell a story, right? Just like Elon. You don't need a rocket.to.Mars. But you do need a bustling, growing, dynamic place that attracts wealth and youth. And you need luxury. Superlatives help. And you need the ceiling to be far off. Because that story sells. 1,200 square feet of lally columns and 2x4 frames just down the road for median prices makes for boring brochures and boring PowerPoints and boring returns that just don't excite capital to bite. And besides, you need public investment in infrastructure for middle class housing that you don't for luxury investment condos that aren't going to come with lots of new commuters and full time public students and public recreation and library users, etc. So it's great for keeping taxes down.

As wealth gets more concentrated, and there are many millions fewer small fish just looking to invest in the local niche they know for a small return, but now a small number of much bigger big huge fish looking for a big huge meal (return percentage) it's going to be the guy with the biggest, shiniest lure and the rig that can handle the weight who go home the winners. And the story of the day will have little to do with how hungry or not the little fish are. In fact, nobody will care or think much about the little fish at all. Until there's not enough of them left to sustain the big huge fish. Those graphs may as well have been pictures of sick and dying little fish interspersed with growing population charts of big, huge fish.

[jk]

Re: Income Inequality: So What?

Special Report: Spiders, Sewage and Fees-The Other Side of Renting From Wall Street

private equity manages its single family portfolios like slum lords. surprise!

[dcarrigg]

Re: Income Inequality: So What?

Special Report: Spiders, Sewage and Fees-The Other Side of Renting From Wall Street

private equity manages its single family portfolios like slum lords. surprise!

Great article!

Not only that, but imagine how much that drives the market. Only a few players are in the 10,000+ single-family home (SFH) ownership club right now. But many more are in the 1,000. Ever since Deutsche Bank opened up the spigot by allowing Blackstone and Cerebus and all to securitized rental income (you thought MBS were bad, these are literally RBS--rent backed securities) and they managed to get them rated AAA by all three of the ratings agencies.

What does that mean? It means they get financing at about 1.5%, and they've levered their SFH portfolios at about 1:1--that is, they've basically got a mortgage worth of rental income. BUT, since any competitor who goes for financing has to take a mortgage or standard debt financing out at 3 to 5% higher than RBS financing, there will always be a spread there that is wide enough to allow big capital groups to operate.

And some might do that. But the real vulturey PE groups, we both know have no interest in a 3 to 5% long term return that comes with headaches like tenants. The people who want that 3 to 5% return are the RBS investors themselves, most of whom probably don't have any clue what it is they're holding, or how risky it is.

The PE firms want the quick cash out. So you spend, if you're Blackstone, a billion or so on single family homes, bundle up the projected rental cash-flow and sell that as bonds on the market to some European sucker who never dreamed such a thing was possible and thinks this is just any other component of a diversified bond portfolio, and get the cash value back 1:1.

Now you're in a great position. You've recouped your investment. But you haven't made your nut yet. How do you do that? You already sold off the rental income for 30 years. That's not working for you. What do you do? You beat the assumptions. That means keeping the sucker rented more often and for more money than the base assumptions on the bonds. And then you hit them with fees. You hit them with fees after fees after fees. You're the landlord, so you can fee them for almost anything. Letting the place go, being too loud, having too many cars, having too many people over, late payment, multiple-fee fee, contract fee, processing fee, early lease termination fee, security fee, pet fees, doesn't matter. Just fee the shit out of them.

When you're an absentee landlord twice removed from ownership, you literally have almost zero incentive to keep the home up. You have less than zero incentive to care about the tenants. In fact, that whole thing is probably best addressed by paying off some PR firm a few grand to "manage" (read make bots, lie, and manipulate) your internet presence and reviews. You already recouped the investment on the home, and you no longer own it, you just manage it. Who cares if it falls apart really? Do you want to be doing this for 30 years? No. And imagine how much you can charge in eviction fees or early termination fees if fed up tenants just leave. That kind of churning can be very lucrative.

And of course, for the suckers holding the RBS bags, you think that that low-yield junk really is AAA? You think diversity in geography or whatever is really going to help you the day a big player like Blackrock or Cerebus pulls out? And what do you think will happen to home values when a glut of these junky, unkempt, blighted homes that can only be sold to cash buyers flood the market simultaneously? If anything, the rationale for why MBS should be rated AAA is stronger than the rationale for RBS. And we saw what happened there.

