Grandma’s Kids

May 27, 2018

by Steve Stofka

The birth rate has touched a 30-year low, repeating a cycle of generational boom and bust since World War 2. The first boom was the Boomer generation born in the years 1946-1964 (approx). They were followed by the baby bust Generation X, born 1964-1982. The Millennials, sometimes called Generation Y and born 1982 – 2001, surpassed even the Boomers in numbers. Based on the latest census data, Generation Z, born 2002- 2020, will be another low birth rate cohort.

These numbers matter. They form the population tide that keeps the entitlement system afloat. Social Security and Medicare are “pay as you go” systems. Older generations who receive the benefits depend on taxes from younger generations for those benefits. As the population surge of Boomers draws benefits, the surge of Millennials is entering their peak earning years.

To maintain a steady population level, each woman needs to average 2.1 births. During the Great Recession, the birth rate for native-born Hispanic and Black women fell below that replacement level. White and Asian women fell below that level during the recession following the dot-com boom in the early 2000s. Foreign born Hispanic and Black women are averaging a bit more than 2-1/2 births. The average of foreign born White and Asian women is just about replacement rate.

Around the world, birth rates are falling. Social welfare programs depend on inter-generational transfers of income. When a smaller and younger generation must pay for a larger and older cohort, there is an inevitable stress.

I will distinguish between social welfare programs and socialist welfare programs with one rule: the former require that a person pay into the program before being entitled to the benefits from the program. In this regard, they are like insurance programs except that private insurance policies are funded by asset reserves held by an insurance company. Government “insurance” programs are “pay as you go” systems. Current taxes pay for current benefits. The Social Security “reserve” is an accounting fiction that the Federal government uses to track how much it has borrowed from itself.

Examples of social welfare programs that require the previous payment of dues are: Social Security, Medicare, Unemployment and Workmen’s Compensation Insurance. Although the latter two are paid directly by employers, they are effectively taken out of an employee’s pay by reducing the wage or salary that the employer pays the employee. Employers who fail to understand this go out of business early in the life of the business. I have known some.

Examples of socialist welfare programs that are based on income, or need: Medicaid, TANF (Welfare), WIC, Food Stamps, Housing and Education Subsidies. There is no requirement that a person pays “dues” into a specific program before receiving benefits.

Health care in America is primarily a social welfare program with socialist elements. The Federal government does subsidize all employer provided health insurance and most private insurance through the tax system or the Affordable Care Act. However, most beneficiaries must pay some kind of insurance to access benefits. Under the 1986 EMTALA act, emergency rooms are notable exceptions to this policy. They are required to treat, or medically stabilize, all patients insured or not.

As Grandma begins to draw benefits from Social Security and Medicare, she relies on the earnings of her kids who form the core work force aged 25 – 54. Grandma has paid a lifetime of dues into the social welfare programs and wants her benefits. Grandma votes.

Her grandkids want government subsidies for educational needs and job training. They depend on socialist welfare programs with no dues. The grandkids don’t vote.

The kids are caught in a generational squeeze.  Their taxes are paying for both their parent’s benefits and their kid’s benefits.


Housing Trends

In the spring of 2008, there was an eleven month supply of existing homes on the market.
2010 – 8-1/2 months
2012 – 6-1/2 months
2014 – 5-1/2 months
2016 – 4-1/2 months
2018 – 4 months

In some cities, a median priced home stays on the market less than 24 hours.

Here is another generational shift.  Grandma and Grandpa now own 40% percent of home equity, up from 24% in 2006. Their kids, the age cohort 45 – 60, own 45%. Those under 45 have only 14% of home equity, down from 24% in 2006.


Brave New World

E-Commerce is now 9.5% of all retail sales, almost triple the percentage ten years ago. (Fed Reserve series ECOMPCTSA). In 2000, the percentage was less than 1%.

October Surprise

October 11, 2015

A good week for stocks (SPY), up over 3%.  Emerging markets (VWO) were up over 5%, but are still down 18% from spring highs and are on sale, so to speak, at February 2014 prices.

On news that domestic crude oil production had fallen 120,000 barrels per day, about 15%, in September, an oil commodity ETF (USO) rose up 8% this week.  On fears, and confirmations of fears, of an economic slowdown in much of the world, commodities have taken a beating in the past year, falling 50% or more.  A broad basket of commodities (DBC) was up 4% this week but are still at ten year lows.  An August 2010 Market Watch commentary recounted the evils of commodity ETFs as a place where the pros take the suckers’ money.  Not for the casual investor.

