“Patrimonial Capitalism” and Your Life Savings

March 26, 2014

  • As if the “war on savers” weren’t bad enough, here comes the war on investors
  • The book you’ve never heard of that’s paving the way for a global wealth tax
  • Bigger than fracking? Byron King briefed in New York about another investable energy phenomenon
  • The next big catalyst for gold, due next year
  • Another view of the Russian stock market… five “miracles” that make the self-driving car inevitable… the cure for everything that ails Washington (a reader hopes)… and more!

  A new front is about to open up in “the war on savers.” Fair warning: No matter the makeup of your portfolio, you’re now at risk.

The typical picture of a saver being punished by “ZIRP,” or zero interest-rate policy, is Virginia resident Roger Wood. “I’m worried about my portfolio because of low interest rates,” he tells Bloomberg.

Wood retired from his job as a telephone repairman 12 years ago. Now, at age 69, he works at Lowe’s 12-15 hours a week, at $12 an hour — “about the same amount I made 30 years ago.” He’s thinking about taking on full-time hours to make ends meet.

Little wonder: A 5-year CD earns about 1% — even less than the government’s heavily gamed inflation number.

“Most domestic savers are seniors and those approaching retirement, who planned to live on the income generated by their savings,” writes Terry Savage, the veteran personal-finance columnist. “Today, that’s simply not possible — unless they are willing to take on a lot more risk.”

  Now, even if you take on that risk, you’re in line to be punished. Especially if you’ve met with a modest amount of success.

The intellectual groundwork has been laid in a new book called Capital in the 21st Century, by a French economist named Thomas Piketty.

Maybe you haven’t heard of it, but a lot of mover-and-shaker types are lapping it up. The Economist says it could change the way the experts think about the last two centuries of economic history. A former senior economist at the World Bank calls it “one of the watershed books in economic thinking.” And The New York Times’ Paul Krugman calls it “the most important economics book of the year — and maybe of the decade.”

It’s dangerous to write about a book one hasn’t yet read. But the buzz is such that we feel compelled to get the warning out to you as soon as possible.

To be sure, Piketty is a thorough researcher. More than once, we’ve cited this chart of his — showing average U.S. family income, excluding capital gains and adjusted for inflation. The bottom 90% of American families lost ground from 2002-12, and the 5% above them only treaded water.

 Blame the Federal Reserve, says Marc Faber of the Gloom Boom & Doom report. “The Fed’s monetary policies have failed to boost the real incomes of most people, but have had an enormously favorable impact on just 0.1%, or the ‘1%’ as they are commonly referred to.

“In fact, I would argue that the Fed is fully responsible for the fact that 90% of U.S. families have had declining real incomes (inflation adjusted) over the last 10 years or so (as money printing raised the prices of energy, food, education, transportation, health care, insurance, etc.) and have experienced a decline in their net worth.”

For some eye-opening numbers illustrating the impact, we pinch this table straight from Contra Corner, the new blog kept by David Stockman, author of The Great Deformation. The “Let them eat iPads” reference? We wrote about that three years ago — an infamous effort at public outreach by the Fed, in which New York Fed chief Bill Dudley tried to tell the hoi polloi there’s no inflation because the cost of an iPad keeps coming down. “I can’t eat an iPad,” came the reply from the audience…

“It was the Fed,” Faber sums up, “that repeatedly and deliberately created and continues to create bubbles, which benefit only a minority, while hurting the majority.”

  Unfortunately, Mr. Piketty and his legions of admirers have come to a very different conclusion. The problem, they say, are the returns you get from stocks and gold and real estate and everything else. “Patrimonial capitalism,” Piketty calls it.

Krugman describes the phenomenon as “the dominance of income from capital, which can be inherited, over wages — the dominance of wealth over work.”

It goes like this: If the return on capital is higher than the economy’s growth rate, then investment income will tend to rise faster than income from wages and salaries.

Piketty labels this phenomenon “the central contradiction of capitalism.” We’d label it the obvious result of the Fed tampering with things that should be left alone, but there you have it.

  And the solution suggested by Piketty’s “watershed book of economic thinking”? Why, a global wealth tax, of course. Plus higher rates on the largest incomes.

