On Occupy Wall Street

 | Oct 17, 2011 | 1:00 PM EDT  | Comments
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This commentary originally appeared on Real Money Pro on Oct. 17 at 9:10 a.m. EDT.

Not long ago, someone suggested that I read Since Yesterday, a book by Frederick Lewis Allen, a popular historian of the 1930s and 1940s. Published in 1940, it turned out to be a shrewd, concise, wonderfully written account of America in the '30s.

It also turned out to be something else: a reminder of why history matters....

In Since Yesterday, bankers are vilified; homes are foreclosed on; people desperately search for work -- just like today. Businessmen speak of the need for "confidence," a word that "enters the vocabulary only when confidence is lacking." Elsewhere Allen writes, "No longer were vital economic decisions made at international conferences of bankers; now they were made only by the political leaders of states...."

Toward the end of his book, Allen sums up the mood of the country. By 1939, people were weary of hard economic times, but they were also weary of Roosevelt's endless experiments. Many modern historians believe that Roosevelt's biggest problem was not that he'd done too much, but that he'd done too little -- that the Depression required a response bigger than even Roosevelt's New Deal.

-- Joe Nocera, The New York Times ("The 1930s Sure Sound Familiar"; Oct. 14, 2011)

In four weeks, Occupy Wall Street has gone from an ad hoc aggregation of annoying protestors to a potentially important part of the national debate about the disparity between the haves and have-nots.

As I wrote in "Thrown for a Loop" over the summer, there is a broken feeling in the way many Americans view their future. The younger the person, it seems, the more the shallowness and despair that exists.

The primal screams of Zuccotti Park in New York City reflect the economic inequities that have accelerated since the Great Decession of 2007-2009, as well as the outrage associated with past bailouts and too-big-to-fail public policy that is seen as having socialized risks and privatized profits.

  • The 400 wealthiest Americans have a greater combined net worth than the bottom 150 million Americans.
  • The top 1% of Americans possess more wealth than the entire bottom 90%.
  • In the Bush expansion from 2002 to 2007, 65% of the economic gains went to the richest 1%.

Occupy Wall Street embodies the zeitgeist of populism and is a continuance of a growing economic desperation that has existed over the last 10 years and that has worsened as U.S. unemployment has failed to recover over the last three years.

Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7%, to $49,909, according to a study by two former Census Bureau officials. During the recession -- from December 2007 to June 2009 -- household income fell 3.2%.

-- Robert Pear, The New York Times, ("Recession Officially Over, U.S. Incomes Kept Falling"; Oct. 9, 2011)

Here are some vividly illustrated charts (hat tip to Barry Ritholtz of The Big Picture blog) that graphically detail the schism:

1917-1981: Bottom 90% Captured 69% of Income Gains
Source: Economic Policy Institute, The State of Working America; data come from this table on Emmanuel Saez's website at University of California, Berkeley.
1982-2000: Bottom 90% Captured 23% of Income Gains
Source: Economic Policy Institute, The State of Working America; data come from this table on Emmanuel Saez's website at University of California, Berkeley.
2001-2008: Bottom 90% Had Income Losses (Negative Gains)
Source: Economic Policy Institute, The State of Working America; data come from this table on Emmanuel Saez's website at University of California, Berkeley.

I wrote about this growing economic unevenness and disparity in a June 2011 editorial in the Other Voices section of Barron's "The Threat of Screwflation."

The theme of my editorial was that the average Joe has seen his wages stagnate (actually in last decade the average income has dropped by 7%) while the costs of the necessities of life have gone up measurably. Corporations, by contrast, have taken an outsized share of GDP and income -- as they relentlessly cut fixed costs (read: chopping jobs) over the last decade.

Meanwhile structural unemployment has deepened, stemming from a talent/skills mismatch, globalization (it became cheaper to manufacture abroad because salaries are far lower and burdensome and costly regulations don't exist overseas), rapid technological change (which has replaced many jobs), the increased and accepted use of temporary workers as a permanent feature of the jobs market, the loss of mobility (caused by a 35% drop in home prices) and the absence of an economic growth engine to replace the role of a booming housing market that accounted for more than one-third of the job creation of the last economic cycle.