The Telegraph carried a brief summary of the latest IMF assessment of credit conditions around the world.  There is an informative graphic of the four stages of the macro credit cycle and which countries are at what stage in the cycle.


Social welfare

Some people say they dislike redistribution schemes on moral grounds.  The government takes money from some people based on their ability and gives it to other people based on their need, a central tenet of Communism.

In a 2014 paper IMF researchers have found that redistribution is a hallmark of developed economies.  Why?  Because advanced economies have the most income inequality.  Why?  Developed economies have greater income opportunity and opportunity breeds inequality.  A sense of human decency prompts the voters in these developed countries to even the playing field a bit.

In countries with greater equality, living standards and median income are lower.  There is less income to redistribute.  In the real world where the choices are higher income and redistribution vs an equality of poverty, I’ll take the more advanced economies.



Since the beginning of this year the manufacturing component of the Purchasing Managers’ Index has continued to expand.  The strong dollar has made U.S. products more expensive around the world and this has hurt domestic manufacturers.  Growth has slowed from the strong expansion of the last half of 2013 and all of 2014.  September’s survey of manufacturers is right at the edge between expansion and contraction.  The CWPI weights the new orders and employment portions of each index more heavily.  Using this methodology, the manufacturing side of the equation looks stronger than the headline index indicates.

The services sector, most of the economy, is still enjoying robust growth and this strength elevates the combined CWPI.

How much will the substandard growth in the rest of the world affect the U.S. economy?  Industrial production in Germany declined last month.  China’s growth is slowing.  GDP growth in the Eurozone is barely positive.  Emerging markets are struggling with capital outflows.  Developed economies that are dependent on natural resources – Canada and Australia – are struggling.  The GDP growth rate of both countries is very slightly negative. The U.S. is probably the one economic ray of hope.  September’s lackluster labor report and the Fed’s decision to delay a rate increase has attracted capital back into the stock market. This past Monday, volatility in the market (VIX – 17) dropped down below its long term historical average of 20 but is a tiny bit above its 200 day average.  I’d like to see another calm week before I was convinced that the underlying nervousness in the market has abated.  Third quarter earnings season is here and estimates by Fact Set  are for a 5% decline in earnings, the second consecutive quarter of declines since 2009.

Income and Poverty

September 21, 2014

A steadily rising market supports our theory that we are astute investors.  Fed Chairwoman Janet Yellen reassured investors that the Fed intends to keep interest rates near zero till at least the middle of 2015. The stock market closed out the week at a new high, edging out the high set two weeks ago.  In an economy fueled largely by consumer spending, median household income is down 8% since 2007.  The Japanese yen broke below $90 this week, a seven year low.  At this week’s meeting in Australia, the financial heads of the G-20 countries are seeing increasing economic strains around the globe but particularly in Europe and Asia. (Bloomberg)  Housing starts and building permits are getting erratic, jumping up one month only to fall precipitously the next.  Using either idle cash or borrowing at historically low interest rates, companies are buying back their own stock at a steady clip to juice per share profits for stockholders.

In a candid moment, many researchers will admit the difficulty of overcoming their own biases.  Investors are subject to the same myopia that afflicts politics and compromises research.  Our biases lead us to ignore or discount some facts.  The most damaging bias most of us have is thinking we have made the right decision.  The justifications for our investment decisions are sound and logical – until later events reveal the folly underlying those decisions.  In the late 1990s, some envisioned the internet marketplace much like a chessboard.  The companies who dominated the center of the board, regardless of the cost, reaped hefty stock evaluations.  It made sense – until it didn’t. Costs matter.  Profits matter.

Soros Fund Management, founded in 1969 by George Soros, has a long track record of generating consistently high returns.  The secret to Soros’ success as an investor is not that he is right most of the time because he isn’t.  Several years ago, his firm estimated that his success ratio was only 53%.  George Soros’ success comes from the fact that he knows he is wrong about half of the time, recognizes when he is wrong, abandons his position and minimizes his losses.  While most of us are not active traders like Soros, we can pay a bit more attention to the balance in our portfolios.  Quarter ending statements will arrive in our mailbox or email inbox in the next few weeks.  It would be a good time to assess portfolio allocations and targets.  A composite bond index (BND as a proxy) is down a few percent since April 2013 while the stock market has risen 33%.  Have we adjusted the balances in our portfolios or is that one of the things that has been on the to-do list for several months?


