Millennials and The Double Whammy

A number of years back, demographers tagged those born between 1981 and 1996 as a generation that they called Millenninals.  When any new generation is defined, most of us have high hopes for them. Millennials were particularly interesting as they grew up with digital technologies and had little or no fear of them. The thought among many of us is that they could blaze a trail faster and better than those of us born decades before. Some of them did. Many of them, however, got hit by two financial crises that have put their long term prospects in jeopardy. 

The first crisis was The Great Recession of 2008-2009. Unemployment jumped from about 4.8% to 10.8%. Detailed studies from major institutions have shown that if you begin your career during a recession your earning power may be stalled for a decade or more and you may never catch up with those somewhat older than you. Adding fuel to the fire was that companies could be stingy with raises given the low or no inflation environment coming out of 2008-2009.  Once burned Millennials knew the importance of steady employment and were often timid about pushing for higher pay. Prior to the Great Recession, home ownership in the U.S. hit an all time high of about 68%. During the recession, it fell to about 60% and has never returned to the pre-crisis high. Why? Well, Millennials were not as confident as previous generations and also could not save enough to put down a 25% down payment on their first homes. Also, the average student loan debt was at $36,000— a huge millstone around a young person’s neck. You could declare personal bankruptcy but you still owed on your student debt.

In recent years, many Millennials dug themselves out of their financial holes. Things were looking up. All that changed this spring when Covid 19, a once in a hundred year event, hit the global economy hard. Many who lost their jobs in 2008 are again unemployed. Yes, government had provided a safety net for many although further help is in limbo as I write. Many Millennials have to be discouraged. Looking at every net worth statistic that I could find (and I love to dig), Millennials are behind previous generations in terms of net worth at the same age.

Yes, the stock market has rallied back smartly from the March lows so many of us are whole again financially but remember, some 50% of those 55+ have NOTHING saved for retirement so the current spike in equity prices has not affected them at all. Even Millennials who dutifully contributed to their 401k or 403b plans are behind many slightly older Americans. Also, if you are unemployed you are no longer building wealth via contributions to retirement plans and you likely are tapping what you did have to cover living expenses. 

I vividly remember reading Malcolm Gladwell’s first two books, OUTLIERS in 2008 and THE TIPPING POINT in 2010. He alluded to that when you are born has more of an influence on your success in life and your attitudes than you might think. As a Canadian, he gave an example of how junior hockey leagues put small fry born on January first in the same group as those born in late December. The January kids tend to be bigger, stronger, and more coordinated and get more attention and often how more success than those born late in the year. 

I think of my own life as an early baby boomer. Yes, I had to worry about Vietnam and the deep recession of 1974 when entering the job market but the booming 80’s and roaring 90’s more than leveled the playing field for me and my contemporaries who took their work seriously. Certainly, there will be a few million Millennials who will shrug off the Covid 19 deep recession and be great success stories. Realistically, however, I fear that there may well be several million more who will be left behind.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a comment on the blog. 

A Mild Defense of Wall Street

 In some quarters, it is fashionable to trash Wall Street. The media keeps hammering financial executives for their large compensation packages and politicians love to go after them. In 2016, the colorful Bernie Sanders, Senator from Vermont, and an avowed Democratic Socialist, basically gave the same speech at every rally and in every debate. In essence, he repeated the same spiel in his 2020 run for the White House. One line in Bernie’s stump speech that I heard and read so much I memorized. From memory, the lively Senator said, “Greed, fraud, dishonesty and arrogance, these are the words that best describe the reality of Wall Street today.” 

Senator Elizabeth Warren of Massachusetts also has Wall Street as a target and is far more disciplined in her comments and does a lot of digging before she launches a broadside at Wall Street. While I think she goes too far in her attacks, I must say that I was glued to C-Span when she took apart Wells Fargo executives among others at a Senate hearing a few years back. She moved methodically and relentlessly and would not accept the way that squirmy titans tried to rationalize their actions. At the same time, her solutions, to me, are way too broad. Break up the big banks, put in confiscatory taxes and lay on big regulation. Directionally, she is correct. Something is indeed wrong at times. Yet we need reform, not revolution.