Report your net worth to the authorities, and if it’s more than $1 million, you’d have to pay up 1%. Which means if you own a modest-sized home in a high-cost-of-living place like California, you might have to scrape up another $10,000 every year. Better put on that Lowe’s smock and get to work.

As for incomes? “According to our estimates,” Piketty writes, “the optimal top tax rate in the developed countries is probably above 80%.” Slapping a rate on such incomes over, say, $500,000 a year, “not only would not reduce the growth of the U.S. economy but would in fact distribute the fruits of growth more widely…”

[Ed. note: Maybe Piketty’s prescriptions for income redistribution will never see the light of day. But we figure it’s best you hear about it from us now rather than from the president or Harry Reid later.

In the meantime, we urge you to take every legal step you can to minimize your tax bill by using tips and tricks known only to 127,531 Americans. “I’m more than doubling what I would have gotten,” says one happy individual. You owe it to yourself… because otherwise you’ll owe it to the IRS.]

  Another directionless day on Wall Street. Today, it’s the blue chips’ turn to show strength; the Dow is up fractionally, to 16,394. Small caps represented by the Russell 2000 are down a quarter-percent, to 1,175.

The Street buzz is all about the debut of King Digital Entertainment, maker of the Facebook and mobile game Candy Crush. The IPO was priced at $22.50. As we write, it’s already down 10%, to $20.17. Heh…

  “Could Russia actually turn into the market’s ultimate contrarian play?” muses Greg Guenthner.

We gave you Chris Mayer’s take on Russia yesterday: Yes, it’s dirt-cheap, but it can get cheaper still. Greg, however, perked up the other day when White House press secretary Jay Carney said, “I wouldn’t, if I were you, invest in Russian equities right now… unless you’re going short.”

An obvious buy signal? Here’s another chart of the Market Vectors Russia ETF (RSX).

“Russian stocks,” says Greg, “have made a sharp recovery over the past two weeks. Yesterday, RSX gained more than 3%.

“A snapback rally could ignite shares and give you the chance to book quick gains. Just set your stops at this month’s lows and let the position work for you.”

  “Autonomous vehicles will permanently change our world over the next few decades,” says Bran Ferren, one of the speakers at the TED conference in Vancouver, where Breakthrough Technology Alert editor Stephen Petranek is in attendance.

You might know “autonomous vehicles” by the more conventional name, self-driving cars.

“Ferren,” Stephen writes, “is co-chair of what may be the greatest powerhouse of engineering minds in the United States, a company called Applied Minds. He made a lilting and beautiful connection between the miraculous ancient Roman Pantheon and modern breakthroughs. He noted that the Pantheon could not have been built 2,000 years ago without five ‘miracles’ of new technology, including the creation of concrete.

“Ferren drew a line directly to five recent technological miracles that will allow autonomous vehicles to become reality soon:

1. Technology that allows a car to know where it is and what time it is.

2. Technology that allows a car to know where the road is and where it is going.

3. Technology that allows a car to communicate with other cars around it.

4. Special roads that can be used for early versions of autonomous vehicles, such as HOV lanes.

5. Competitors that will be forced to participate or go out of business.”

The upside: Tens of thousands of lives saved by not crashing into other cars, and more productivity by workers no longer stuck in traffic.

“At least four major auto companies,” Stephen reminds us, “have announced they will sell self-drive vehicles by 2020.”

 “Deep water is where Big Oil is,” says Byron King — even more than in the shale deposits of North Dakota and Texas.

That’s one of the takeaways Byron had after meeting in New York recently with Chevron CEO John Watson. For all the oil coming from onshore from fracking, “Chevron foresees even more of future energy production growth coming from deep water — offshore drilling and deep, with the potential for ‘super-wells’ that yield 10,000-20,000 barrels per day and more.”

Both deep water and fracking are expensive propositions: “Chevron,” says Byron, “is looking for prices of $80-120 per barrel consistently and far into the future. If the price isn’t there, Chevron promised a roomful of flinty analysts, it won’t spend funds to recover energy resources at a poor return, let alone at a loss.”