Census Report

The Census Bureau just released their annual estimate of household income and poverty in the U.S.  Measurements of household income must be taken with a grain of salt, so to speak.  Say that a married couple with $70K in household income split up.  The total income remains the same but the number of households is now two and household income is $35K.

Given those caveats, there are some real bummer stats in the report as well as some surprises.  Real or inflation adjusted median household income was little changed in 2013 and is 8% lower than in 2007.  Median income of white households was $58K in 2013 but for black households, the annual figure was $34K.  The ratio of incomes between these two groups has changed little over the past five decades.  Since the mid 1980s, the income of white households has lost ground when compared to Asian households. Since the mid-90s, the ratio of Hispanic to white household income has risen.

One of the strengths of American society has been the income mobility that our economy generates. The Census Bureau groups incomes by quintiles, like steps on a ladder.  Each step is in 20% increments so that households are ranked in the bottom 20%, top 20% or in between. From 2009 – 2011, 30% of those who were on the lowest rung of the income ladder moved up the ladder.  During that same period, 32% of those at the top of the ladder moved down the ladder.

The poverty rate declined slightly but one in seven households, about 45 million people, is below the poverty threshold.  A continuing complaint about the methodology used in computing the poverty level is that non-cash benefits like subsidized housing, medical care, child care and food stamps are not included in the calculations.  In the early 60s, before the introduction of social welfare programs, almost one in five households were below the threshold.   Remember, the 60s were a boom decade. Various estimates of those who were chronically poor at that time ranged from 10% to 16% of households. In 1969,  several years after the introduction of the Great Society programs, the poverty rate was close to 14% (Source), about the same as it now.

Conservative commentators will make the case that, over the past fifty years, the U.S. has spent some $22 trillion (2013 dollars) on social welfare programs with little progress in alleviating poverty. During the three year period from 2009 – 2011, years of severe economic stress and political games of “chicken,” the Census Bureau reports that almost 32% of households had a spell of poverty lasting two months or more.

The Census Bureau also reports that only 3.5% of households were chronically poor, living under the poverty threshold during the entire three year period.  The low percentage of chronically poor is often ignored by those who are antipathetic to social welfare programs.  In the aftermath of this past recession, one of the most severe economic downturns of the past century, social welfare programs have provided a temporary helping hand up, a shelter against the economic storm, and cut the long term poverty rate to a quarter of what it was during the booming 60s.

Liberals will ignore this success, of course.  Instead they will point to the higher figure of temporary poverty to make the case for more welfare spending. More programs and more spending is the liberal brand.  Conservative pundits should point at the rather low 3.5% figure of the chronically poor and make the point that we don’t need more welfare spending.   But they won’t.  Opposed to income transfers as a matter of principle, conservatives don’t want to acknowledge the success of social welfare programs.

For those readers who don’t have the time to read the full report, a NY Times article provides a summary.


Lasting longer

When the Social Security system was enacted in the mid thirties, life expectancy for a 60 year old worker was 72.  (Bureau of Labor Statistics Monthly Labor Review, pg. 4)  Many of us don’t realize that the largest gains in life expectancy came in the first decades of 20th century with safer sanitation, drinking water and public health facilities. In 2006, the Census Bureau estimated life expectancy for a 60 year old at 82, an additional ten years of life – and retirement benefits and expenses. A 75 year old male today can expect to live to about 87.

In their 2014 survey of the costs of elderly care, Genworth Financial found that a home health aide in Colorado averages about $50K. A private room in a nursing home costs $92K per year.  At a 4% growth rate, that same private room could cost more than $130K in 2025, when the first cohort of baby boomers reaches 75.  How many seniors will be able to afford such an expense?  Many will push for ever more programs to subsidize the costs of living longer.  Seniors vote so politicians listen.  In Japan, the elderly segment of the population has grown from 5% of the population in the 1950s to 25% of the population. (Wikipedia)  This aging cohort commands an ever larger share of the nation’s resources, contributing to the stagnation in the Japanese economy for the past 20 years.

In the U.S. the growth of the elderly population has been less dramatic.  At 9% of the population in 1960, the elderly are expected to almost double to 17% of the population by 2020 (Census Bureau )


Pay attention to portfolio allocations.  Save money.  You’ll need it one of these days.

Heathens and Wizards

During negotiations over raising the debt ceiling from July 26th to August 8th, 2011 the S&P500 fell 16%.  The index fell only 1% in the first week of negotiations as it looked like President Obama and Republican Majority Leader John Boehner might strike a deal.  Then the bottom fell out.