With nearly 17% of our country's workers either unemployed or underemployed, Occupy Wall Street's frustration with these conditions are understandable.

I am in favor of Occupy Wall Street, if it means getting justice and indicting executives from the small cabal of banks and investment banking firms, who sliced and diced mortgages into financial derivatives of mass destruction that poisoned the world's financial system; if it means prosecuting the lenders who, with no- or low-document mortgages, recklessly enticed consumers into mortgage loans that were dead at birth, count me in.

The fact that no one from Fannie Mae (FNM), Freddie Mac (FRE), Merrill Lynch, Countrywide Financial or Lehman Brothers is rotting in jail is appalling to me.

But I don't favor the focus being on the rich; that anger is misaligned. Yes, the rich have gotten a great deal in this country, and it is likely that that deal will not be so great in the future (read: higher marginal tax rates), but the culprits are the politicians (both Republican and Democrats) that have been bought by the lobbyists, who represent small and large corporations and the wealthy.

I favor and would support Occupy Wall Street if their message were clearer -- and if that message and target was geared not toward the rich (and their Upper East Side townhouses) but rather took a southerly route toward our dysfunctional and divided political representatives in Washington, D.C., who are unable to seriously address our country's structural issues (e.g., our fiscal imbalances and structural unemployment) with outside-of-the-envelope, pro-growth fiscal solutions.

We need change, but the direction and context of Occupy Wall Street's message of change would be far better served if it was based not only physically but in substance toward our political representatives in our nation's capital rather than in a park in Lower Manhattan.

The Politics of Frustration and the Evolution of Populism

For three years, ever since the 2007-2009 economic crisis that nearly decimated the world's financial system, Americans have been increasingly frustrated and have sought a solution to reverse their worsening (absolute and relative to large corporations and the wealthy) economic standing, but their efforts have often been scattered, unorganized, ineffective and short-lived -- as if they were floundering from one protest to another.

At first, the dissatisfaction with the status quo led to the political tsunami in November 2008, when President Obama and the Democratic Party captured control of Washington, D.C. Then, the Tea Party emerged as a formidable political force within and outside the Republican Party.

The latest lashing out and the newest movement, Occupy Wall Street (which, according to a new NBC poll, has resonated favorably with 54% of Americans compared to only 27% for the Tea Party), is now gaining traction in the U.S. and abroad -- and is yet another in a series of manifestations of anger and discontent toward the wealthy that has shaped our political and social landscape.

What Does Occupy Wall Street Mean to Investors?

The emergence of populism and the underlying discontent associated with economic inequalities as manifested in Occupy Wall Street are already part of the national agenda and seem destined to play a visible role in the November 2012 elections.

Most recently, greater financial regulation has already been enacted through the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Burdened by a more cumbersome and expensive regulatory environment, bank stocks have been become the piñata of populism -- and have been among the worst performing stock sectors.

Look for other industries (e.g., health care, energy and even utilities) to be challenged by the headwinds and the pressure from the imposition of more costly regulatory burdens in a growing populist context.

In the fullness of time, Occupy Wall Street's social imperative -- namely, that the wealthy and largest companies have benefited disproportionately from the last decade's growth -- seems almost certainly to be destined to result in a far greater financial/tax burden for those two groups over the next decade, through the implementation of higher taxes and the elimination of tax loopholes.

If I am correct, this helps to partially explain the below-average historic P/E multiples that exist today (especially relative to inflation and interest rates), as current valuations could be reflecting the rising expectation of increased regulatory costs associated with conducting business and an expectation of higher corporate tax rates (that will be responsible, all things being equal, in lowering after-tax corporate profits).

Occupy Wall Street and its older sibling, the political tsunami of November 2008 (that led to the ascent of the Democratic Party), are contributing factors toward a pendulum swinging away from the policies that are perceived by many to have set the stage for the last economic crisis.

Whether one agrees or disagrees with Occupy Wall Street and its goals, the already emerging trends (that it is encouraging) of greater regulation and higher taxes aimed toward the wealthy and large corporations are corporate-profit- and valuation-deflating.

Doug Kass writes daily for Real Money Pro, a premium service from TheStreet. For a free trial to Real Money Pro and exclusive access to Mr. Kass's daily trades and market commentary, please click here.

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