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Nov 12, 2019

Analysis | The Finance 202: Why income inequality is such a huge topic for 2020 candidates — and investors

By Tory Newmyer




Pedestrians pass in front of a women and children sitting on a sidewalk in San Francisco, California, U.S. (David Paul Morris/Bloomberg)
THE TICKER
The reason inequality is emerging as a key flash point in the 2020 presidential election may be as simple as this: The gap between the haves and have nots has been growing for three decades and looks to be approaching a tipping point. 
The situation, and the political debate swirling around it, has grown so acute that Torsten Slok, chief economist for Deutsche Bank Securities, identifies it as the top risk facing investors next year. That means he is rating it as a more serious concern for markets than the presidential election, trade-war uncertainty and slowing global growth.
Slok tells me he made the call in part based on conversations he has had with investors as he travels worldwide. Inequality “is coming more and more to the surfaceWe believe these multi-decade trends are becoming more and more important because at some point, something will be done about them one way or other,” Slok says. 
Charts he pulled together for a recent report help explain why. They paint a bracing picture of a U.S. economy in which the middle class is shrinking, wealth stratification is accelerating, and children increasingly should expect to earn less than their parents.
The presentation starts with a stat that should be familiar to anyone who has heard Sen. Bernie Sanders’s (I-Vt.) stump speech:

And those at the top are vacuuming up an ever greater share of the country’s wealth:

Looked at another way, the top 1 percent now owns more wealth than the middle class:

The median net worth of the top 1 percent took a big hit during the financial crisis, but it has since recovered to an all-time high:

That’s in part because the top 1 percent now pulls down nearly twice as much income as the bottom 50 percent:

And they are paying a lower tax rate, according to research by economists Emmanuel Saez and Gabriel Zucman, who helped design Sen. Elizabeth Warren’s (D-Mass.) proposed wealth tax:

Meanwhile, economic mobility is stumbling, with the United States ranking behind every northern European country, Greece and Japan, among others, in the time it takes low-income people to reach the mean income:

Younger generations are making steadily less than their parents:

By the share of the population belonging to the middle class, the United States more closely resembles Russia and China than France or Japan:

So there should be no surprise that a rising number of voters report they are very concerned about inequality:

Slok isn’t making predictions about the election outcome — or even what it will mean for the market. While some Warren critics have projected stocks will tank if Warren wins the White House, Slok says individual sectors would respond differently. If Warren succeeds in canceling student debt, for example, consumer spending could surge, benefiting companies that rely on it.
“We’re just trying to take it at the highest level and say it’s something the market should at least be paying more attention to,” Slok says. “It’s not early to at least lean back in your chair and think through these different scenarios.”
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MARKET MOVERS


Traders work on the floor at the New York Stock Exchange. (Reuters/Brendan McDermid)
Trade jitters weigh on stocks. CNBC's Fred Imbert: "The Dow Jones Industrial Average closed slightly higher on Monday, erasing a deficit of 163 points, as Boeing shares popped on news it will resume deliveries of beleaguered 737 Max jet next month. The 30-stock average ended the day up 10.25 points, or 0.04% at 27,691.49, notching a fresh record closing high. Boeing shares were up more than 4.5% on the news.
"But the rest of the market closed lower amid lingering U.S.-China trade worries while protests in Hong Kong escalated. The S&P 500 slipped 0.2% to 3,087.01, snapping a three-day winning streak, led lower by the utilities and energy sectors. The Nasdaq Composite dipped 0.1% to close at 8,464.28."
  • All eyes on Trump's speech. Bloomberg's Felice Maranz: Trump is due to deliver remarks at the New York Economic Club on Tuesday. Analysts will listen closely for comments on trade talks with China... 'The bulk of the speech is likely to tout the economy’s strength, but we will be focused primarily on the trade policy language,” [Compass Point's Isaac] Boltansky wrote. He senses the remarks will be “directionally positive for the market,' as Trump may nod at China hawks, but will be 'broadly supportive of efforts to finalize a Phase 1 deal.'
UBS: Rich brace for stock selloff. Bloomberg's Joanna Ossinger: "Wealthy people around the globe are hunkering down for a potentially turbulent 2020, according to UBS Global Wealth Management. A majority of rich investors expect a significant drop in markets before the end of next year, and 25% of their average assets are currently in cash, according to a survey of more than 3,400 global respondents. The U.S.-China trade conflict is their top geopolitical concern, while the upcoming American presidential election is seen as another significant threat to portfolios."