About 35% of the rental market is now single-family homes. Most of these were never intended to be rentals. There has been an average increase of about 400,000 SFH per year on the rental market since 2006. This is a massive shift that really makes today an entirely different environment than 10 years ago. I don't think most people have really wrapped their heads around that yet.

[thriftyandboringinohio]

Re: Income Inequality: So What?

The realities of life will collapse that game. Decent renters just move away when the landlord won't fix the place. While a lease is a contract that can be enforced, you can't make any real money suing your former tenants, your profit gets transferred to the law firm. Slum lord properties can only attract low quality tenants that don't pay the rent reliably.

Finance people experienced in the FIRE economy are poorly suited to working in the real production economy, where tangible products and services need to be delivered on time to real people. I can't see how Blackrock and Cerberus will still be in this business five years from now. It's a low margin business full of hard work and headaches.

[dcarrigg]

Re: Income Inequality: So What?

The realities of life will collapse that game. Decent renters just move away when the landlord won't fix the place. While a lease is a contract that can be enforced, you can't make any real money suing your former tenants, your profit gets transferred to the law firm. Slum lord properties can only attract low quality tenants that don't pay the rent reliably.

Finance people experienced in the FIRE economy are poorly suited to working in the real production economy, where tangible products and services need to be delivered on time to real people. I can't see how Blackrock and Cerberus will still be in this business five years from now. It's a low margin business full of hard work and headaches.

Can you see any exit that's good? The properties aren't actually owned by private equity anymore--they're functionally mortgaged to RBS bondholders.

So think what this lets them do. The private equity firms no longer have to worry about timing the market. They can sell at the bottom and the bondholders--not them--take the haircut.

It's obviously going to exacerbate the next downturn. Meanwhile, any revenue they can milk out of this is gravy. And the second it becomes more of a headache than it's worth, they can just hand the keys to a real estate agent and walk away.

But you see what they've done, don't you? They got themselves all the powers and rights associated with real estate ownership, with basically none of the risks or responsibilities of actual ownership.

I think this is really the trick behind 'disruption.'

It's the same magic that makes Uber work, right? Uber doesn't own anything. But they get all the rights and powers associated with owning a fleet of taxis and hiring a fleet of taxi drivers to drive them without actually owning any cars or buying any hack licenses or hiring any employees.

Basically, the goal is simple: By hook or by crook you get the legal powers of property ownership and hoist the responsibility and risk of property ownership off on someone else, then use that power to extract rents.

It's the same pattern over and over again. It's not actually producing any useful products or services. It's just manipulating legal property rights to gain an unfair advantage then using that to milk the rubes for rents. It's basically a simple ruse at its core. No more complicated than a ponzi scheme. And so long as nobody brings the hammer down, it's functionally legal, even though in most cases lots of laws are being broken.

[thriftyandboringinohio]

Re: Income Inequality: So What?

I see your point, and your thesis is correct as far as it goes. The practices you describe are a kind of slash-and-burn that just is not sustainable. The scoundrels will skim off the available cream and fly away when the scheme collapses. Investors will lose money, bondholders will lose money, and home values will drop. It's starting to smell like the housing boondoggle during the run up to 2007 collapse.

[BK]

Re: Income Inequality: So What?

dcarrig,
I agree with most of what you say here.

Uber - how do Yellow cabs compete when Uber can lose $4.5 billion in 2017 and still offer lower prices. https://www.cnbc.com/2018/02/13/uber...n-in-2017.html

The list of tech companies that lose $30Mil - $40 Mil per qtr and yet are sought after growth stocks.

Tight rents in some communities where Bank owned properties remain empty and not available for occupancy.

Cash only real estate buyers (often from China) who then do cash-out refinance and roll the CASH into another property (again, Cash out refinance).

How does the regular guy survive. What a country!

[dcarrigg]

Re: Income Inequality: So What?

dcarrig,
I agree with most of what you say here.

Uber - how do Yellow cabs compete when Uber can lose $4.5 billion in 2017 and still offer lower prices. https://www.cnbc.com/2018/02/13/uber...n-in-2017.html

The list of tech companies that lose $30Mil - $40 Mil per qtr and yet are sought after growth stocks.

Tight rents in some communities where Bank owned properties remain empty and not available for occupancy.

Cash only real estate buyers (often from China) who then do cash-out refinance and roll the CASH into another property (again, Cash out refinance).