Imagine if Wall Street (the financial world as we know it) did not exist. Do you like your I-phone? Apple products? Your cars? Your credit card with the huge credit limit or cash back features? Amazon Prime? Netflix? Disney Plus?  How about 21st century medicine? Without it and the financial backing that Wall Street provided, I am sure that I would have been dead a few decades ago. Wall Street, by providing big time financing has allowed entrepreneurs to grow far faster. Without a strong finance industry, we might still be living in something akin to feudal or colonial times. With all its flaws, I will take 21st century America without any hesitation. We need a robust financial world that fosters innovation and new ideas and entrepreneurs. BUT, the players need to play by the rules.

I have been following this topic for 50 years. Don’t believe me? Read on, my friends. Get comfortable. This will take a few minutes.

Back in 1970-72, I was studying economics. I did not like it; I loved it. To me, the way markets moved was fascinating and still is. I was taking a course in Money and Banking and another in History of Economic Thought. It was a small school so I was able to work on a detailed paper that would apply to both courses. My topic was Swiss Banks. As I dug in to it, I was fascinated by a group of institutions known as private banks. They were not the kind of entities that would want my or perhaps your checking account. They tended to work for high net worth individuals and also, in many cases, operated as investment bankers, raising money for new companies. Names such as Pictet & Cie, Vontobel and Julius Baer topped the list.  What startled me about studying them was a term in the bylaws of the private partnerships—unlimited liability. In other words, if the investment that the private bank made in an enterprise went south, the partners were literally on the hook for the entire amount of money. Even as a young pup, I understood how that they were putting their ENTIRE personal net worth up in to the private banking partnership. It was no wonder that, at the time, Swiss bankers were viewed as careful and very prudent. My profs liked the paper and gave me constant encouragement. They told me that investment banking firms in New York had the same set up—if they had big trading losses or backed a loser of a new company, the partners passed the hat and made good on it. 

Over the summer, insufferable nerd that I was, I kept digging in to the topic. Reading through old copies of The Wall Street Journal, I saw that on May 26, 1969 Lufkin and Jenrette (known as DLJ), a modest sized investment banking house, had asked the New York Stock Exchange (NYSE)  Board of Governors for permission to go public. Their argument was that by turning to the public, they would have the capital to do bigger deals. Prior to that time, the NYSE had to approve all stockholders of a member firm. It was, in essence, a club.

To the surprise of many, DLJ received permission as it appears that the Wall Street insiders recognized that for the economy to keep growing, a cash infusion would help spur expansion. When I excitedly discussed this with my mentors in September, they were, as usual, very polite but did not see it as earthshaking in terms of the industry. So, I got on with my life.

I did notice that some financial people did “eat their own cooking.” Warren Buffett allegedly has some 97% + of his net worth tied up in Berkshire Hathaway stock. A friend once told me he slept well at night owning Berkshire shares as he was casting his lot with Warren. A few boutique mutual funds insisted that their money managers had a large portion of their personal assets in the fund(s) they managed as well.

Being a business news junkie then and now, I noticed over the next 15 years that the DLJ initial public offering  was not a one off. Merrill Lynch went public in 1971 while I was still an undergraduate. In 1981, Solomon Brothers merged with commodities heavyweight Phibro and then went public, followed by Bear Stearns in 1985 and Morgan Stanley the next year. I was busy with a young family and noticed it but shrugged. Finally, the most prominent firm, Goldman Sachs, bit the bullet and went public in 1999 and the super secret Lazard Freres was last to join the party in 2006. All of this got my attention and I noticed one thing. Shareholders of these famous firms received rather stingy dividends while a reading of the annual reports exposed that senior management and some young traders (stock, fixed income or commodity) were taking home multi-million dollar bonuses. It was almost as if they were still partnerships. The shareholders (the public) provided the capital but a disproportionate amount of the spoils went to the management. Far more damning was that when they had a bad year, the stock price tanked but many of the seven or eight  figure bonuses continued. This was often dubbed “corporate welfare” or “socialism for the rich” as either shareholders or, as happened in 2008-2009, the taxpayers had to absorb some of the losses. This really triggered the heated comments of Senators Sanders and Warren.