After pushing U.S. oil and natural-gas production to record levels, some shale companies are doing the unthinkable: They are planning to pump less.
WSJ
2020 WATCH: 

Former Massachusetts governor Deval Patrick seen here in 2014. (Elise Amendola/AP)
🚨 Patrick eyeing possible 2020 campaign: “Former governor Deval Patrick of Massachusetts has told Joseph R. Biden Jr. and other Democratic officials that he is considering making a last-minute entry into the presidential race, the latest evidence of how unsettled the party’s primary is less than three months before the Iowa caucuses,” the New York Times's Jonathan Martin reports.
“Patrick told [Biden] in a phone conversation last week that he was weighing a bid, according to a Democrat directly familiar with the call, but did not indicate that he had fully decided to run. [Patrick’s] conversations with other party officials was confirmed by two other Democrats with knowledge of those talks. [Patrick] has told party leaders that he doesn’t think any of the candidates running have established political momentum and that he thinks there is an opening for somebody who can unite both liberals and moderate Democrats, according to Democrats who have spoken to him.”

TRUMP TRACKER

TRADE FLY-AROUND:

President Donald Trump. (Andrew Harnik/AP)
— Trump expected to delay auto tariffs: “Trump is expected to announce this week that he is putting off a decision on whether to impose tariffs on European Union autos for another six months, a person familiar with the decision said,” Politico's Ben White and Doug Palmer report.
“That would avoid a new bruising dispute with one of the United States' biggest trading partners, just as Trump is trying to put out another trade fire by striking an initial deal with China. But it would also set the stage for Trump to revisit the controversial trade issue in the throes of next year's presidential campaign.”
West coast imports plunge as tariffs bite. WSJ's Paul Page: "Seaborne imports into the largest U.S. gateway for trans-Pacific goods plummeted last month in the latest sign of volatility in supply chains from the U.S.-China trade war. The ports of Los Angeles and Long Beach handled 120,077 fewer loaded inbound containers in October than a year ago, a 14.1% drop, according to figures released by the neighboring Southern California ports.
"The Pacific ports together handle about 37% of U.S. seaborne container import volume, and are considered a bellwether of U.S. trade, particularly with Asia. The decline in container volume followed the U.S. implementation of a new round of tariffs in September on more China-made products, including the first large swath of consumer goods to be slapped with levies."

Adidas plans to close its only sneaker factories in the U.S. and Germany, shifting cutting-edge automated footwear production to Asia and reversing an effort to make products closer to shoppers in the West.
WSJ
TRUMP WATCH:

Demonstrator vapes during a rally outside of the White House. (Jose Luis Magana/AFP/Getty Images)
— Trump to meet vaping industry: Trump said “that he would meet with vaping-industry representatives as he nears a decision that could bar sales of sweet, fruit-flavored e-cigarettes aimed at young people, raising concerns among public-health advocates that the measure could be diluted,” the Wall Street Journal’s Thomas M. Burton and Alex Leary report.
“He didn’t say when the meeting would happen, but the policy has been delayed under heavy lobbying. On Friday, [Trump] said he supported raising the minimum purchase age for e-cigarettes nationwide to 21 years old from 18. Public-health advocates, including doctors who specialize in treating lung diseases, voiced concern about what may be in the background of the president’s tweet. In particular, the worry is about who attends any meeting with [Trump].”
— Judge deals Trump another setback over tax returns fight: “A federal judge in Washington dismissed Trump’s lawsuit seeking to block the House Ways and Means Committee from using a recently enacted New York law to request his state tax returns, saying that for now the case belongs before a judge in New York,” my colleague Spencer S. Hsu reports.
“The decision by U.S. District Judge Carl J. Nichols injected new urgency into Trump’s effort to shield his state tax records from Congress. The House panel, chaired by Rep. Richard E. Neal (D-Mass.), has not requested Trump’s state returns. Trump’s attorneys filed the lawsuit in July preemptively, arguing that without an emergency court order blocking a congressional request, his New York returns might be disclosed before the president’s opposition could be heard in court.”
IMPEACHMENT MINUTE: A speed read on the latest from the congressional impeachment inquiry.
"White House infighting flares amid impeachment inquiry." By The Post's Erica Werner, Josh Dawsey, Carol D. Leonnig and Rachael Bade.
"Trump cites corruption in Kyiv and European stinginess to justify actions on Ukraine. Neither rationale withstands close scrutiny." By The Post's  Karen DeYoung and  Ellen Nakashima.
"Testimony from Pentagon, State Dept. officials undercuts a key piece of Trump’s impeachment defense." By The Post's Karoun Demirjian, Elise Viebeck and Rosalind S. Helderman
"The insider's guide to the impeachment hearings." By Politico's Andrew Desiderio and Kyle Cheney.