In the week of trading since budget talks intensified on Dec. 20th, 2012 the S&P500 has lost 2%. 

Investors are worried but hopeful that Congress and the President can come to some resolution before tax increases and spending cuts automatically take effect on January 1st.  Housing and automobile sales are showing renewed strength; the yearly increase in Christmas shopping was a disappointment but the underlying fundamentals of the economy give reason for cautious optimism.

The rapid decline in last year’s stock market should serve as an example to investors in today’s market.  For the long term investor, a further decline of 5 – 15% will present some buying opportunities – time to make that IRA contribution or to put some sidelined cash to work.

The volatility index, or VIX, measures the relative uncertainty of the broader market using a formula that analyzes the bid -ask spreads of option contracts, which are promises to buy or sell stocks in the future.  When the markets are fairly calm, the VIX index is under 18 – 20.  As markets melted down in October 2008, the VIX rose to 80.  So, 16 is pretty good; 80 is real bad. In the last week of July 2011, this index jumped 20%, then skyrocketed to 48 in the first week of August.

This past week, the VIX went up from the calm range of 18 to 23, indicating the underlying worry.

Last week I wrote about the debate over which inflation measure to use, the CPI or deflator.  If you hear about “chained dollars” or “chained CPI”, it is the deflator that they are referring to.  The difference between the two yardsticks is $3 – $5 per month in a $1000 Social Security check.  This afternoon, Senate Majority Leader Harry Reid walked away from negotiations over this issue.  As I write this in the afternoon of Sunday, Dec. 30th, Senator John McCain has announced that Republican Senators have just taken this issue off of the table.  We can expect that the issue will come up again in the coming negotiations over the raising of the debt ceiling.

For the past several years, Republicans both in Congress and at the state level have targeted the growth in state and local spending.  This campaign of austerity, as Democrats call it, or fiscal common sense, as some Republicans call it, has won Republicans the governerships of thirty states.  Most of that spending growth has been curbed.

On a per person basis, inflation adjusted spending is at the same level as the mid 1990s.

For states, this return to mid 1990s spending levels has meant cuts in services to their residents.  Medicaid spending takes an increasingly larger portion of state budgets; because states can not run budget deficits, reductions have to be targeted toward education and infrastructure spending.  In 2011, Medicaid spending averaged 25% of state budgets, more than the 20% spent on education (Reuter’s source)

While Republicans dominated the Congress and Presidency in the early 2000s, they showed little concern for the growth in what they call entitlements, programs like Medicare and Social Security.  Instead, they increased entitlement programs, adding a Medicare drug benefit program.  Since they lost their Congressional dominance in 2006,  Republicans have become more cost conscious – and the next targets are entitlements.  Most seniors who have paid into Medicare and Social Security all their lives do not consider these programs as “entitlements.”  It is a dog whistle word that Republican politicians use to call out to their pack.

Democrats look and look and look but simply can not find any cuts that they can make to the social safety net.  Under the rubric of compassion, the Democratic strategy consists primarily of buying votes with ever more social welfare programs.  In the Democrat view, a government and its citizens are in a partnership.  Republicans rightly point out the dangers in any partnership where one partner, the government, holds all the power.  Despite all the rhetoric about limited government, Republicans are advocates of a different kind of partnership between government and corporations whose political contributions are essentially kickbacks for contracts with the federal government and a more relaxed regulatory environment.

Supposedly vigilant Republicans get out their spending cleavers but can not find any cuts they can make in current defense spending.   The operative word here is “current.”  The Defense Dept lives in a budget bubble that most of us would envy because it has little economic responsibility for soldiers once they leave the service.  Most rehabilitation, medical, housing, retraining and other services that the soldier is entitled to or need are no longer born by the defense department. Congress “dumps” these costs on the Human Services department, routinely targeted by Republicans for spending reductions.  In inflation adjusted dollars, we are currently spending 30% more on defense that we spent during the Vietnam War years, 25% more than during the military buildup of the Reagan years.

At the beginning of this century, we have two parties whose allegiances prevent them from coming to any meaningful compromise.  Tax policy is riddled with temporary tax cuts to promote various social causes. Special interest groups and wealthy taxpayers nibble away at tax legislators, creating a swiss cheese of fairness. Budget planning is a legerdemain practiced by a small coterie of heathens and wizards in budget committees; under current budget rules, there are few reductions in spending, only reductions in projected increases in spending.  Imagine that your family budgets for a 3% yearly increase in your utility bills.  One year, the utility company has no rate increase.  Your family claims that they have cut spending on utilities.

