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The Sandy Spring Way

June Observations

June 4th, 2014 | By Beau Mercer

FredericBurke“Don’t worry about a thing, ‘Cause every little thing gonna be all right”-I won’t worry! “Don’t worry about a thing, Cause every little thing gonna be all right.” “Don’t worry about a thing, oh no! ‘Cause every little thing going to be all right!”

—Bob Marley “Three Little Birds”

The first Memorial Day was celebrated May 30, 1868, three years after the end of the Civil War to honor the dead. Roughly 750,000 men lost their lives in the Civil War in the field of duty. Ulysses Grant wrote about the surrender that the Southerners fought valiantly for a cause that was one of the worst for which people ever fought. What did the Confederacy hope to accomplish by seceding from the Union? There seemingly was an ignorance of the economic realities at the expense of human life. The cause was clothed in slavery and states’ rights but the debate was swayed by sectional culture. The differences in manpower and industrial capacity were profound. The South had 25% of the country’s free population but only 10% of the country’s capital. The South had no factories to produce guns or ammunition. Though agriculture thrived in the South, planters focused on cash crops like tobacco or cotton and did not produce enough to feed the southern population. The South also lost its banking system which had been headquartered in New York. The Northern economy was diverse and based on manufacturing processes on finished goods. The North also controlled most of the nation’s capital and used its control of the national treasury to issue a massive bond to fund its war effort. The Northern states and the federal government introduced the first income tax and the IRS was established. By the end of the Civil War, the South was economically devastated, having experienced extensive loss of life and destruction of property. The current crises in many of the emerging market countries rhyme with the US Civil War.

In a new book by economist Thomas Piketty, “Capital in the Twenty First Century”, the author explains the implications of inequality fever. The progressive media has used Piketty’s book to broadcast two tenets: first, today’s income is as lopsided as it was in the 1920’s. Second, most income gains have gone to people on the top. All income derives from either labor or capital. The 2007-2008 financial crises decimated the employment rolls. Unemployment and inequality suddenly became correlated. Suddenly there was recognition that a growing labor economy was a necessary essential in fighting inequality. Former Federal Reserve Board Chairman Ben Bernanke consistently revealed that governments should enable employment growth because of the growth implications on the economy.   Piketty wrote that capital (wealth) is growing faster than labor and that capital owners will consequently accumulate greater wealth. According to Piketty, taxation can be the arbitrator of the wealth/capital distribution rules.

Historically, pockets of great wealth are unevenly spread across society and with obvious social implications. Bill Gates can fund world health projects while others can continue to accumulate wealth. Wealth, however, eventually will be deployed by investment, tax, philanthropy or waist. In the U.S. about 70% of federal spending goes to the poor and middle class, and the ‘super rich’ pay nearly a quarter of federal taxes. The middle class can go about its business, work hard, save periodically and have a fair opportunity to find a great life. The living standards of ordinary people have risen significantly since World War Two and will continue to do so. Despite the outcry of certain economists, maybe the wealth/capital tradeoff still works.

The U.S. GDP contracted by 1% on an annual basis in the first quarter of 2014. Despite the pullback, the S&P 500 hit an all-time high at the end of May as interest rates kept going down. The current yield on the 10-year Treasury is much lower than expected six months ago. The 10-year Treasury yield started 2014 around 3%. The medium estimate from market strategist was for the yield to rise to 3.4% by the end of 2014. As of the end of May the yield was 2.47%. Rates cannot go much lower. Inflation is not present but will eventually materialize at the expense of the bond and stock market.  There is a lack of competition from fixed income products for the investment dollar making equity dividend stocks more appealing. Beware of complacency and volatility.


—Doug Sanders, Professional Golfer.