POCKET CHANGE


A Walgreens Boots Alliance Inc. store in San Francisco. (David Paul Morris/Bloomberg)
— KKR makes formal approach to Walgreens. Bloomberg's Ed Hammond, Aaron Kirchfeld and Dinesh Nair: "KKR & Co. has formally approached drugstore giant Walgreens Boots Alliance Inc. about a deal to take the company private, in what could be the biggest-ever leveraged buyout, people familiar with the matter said. The New York-based private equity firm has been preparing a proposal to potentially buy out shareholders of Walgreens Boots, said the people, who asked not to be identified because discussions are private. It’s unclear how feasible the transaction would be, given the need for large amounts of financing, and Walgreens Boots and KKR could decide against pursuing a deal, the people said."
— Wall Street bonuses poised to drop. Bloomberg's Hannah Levitt: "Traders and bankers hoping a better-than-expected third quarter would boost their year-end pay are likely to be disappointed. Bonuses across Wall Street are poised to drop in 2019, according to a report Tuesday by compensation consultant Johnson Associates Inc. Equity traders are likely to fare the worst, with a drop of as much as 15% from a year earlier, while debt and equity underwriters may see a 10% decline. Fixed-income traders may do slightly better, with their bonuses falling only as much as 5%."

Dozens of grounded Boeing 737 Max airplanes crowd a parking area adjacent to Boeing Field in Seattle. (Elaine Thompson/AP)
— Boeing lays out plan for 737 Max’s return: “Boeing Co. jumped after providing more detail on how the 737 Max will return to the skies — even as the company backed away from earlier assurances that the grounded jet would win full regulatory approval by year-end,” Bloomberg News’s Julie Johnsson and Mary Schlangenstein report.
“The U.S. Federal Aviation Administration is on track to certify redesigned flight-control software by mid-December, Boeing spokesman Gordon Johndroe said Monday in an email. That could enable the planemaker to begin shipping new jets that have been stashed across the Pacific Northwest and Texas during a flying ban imposed in March after two crashes killed 346 people.”
  • Commercial approval will take longer: “But the Max won’t be cleared to resume commercial flights until regulators also sign off on updated training material for pilots — a step Boeing expects in January. And the company acknowledged it will take time for airlines to ready stored jets for service and work them back into flight schedules.”
  • But shares were up the most in months: “Still, the detailed road map eased investor jitters over the prospects for Boeing’s main source of profit after months of damaging revelations. The shares rose 4.5% to $366.96 at the close in New York, the biggest trading gain since June 18.” 
— Amazon’s focus on attracting Chinese sellers puts consumers at risk: “It looked like Amazon.com Inc.’s yearslong quest to build a shopping business in China was a bust in July when it folded a big part of its local business,” the WSJ’s Jon Emont reports. “In fact, Amazon’s China business is bigger than ever.”
“That is because it has aggressively recruited Chinese manufacturers and merchants to sell to consumers outside the country. And these sellers, in turn, represent a high proportion of problem listings found on the site, according to a Wall Street Journal investigation … Chinese factories are squeezing profit margins for middlemen who sell on Amazon’s third-party platform. Some U.S. sellers fear the next step will be to cut them out entirely.” (Amazon CEO Jeff Bezos owns The Washington Post.)
  • Key stat: “A new product listing is uploaded to Amazon from China every 1/50th of a second, according to slides its officials showed a December conference in the industrial port city of Ningbo.”
— WeWork in talks to hire T-Mobile CEO: “WeWork is in discussions with T-Mobile TMUS -1.63% US Inc. Chief Executive John Legere to take over leadership of the troubled office-sharing startup, according to people familiar with the matter,” the WSJ’s Sarah Krouse and Maureen Farrell report.
“WeWork’s parent, formally known as We Co., is searching for a CEO who can stabilize the company following the erratic tenure of its co-founder Adam Neumann. After WeWork’s failed attempt at an initial public offering, SoftBank Group Corp. bought a majority stake in the company last month in a bailout, severing most ties with [Neumann].”