The Defense Dept has no long term accountability for the care of their soldiers.  The Human Resources Departments have no accountability for increases in health care spending; they are on automatic pilot.  Congress has no accountability for passing a budget; they have not done so for six years yet continue to get paid.  Bankers risk huge amounts of money that threaten the savings of millions; the company pays a relatively small fine and the individuals responsible suffer no criminal prosecution because of the difficulty and expense of such trials. The public senses that the political party system is morally bankrupt; that the leaders and representatives of this country are unable to break out of the cycle of partisan brinkmanship; that many representatives are bought and paid for; that most of the public has been left out of the deal. 

The public will either find a way to reclaim their authority over the political process of governing or be left standing helplessly on the sidelines while the two parties scrimmage at midfield, both parties having lost sight of either the goal or the audience.  Political advantage has become their goal.  Party leaders enforce a rigid heirarchy of committee assignments, rewarding those in the party who comply while shrugging off those who might compromise.  Gerrymandered districts ensure that many representatives are accountable only to the more rigid ideologies of their district;  their sole challenge comes from extremists in their own party. 

Maybe this time is different.  Maybe not.  Slowly and finally, the social, economic and political order cracks; the public votes in the most extreme elements who promise to restore order and principle or their version of fairness.  What they bring is despotism.

But that could be many years in the future.  For now, we salute the New Year!


This past week the Census Bureau released their annual estimate of median income and poverty.  For 2009, the poverty level increased from 13.2% to 14.3%.  Economists and policy makers have been debating the definition and calculation of poverty since the introduction of the social welfare programs of the Great Society  in the 1960s.  Since the mid-nineties, many have called for a revision of the calculations that gives weight to cost of living variances in the country.  To most people, that makes sense.  Because it makes sense, it is a political hot potato.  The thresholds of poverty are used to determine eligibility for a number of federal programs.  Adjusting  those thresholds would qualify many more people for assistance in some areas, particularly larger metropolitan areas, while disqualifying some in rural areas where the cost of living is less.

How does the Census Bureau measure poverty?  They include all cash income but non-cash items like Medicaid, food stamps and housing subsidies, like Section 8, don’t count as income. (Source)  To qualify for housing assistance, the family’s income may not exceed 50% of the median income for the county or metropolitan area in which the family chooses to live.  The rent subsidy is generally the lesser of the payment standard minus 30% of the family’s monthly adjusted income or the gross rent for the unit minus 30% of monthly adjusted income.

Let’s look at two “traditional” families of four in Denver, Colorado, where wages and cost of living are only slightly above the national average. (Source)

In Family A, Dad works a regular job as a laborer for $12 an hour for 35 hours a week, slightly more than the median hours worked per week, earning about $22000 per year.  Family A’s income is at the poverty level, qualifying them for housing assistance, Medicaid, food stamps and other assistance programs for meeting their monthly bills.  Family A’s adjusted income per HUD standards is gross income less about $500 per dependent, or $20K.  They would pay 30% of that for rent, $6000, for an apt renting for about $9600 annually, receiving about $3600 in tax free income.  In addition, they would get about $325 in food stamps  per month, or another $4000 in untaxed income.  In addition, Dad would get $34 per week in Earned Income Credits, paid by his employer, for an annual total of about $1800.  Since they qualify for Medicaid, this family would have no or minimal health insurance premiums. This family would pay no federal or state income taxes but they would be subject to the FICA payroll tax of about $1650 per year. This family’s net effective income is about $30K.

In Family B, Dad works for $22 per hour for 35 hours a week, earning an annual gross of $40,000, about 16% – 18% less than the median household income for Denver but about equal to the median wage.  This family’s income is in the 40th percentile of Denver area income, slightly above that percentile for the country as a whole.  This family does not qualify for either  housing assistance, Medicaid, food stamps, the energy assistance program LIHEAP or the Earned Income Credit. Dad pays 50% of a $1200 HMO family medical plan which his employer offers, an annual cost of $7200.   This family pays about $120 per year in federal and state income taxes and $2500 in FICA taxes.  This family’s net effective income is also $30K.

Two families – one at the poverty level of income, one slightly below the median income level – have approximately the same level of disposable income.  Either there are a number of families classified as poor who really aren’t poor or about 40% of the households in this country are effectively at or below the poverty level.