America’s Income Problem


Editor’s Note: This is an article that expresses our personal opinions about economic or social issues and comments made on Television and in Print.  It is NOT intended to provide any investment advice of any type whatsoever.  No one should base any investing decisions or conclusions based on anything written in or inferred from this article. Investing is a serious matter and all investment decisions should only be taken after a detailed discussion with your investment advisor and should be subject to your objectives, suitability requirements and risk tolerances.


We were fortunate to hear an interview by Mr. Charles Biderman, CEO of Trim Tabs Research on CNBC on May 20. In this interview, he spoke about the problem of income in America. (see Interesting Videoclips Of the Week (May 16 – May 22). To quote: 

“Incomes are plunging; we track income tax collections and they are falling off a cliff; there are no “green shoots’ that we see; savings by all retail money market funds, bank savings, CDs  are plunging, people are taking money out of savings…”

He went on to add that $83 billion have been taken out of America’s savings accounts in April 2009, the largest such outflow in the history of the data.

Other researchers are also worried. Deutsche Bank released a report on May 21 titled “Household income concerns cash shadow over recovery”. The report includes the chart below. This chart below speaks more eloquently than we ever could about how incomes are plunging in America.


                          Withholding tax receipts are plunging dramatically  
                          (Chart courtesy of Joseph Lavorgna – Chief US Economist – Deutsche Bank)


Recently, we saw a BAC-Merrill Lynch (“BAC-ML”) report on the same topic written on March 30, 2009 by David Rosenberg, the then Chief economist of that firm. This reports states that “Total personal income, excluding government benefits has contracted by $234 billion since peaking six months ago – a plunge of unprecedented proportions.”

When we read these reports and see the chart above, we simply cannot comprehend the hysteria about inflation in today’s markets. If consumer incomes are plunging and, as we all know, their credit has been squeezed, how will consumer spending increase to the point of creating inflation?

In our opinion, this unprecedented drop in American income will likely lead to a problem of falling demand leading to price reductions by merchants which will lead to lower profits and lower wages which will lead circularly to demand falling further and so on. This is a classic vicious circle that leads to Deflation and not Inflation.

Ben Bernanke understands this danger and that is why he has being so heroic in his efforts to create liquidity in the American financial system.


Why don’t Financial TV Anchors and Journalists see this?

The answer is starkly simple. The salaries of TV Anchors and TV reporters are very high compared to that of the median American household. These salaries are also stable due to the health of the Cable Broadcasting industry. These TV reporters and anchors tend to hob-nob with rich traders-analysts and even richer hedge fund managers.

Should we be surprised that they do not have a clue about the serious lack of income in the American household? Is it any wonder that the TV folks do not see the deflation in the assets of American household and their struggle to service their debt load with decreasing income?

Financial journalists can’t stop talking about inflation and high interest rates of the Reagan years. If they look back, they would realize that the salaries of TV anchors-reporters during the Reagan years were a pittance compared their salaries today. So relative to the American household, the TV folks are far, far better off than they were in the 1980s. This is perhaps why the TV Anchors see inflation everywhere they look. After all, inflation is a problem of too much money.


Problem is more acute for Boomers – America’s demographic megatrend

The first of the Boomers is 63, the median Boomer is 52 and the youngest boomer is 45 years old. The BAC-ML report estimates that boomers lost about $20 trillion of net worth during the 2008-Q12009 bear market.

Given their age, boomers simply do not have enough time to make up for their loss of wealth. So the report argues that focus on safe income generation will become the critical investment focus of the boomer generation.

Think back to 1982 when the long bull market in stocks began. The median boomer was 25 yrs old at that time. In other words, the median boomers were then entering the earning growth period of their lives. In 1995, the median boomers were 38 years old , entering the highest earning period of their lives. Are these facts relevant to the birth of the bull market in 1982 and the explosion of the stock market from 1995-1999? We think so.

The boomers have been a demographic mega-trend for America. They are now past their peak earnings period as a group and that poses a very large income problem for America and America’s prosperity. After all, you cannot manufacture demographics.

Unless of course, America embarks on a renewed drive to enable immigration of ambitious, highly educated immigrants into America. Given today’s politics, this possibility seems even more remote than the possibility of creating inflation in today’s income-deflating America.


What is Safe Income?


Bill Gross, the manager of the largest bond mutual fund in America, told CNBC on May 21 that investors should buy high quality corporate bonds and municipal bonds rather than US Treasury bonds. This is a message that is drummed daily into individual investors on Financial TV.

Clearly corporates and municipals provide a higher level of income than US Treasuries do. Interestingly, the day Mr. Gross advised individuals to buy corporate bonds, hapless GM bondholders were protesting the near total loss of their bond investment in Washington DC. One tearful individual told CNBC that he was not a speculator but a buy-and-hold investor. He had bought $260,000 of GM Bonds five years ago and this money was now gone.Another lady said she has invested $160,000 of her retirement savings in GM Bonds and now that money was gone.

Remember GM was a successful company five years ago and GM stock was around $45. So it was natural and safe for individual investors to invest in GM bonds rather than in Treasuries that generated far less income.

This illustrates a big difference between Mr. Gross and individual investors. Mr. Gross’s fund can sell GM bonds when needed because Wall Street will accommodate his requests. After all, he is the largest bond investor in America. Unfortunately the individual investors are out of luck if they try to sell their bonds when the company’s condition deteriorates.

There is another big difference. As a fund, Mr. Gross can buy CDS or insurance against a default by a company. When the company defaults (like GM), Mr. Gross can present his bonds plus the CDS to get back the bulk of his money. Most individual investors cannot buy CDS insurance and so they are helpless when a company defaults. Their only choice is to suffer their loss with dignity.

Municipal Bonds have been relatively safer but one wonders how long that will be true? Look at the budget mess in California. Also look at the sharp fall in tax revenues for states like New York. This is why many states have approached the Obama Administration for a bailout of their municipal bonds.

In our opinion, individual investors should treat the casual advise of fund managers like Mr. Gross with caution. In addition, TV Anchors should ask guests such as Mr. Gross to talk about difficulties of selling bonds they recommend on TV.

What does the BAC-ML report say about “Safe Income”? It says “it looks like the household sector will have to come to grips with the lower-yielding but higher-safety and liquidity offered by the Treasury Market.

We concur absolutely. US Treasuries are the ideal vehicles to provide “safe income” for American households.


Is what is good for American Households also good for America?

The BAC-ML report provides data about the assets owned by American Households. We used this data to create the self-explanatory chart below.



                                        What American Households Own
             (
Figures in $billion – source BAC-Merrill Lynch Report dated 3/30/2009)


If US Treasuries are the ideal vehicle for safe income, it follows that American Households have to dramatically increase their ownership of US Treasury securities.  Look at the chart above. If American Households merely raise their Treasury ownership to the level of their agency bonds, then they would buy about $640 billion of the new issuance of Treasuries, a figure that is about 50% of all Treasury issuance expected in 2009. 

If American households raised their Treasury ownership to the level of their Corporate Bonds, then they would have to buy about $1.4 trillion of the new issuance of treasuries. If they replaced only half of their equities with Treasuries, then they would have to buy about $4.2 trillion of Treasuries. This figure is higher than all the new issuance expected from the United States Treasury Department.

If they followed any one of the three scenarios above, we would not have to worry about begging China to buy Treasuries. This is a case where providing safe income for American households will result in solving America’s major problem.

A true win-win situation for Americans and America.


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