Former Uber CEO Travis Kalanick. (Justin Sullivan/Getty Images)
— Uber co-founder sells $500 million in stock: “Uber co-founder and director Travis Kalanick sold more than half a billion dollars worth of stock last week after the company’s lockup period expired,” CNBC’s Lauren Feiner reports.
“Uber’s 180-day restriction on inside and early investor sales came to an end Wednesday, sending the stock down that day in anticipation of a wave of sales. Kalanick, the former CEO of Uber who was ousted from the top seat after being accused of fostering an unhealthy workplace environment, sold more than 20 million shares held in a trust over three days last week, according to a financial filing submitted to the Securities and Exchange Commission on Friday.”
Meanwhile, Uber CEO calls Khashoggi death “a serious mistake”: “Uber CEO Dara Khosrowshahi called the slaying of Jamal Khashoggi ‘a serious mistake’ by the Saudi government in an interview with Axios on Sunday, comparing it to the accident involving the tech company’s self-driving car that killed a pedestrian last year,” my colleagues Deanna Paul and Faiz Siddiqui report. “‘It’s a serious mistake. We’ve made mistakes, too — with self-driving, and we stopped driving and we’re recovering from that mistake,’ he said in the episode of “Axios on HBO.” ‘I think that people make mistakes, it doesn’t mean they can never be forgiven. I think they have taken it seriously.’ ”
“About an hour later, Khosrowshahi contacted Axios to clarify his comments on Khashoggi. "'I said something in the moment that I do not believe. When it comes to Jamal Khashoggi, his murder was reprehensible and should not be forgotten or excused,' he wrote in an email, according to the publication.”
— CBS head gets to keep $100 million in severance, job: “CBS Corp. acting Chief Executive Officer Joe Ianniello is in line for a hefty haul when Viacom Inc. completes its proposed merger with the broadcast network,” Bloomberg News’s Anders Melin and Lucas Shaw report.
“While he won’t get to lead the combined entity, he’ll collect $100 million severance and remain chief of CBS with a new contract entitling him to tens of millions of dollars more. The arrangement illustrates the extent of CBS’s effort to persuade Ianniello, a 22-year company veteran, to support the tie-up without having a shot at the top job.”

MONEY ON THE HILL


Former New York mayor Michael Bloomberg. (John Locher/AP)
Bloomberg’s company weighs implications of covering possible campaign: “As Michael Bloomberg weighs another bid for political office, the financial-data and media company he co-founded is grappling with the implications of having to cover his campaign,” the WSJ’s Lukas I. Alpert reports.
“If [Bloomberg] ultimately decides to run, he intends to step away from any role at his company, including as a member of its six-person management committee, people familiar with the matter said. Bloomberg LP would cover his candidacy as it covered his 12-year tenure as New York’s mayor, they said. Last week, Bloomberg LP executives told employees in a memo that [Bloomberg’s] possible presidential run wouldn’t affect the company.”
  • A blind trust could be expected if Bloomberg becomes the nominee: “If [Bloomberg] were to gain the Democratic nomination or presidency, it is likely that he would move control of his assets, including his ownership of the media company, into a blind trust or a similar structure, the people said. One of the people said the timetable for such a move — or how it would work — hadn’t yet been determined.”
  • But that’s not how the company operated during his mayoralty: He “didn’t put his company in a blind trust and reserved the right to weigh in on larger, strategic decisions, the people said, although he largely placed operational control in the hands of others. Bloomberg LP made several acquisitions during Mr. Bloomberg’s tenure as mayor, including a deal to purchase Businessweek in 2009.”
— Cuban becomes latest billionaire to bash Warren’s wealth tax: “Billionaire investor Mark Cuban suggested in a series of weekend tweets that the proposed wealth tax from [Warren] ‘diverts attention from reality’ and is designed to hide her own wealth from the public,” CNBC’s Jordan McDonald reports.
Some of his comments:
She also knows there is a lack of equity in her plan as well . This is a great article on one of its inequities , https://t.co/sICUFKARTu
— Mark Cuban (@mcuban) November 9, 2019

DAYBOOK

Today:
  • Trump speaks at the Economic Club of New York
  • CBS Corp, Tilray, D.R. Horton, Tyson Foods, Overstock.com and Advance Auto Parts are among the notable companies reporting their earnings, per Kiplinger.
  • CFTC Chairman Heath Tarbert speaks at the third annual Invest:NYC conference
  • Peterson Institute for International Economics holds an event focused on Europe, which will feature remarks from a top European Commission official
Wednesday:
  • The Joint Economic Committee holds a hearing featuring testimony from Fed Chair Jerome Powell
  • Cisco Systems, Energizer and Canada Goose are among the notable companies reporting their earnings, per Kiplinger.
Thursday:
  • Powell continues his testimony on the Hill with an appearance before the House Budget Committee.
  • Walmart, Nvidia, Dillard’s, Viacom, Shoe Carnival and Williams-Sonoma are among the notable companies reporting their earnings, per Kiplinger.
  • The Cato Institute holds its 37th Annual Monetary Conference entitled “Fed Policy: A shadow review"
  • The American Enterprise Institute holds an event focused on the Fed’s ability to manage the next crisis
Friday:

THE FUNNIES

FromThe Post's Tom Toles:


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