Congress passed the Dodd-Frank bill to regulate Wall Street. It is an impenetrable 2300 pages. I bet that, other than a bleary eyed Liz Warren, nobody else in the US Senate read the whole thing. Smaller banking institutions are finding compliance onerous and expensive. Dodd-Frank undoubtedly had some good parts. Here is my alternative after my 50 years of observation: Go back to some form of unlimited liability for investment bank senior officers. Think about this. If a bank makes a multi-billion dollar mistake again Chagalls and Picassos would come off walls, the ranch in Montana and the ski lodge in Aspen would go on the block, the beach house in the Hamptons would change hands and god forbid, the duplex on Park Avenue would have to be sold. Bankers would get religion pretty damn quickly.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

The Scariest Demographic Trend

Not quite five years ago, two well thought of academics, Anne Case and Angus Deaton, published a paper with perhaps the most downbeat title ever: “Rising Morbidity and Mortality In Midlife Among White Non-Hispanic Americans in the 21st Century.”  It was published in a scientific journal with the catchy name of Proceedings of the National Academy of Sciences of the United States of America. I know, my dear readers, that many of you are envious of me, but seeing clearly how I spend my time must make you even more jealous. I can almost hear you saying to yourselves, “why can’t my life be as exciting as Don’s?”

The prose did not read like a best selling novel. Yet, if you fought your way through it, as I did, there was some sad and startling information. What leapt off the pages was that from 1999-2014 there had been a significant increase in the death rate of white Americans of middle age. It almost seemed un-American to many at first blush. Historically, each American generation had thrived relative to the previous one and improvements in medicine had lengthened life spans. 

To oversimplify, the authors attributed the rise to what they dubbed “deaths of despair”—an increase in drug and alcohol related deaths, suicides, and cirrhosis of the liver. Prior to 1999, deaths among 45-54 year old men were falling in the U.S. almost totally in line with other “wealthy” nations around the globe. Since 1999, they have taken a U-turn and gone upward. Also, and importantly, deaths of African-Americans and Hispanic Americans among the same age group in the U.S. are almost perfectly in line with the global trends NOT those of U.S. white males of the same age.

So, what was and sadly still is going on?

Deaton and Case drilled down in to the numbers and found that the large majority of the deaths were among Men without a college education. Fifty years ago, poorly educated men in the U.S. lived only five years less than high income men of the same generation. Now, the gap is an eye-popping 15 years. A British columnist put it this way in October, 2016—“Dying half a generation sooner than you might have is bad enough. Expecting to die younger than your parents is worse. It goes against what Westerners in general, and Americans in particular, have taken for granted.” *

Some have put the finger on growing inequality. Labor unions are much weaker than 50 years ago and we have a post industrial economy centered on services and information which do not make skills of many blue collar workers financially fit. So, the American working class in in decline and Artificial Intelligence can only make it worse. Some forecasters are projecting that within 15 years some 2.5 million truck drivers will lose their jobs as self drive vehicles become widespread. Driving a truck provided a fine income for many without a college degree. Political analysts say that Donald Trump’s upset victory in the electoral college in 2016 was due to his ability to tap in the frustration and even desperation of the middle aged- middle class who felt that they are being left behind. The work of Deaton and Case seem to put the light on that political narrative really well.

What can be done? Well, for my entire adult life politicians talk about job re-training for displaced persons due to technological growth. I have seen little in that arena that is meaningful.  Former presidential candidate Andrew Yang suggests a minimum guaranteed income for all as Big Data and Artificial intelligence sweep away millions of jobs in the years to come. That does not strike me as politically viable or healthy for a lot of people given the opioid and alcohol use that Deaton and Case found among the premature deaths.

The other argument is that we can simply grow our way out of it? I have heard this argument used regarding our massive budget deficits in the U.S. That might work if we did not continue to increase spending but politicians lack the will to get draconian. A bigger problem with the issue of growth leveling inequality is that to me it has very little to do with it. A growing economy is fine but it does not reveal a damn thing about how that newfound wealth is being distributed. And, as I have often written in this space, there is always going to be inequality in a free market model although perhaps not as extreme as we are seeing today.

In 1962, Jack Kennedy, trying to sell a tax cut to Congress and the public, said, “A rising tide lifts all boats.” He was wrong then and he would be wrong now. This generation of middle aged men unmasked in the Deaton and Case report is discouraged and increasingly feeling forgotten and their future prospects look pretty awful. Turning around their lives is a big problem that we, as a nation, must deal with. There is no evidence that the situation has turned around in the last five years. It may get a terrible spike as we struggle through the Covid 19 pandemic as well.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

* Edward Luce, Financial Times, 10/9/16