If you’ve been with us for a while, you know Byron is of the opinion Chevron will get those prices. “Forecasts of fracking leading to an oil price war and driving down energy prices over the long haul are far-fetched on the best of days. Looking ahead, oil will NOT get cheap; and if that happens — due to recession or such — it won’t last for long. Cheap oil doesn’t support the capital spending necessary to recover future supply. You should invest accordingly.”

[And if you’re looking for lucrative short-term trades in the energy patch, we have that too — including a trade recommendation coming Sunday that aims to make you “Texas Rich in 60 Days”.]

  Gold is in danger of breaching $1,300. At last check, the bid was down to $1,305.

Can’t blame it on dollar strength; the dollar index is up only a teensy bit, to 80.01.

  Oh, well, the Chinese can just scoop up more at bargain prices.

The latest import figures via Hong Kong are in — 125 metric tons in February. For once, that’s lower than the year-ago figure, but only because the year-ago figure was insanely high.

  “By my calculation, China is now ‘officially’ holding 5,430.48 metric tons of gold,” reckons Daily Resource Hunter’s Matt Insley.

That’s the 1,054 metric tons disclosed by the People’s Bank of China in 2009, plus all of China’s imports and production since. “That total easily places China as the second-largest gold holder in the world (second only to the U.S. — if you believe Fort Knox has gold and not a stack of IOUs).”

When might the Chinese central bank next reveal its holdings? Matt’s on board with a suggestion we’ve ventured before — next year. It fits in with the pace of the previous two announcements in 2009 and 2003. “Coincidentally,” says Matt, “2015 is the same year that China wants to have its currency (the yuan) fully convertible. (Fully convertible in this sense means their currency will be liquid and tradable just like all other major currencies, including the dollar.)

“So 2015 is your huckleberry. That’s the year I believe China will splash the gold world with a huge announcement. An announcement that could light a fire under gold prices.”

  “Laurence Vance,” begins today’s mailbag, “shamefully displays his ignorance regarding the FairTax when he says, ‘There is nothing to prevent an income tax from being reinstituted, giving us a two-headed hydra of an income tax and a consumption tax.’

“I have been a fervent supporter of the FairTax for well over a decade, and let me educate Mr. Vance as well as the rest of your readers: Before any consumption tax (national sales tax) is imposed, the 16th Amendment MUST be repealed. No 16th Amendment = NO income tax — ever again. Without repealing the 16th Amendment, there can be no FairTax.”

The 5: Good luck with that…

  “Forget the flat tax AND the ‘fair’ tax,” writes another reader, “and bring on the APT (automated payment tax) on all U.S. dollar bank transfers, foreign and domestic; everyone pays, but not too much.

“Problem is Wall Street hates it because it eats into their commission profits and kills the incentive for superficial, short-term trading.”

The 5: Why are so many of our readers determined to figure out ways to help keep Leviathan funded?

  “It’s time to stop looking for alternatives to providing unlimited funds for the beast,” says a reader who’s on to something, “and start looking at how we can provide a diet suitable for the size of the Creature we would like to maintain.

“Unsustainable debt levels must be controlled, and the excessive role of government in our society must also be reduced and strictly limited. Instead of seeking new ways to fund a morbidly obese government, it’s time to restrict calories.

“We can meet our objective of a more limited government, and a balanced budget, if we simply outlaw borrowing by government and limit the annual federal budget to 5% of the prior year’s GDP. That way, we will have a good idea of what we will have to pay for government the next year, and we can save up for it along the way.

“Furthermore, any of those scum-sucking ‘public servants’ and bureaucrats who seek greater funding for their beast will have to either eliminate some competitive agencies or grow their respective shares by supporting the private sector and growth in the GDP, from which they get their 5%. Great incentive! But maybe the 5% is too high?”

The 5: Can’t wait to see how the Commerce Department would jigger the GDP numbers to get around that…


Dave Gonigam
The 5 Min. Forecast

P.S. Nothing personal, but every minute you spend writing us about how to fix a broken system in D.C. could be better spent figuring out how to cut your own tax bill. Really, we make it as easy as possible.


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