How does the regular guy survive. What a country!

Exactly. Pulling these ideas together is perfect.

Especially the growth stock idea. Growth stocks are also now more about creating giant whales that can swallow smaller fish for M&A than about actual growing companies.

You want to see something that makes my head explode?

https://en.wikipedia.org/wiki/List_o...ns_by_Alphabet
https://en.wikipedia.org/wiki/List_o...ions_by_Amazon
https://en.wikipedia.org/wiki/List_o...tions_by_Apple
https://en.wikipedia.org/wiki/List_o...ns_by_Facebook

Zero Sherman Act Section 2 Antitrust cases for 15 years, and counting.

If you get confused, or ever forget that fact, just remember how long we've been at war in Iraq.

Of course, the law is quite clear:

Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony.

Remember, the last major enforcement was against Microsoft that began in 1992 and ended in 2002: https://en.wikipedia.org/wiki/United...Microsoft_Corp.

And the very last one was against Dentsply, a smaller firm that made dentures: https://en.wikipedia.org/wiki/United...y_Int%27l,_Inc. That case began in 1993, ended in 2003, and was appealed to 2005.

Since then, the Justice Department has not begun a single case. So 1993 was the last year they even looked into monopoly, considering there's about a 10 year lead time to these sorts of cases working through the system. Really no administration has made it at all a priority since George H.W. Bush. Not Clinton, not W, not Obama, not Trump.

That means, even if a new President got in who cared about it, and even if that President began starting cases right away in 2020, the earliest you'd see any sort of action taken is probably 2030. That's 30 years with no anti-trust enforcement in the US, at the best-case scenario.

The laws exist on the books. There are laws against what Uber does too. Lots of them, espeically local ones. I mean, that's a company primed for a RICO case. The laws are there. It's just that nobody enforces them any more. And that's the bipartisan consensus of the 2010s if there is one. Take bribes; look the other way; let crime run rampant. If only Al Capone thought to incorporate and donate to his local SuperPACs...

But I guess they just all caught a little case of affluenza.

[jk]

Re: Income Inequality: So What?

the model is the same - quickly looting the accumulated value of some established entity or entities. whether it's a takeover of e.g. toys r' us and then loading it up with debt and take all that money out. or similarly sealy mattress or look at bain capitals past investments e.g., or buying 10k single family houses and bundling up the rent flow into fake-aaa bonds [really?? again??] and taking that money out [and i very much doubt the leverage was as low as 1:1 per dc's example], or taking over a gov't, say the u.s., and loading it up with extra debt that flows into corporate profits and then stock buybacks and dividends.

load on the debt, pay the proceeds to the looters. then, basically, the looters don't care much what happens to the indebted entity going forward. if there's a bit more money to be made, great, if not, so what? they've already gotten theirs.

essentially the model is piracy. it's a form of parasitism.

[dcarrigg]

Re: Income Inequality: So What?

the model is the same - quickly looting the accumulated value of some established entity or entities. whether it's a takeover of e.g. toys r' us and then loading it up with debt and take all that money out. or similarly sealy mattress or look at bain capitals past investments e.g., or buying 10k single family houses and bundling up the rent flow into fake-aaa bonds [really?? again??] and taking that money out [and i very much doubt the leverage was as low as 1:1 per dc's example], or taking over a gov't, say the u.s., and loading it up with extra debt that flows into corporate profits and then stock buybacks and dividends.

load on the debt, pay the proceeds to the looters. then, basically, the looters don't care much what happens to the indebted entity going forward. if there's a bit more money to be made, great, if not, so what? they've already gotten theirs.

essentially the model is piracy. it's a form of parasitism.

I think if these guys were named Tony, Pauly and Luigi instead of Laurence, Travis, and Willard, it'd be a lot more obvious to people what was going on. The safest bet for criminals in American culture has always been to hide behind genteel protestantism.

[BK]

Re: Income Inequality: So What?

Real estate is my favorite distorted market. Many homes today that are purchased are empty. When in history have home buyers been able to select from so many empty homes while paying all-time high prices? If you closely as you travel in Massachusetts and else where you will come across empty/not for sale property.

Bank owned properties in Suffolk County https://www.realtytrac.com/mapsearch...uffolk-county/
Bank owned in Middlesex County https://www.realtytrac.com/mapsearch...0county&stc=ma

Plug in your favorite town or county - lots of properties empty or at least owned by the Bank