A. Gary Shilling, president, A. Gary Shilling & Co., Springfield, N.J.: Sens. Kerry and Edwards say the American middle class is an endangered species, that the country is gravitating toward two nations — one rich and one poor. This, however, is nothing new, and as a continuing long-term trend, may be of limited political significance.
Since the late 1960s, the share of total pre-tax individual income (excluding capital gains) of the top 20% has risen to 50% from 43%. Shares of the other four quintiles have fallen as jobs have shifted from highly paid to lower-paid occupations. Due to productivity growth and the movement of jobs abroad, manufacturing workers, who earn 125% of the average, have seen their share of total non-farm employment drop to 11% today from 28% in 1966. In contrast, jobs in leisure and hospitality pay only 43% of the average, but have jumped to 9.4% of the total from 6.4%.
There are three new middle-class depressants. First, offshoring is moving not just call centers but also programming jobs to India. Partly as a result, permanent layoffs jumped to 79% of the total in 2001 from 57% in the early 1990s, while temporary separations fell to 21% from 43%. This means much more time between jobs as people retrain and switch fields. Second, computers and other new tech sectors have become so big that large increases in their professional employment are unlikely. Third, soaring medical costs are increasingly being shouldered by employees, hurting middle- and lower-rank purchasing power.
I don't think these new pressures on middle-class income are enough to sway the election, but they should concern the Bush camp.
Donald G.M. Coxe, chairman and chief strategist, Harris Investment Management Inc., Chicago: Two top problems the politicians ignore:
First, how do we manage the relationship with China? This nation is creating through its own voracious demands, commodity inflation in the United States (for oil, gas and metals), but also prevents U.S. companies from passing along those cost increases because it also exports disinflation or deflation in finished goods. Also, China and Japan have bought more than $450 billion in Treasury securities in the past 18 months, propping up the dollar and holding down bond and mortgage yields. Our housing boom (or bubble) has made-in-Beijing gas in it.
Yet Washington continues to demand that China raise the value of its currency, which would mean our bond, mortgage and, possibly, stock markets would be, uncomfortably, on their own. What do we really want from this new powerhouse? And what happens if they decide to get really tough on Taiwan?
Second, how long should U.S. companies continue to be permitted to use wildly unrealistic pension income assumptions? Financial Accounting Statement 87 was a breakthrough for its time, but letting companies continue to assume 8% to 9% returns, based on the returns of the Reagan and Clinton eras invites terrible problems for the stock market and the economy when reality or the next economic downturn hit.
The stock market modestly prefers George Bush, but the super-rich, like George Soros, and the French and Germans strongly prefer John Kerry. A Kerry victory would be bad news for consistent dividend-paying stocks and for the health-care industry — but wondrous news for tort lawyers.
Alicia H. Munnell, Peter F. Drucker Professor of Management Sciences, Carroll School of Management of Boston College and director of its Center for Retirement Research: A win by George W. Bush will mean a big push for the "ownership society." This might be good news for money managers, but it will put retirement security for middle-class Americans at risk.
The centerpiece of the ownership society is private accounts for Social Security. Social Security provides modest benefits that are nevertheless the primary source of income for the majority of older Americans. It does not make sense to make this basic retirement income depend on the stock market. Any new private accounts should augment Social Security, not replace it.
The second piece of the ownership society are Lifetime Savings and Retirement Savings accounts, which together would allow a family of four to put aside $30,000 per year on a tax-favored basis, in addition to their 401(k) contributions. Who can save $30,000? Not middle-class households, which typically earn only $43,000. Only the rich will benefit. These accounts will use up valuable tax dollars that could be better spent shoring up Social Security. And they will aggravate the pension coverage problem (less than half of today's private-sector workers are covered by a pension) by discouraging business owners from setting up pensions for themselves and their workers.
Fixing the retirement income system should be on the political agenda. But the "ownership society" goes in the wrong direction. We need serious proposals to improve Social Security and employer-sponsored pension plans rather than flighty notions about flying solo.
James W. Paulsen, chief investment officer, Wells Capital Management, Minneapolis: Regardless of who gets elected next month, the most important issue facing investors will remain the financial market transition from a "buy-and-hold" secular trend to a prolonged era of "trading-range-bound" markets.
The Dow Jones industrial average has been hovering around 10,000 since it first reached this milestone more than five years ago. Similarly, at 4.25%, the 10-year Treasury bond yield is about the same as it was in mid-1998.
The days of "buying stocks and bonds and holding on" are over for a while — perhaps for a long while. In the 134 years since 1870, the U.S. stock market has been in a broad-based trading range for about 90 of those years. Until the late 1960s, bond yields were contained within a very narrow range throughout most of U.S. history. Although much of the last quarter-century has been dominated by the "buy-and-hold" mantra, "trading-range-bound" markets lasting 10 to 30 years are much more common. Could we be just five years into a two-decade-long trading range?
Innovative investment strategies are already emerging that attempt to take advantage of this new era. It is no coincidence the most popular investment vehicles in the last five years have been hedge funds. At the core, these investment approaches are essentially based on market timing. Although an unpopular word, market-timing or asset-allocation approaches are the perfect match for the offerings of trade-range-bound markets.
Static asset allocation mixes will no longer work. Pension plans should give ample consideration to whether their investment approaches are dynamic enough to benefit from what may prove to be a prolonged era of sideways trending financial markets.
Steve Hardy, president, Zephyr Associates Inc., Zephyr Cove, Nev.: I believe it has made little difference historically to the economy and the market whether a Democrat or Republican has been president. The reason being that aside from the partisan rhetoric, there is very little difference between the parties.
The Republican rhetoric is "smaller government, lower taxes and less regulation." What Republican president in the last 100 years has reduced the size of government? The only one who tried was Ronald Reagan, and even he couldn't do it. Past Republican presidents blamed their Democratic Congresses. Now we have a Republican president and Republican Congress and we also have record levels of government domestic spending. At least the Democrats are honest. They tell us they want to take and spend more of our money, and by golly they do it.
In this election, one obvious issue is taxes. If John Kerry is elected in November, get your bonus before year-end.
A less obvious result of a Kerry win has to do with how he handles Iraq and its effect on the economy and market. Those of us who were in the investment management business during the Vietnam War know the toll that war took on the market and economy (not to minimize the human toll). Vietnam taught us that you don't go to war unless you plan to win. I believe the surest way to turn Iraq into Vietnam is to elect Mr. Kerry.
As commander-in-chief he would inherit a war (like President Nixon) that he doesn't believe in and doesn't know how to exit. He has already told us that he would basically waste his time trying to build "coalitions" and holding "summits." No matter how badly he failed he could always blame it on George W. Bush.
Mr. Bush started this war. Let him figure out how to end it. It will be better for the economy, the market and most importantly for the U.S. soldiers and Iraqis.
Charles M. Elson, Edgar S. Woolard Jr. Chair in Corporate Governance and director of the John L. Weinberg Center for Corporate Governance, University of Delaware, Newark, Del.: Political elections, because of their inherently unpredictable nature, breed uncertainty. This year's hotly contested race in the United States is no exception to this rule. Both parties have called for starkly distinct approaches to various domestic issues. Oddly enough, however, one area that will probably not see great transition regardless of which party prevails in November will be corporate governance.
Neither party seeks substantial change in the reform-oriented direction seen in the past three years. Support for investor-oriented policies appears remarkably bipartisan. Despite some disagreement on the margins, particularly in the controversial shareholder proxy access and options expensing areas, no one seems to find fault with the basic notion of greater managerial accountability created by investor-allied, independent equity-holding boards of directors. And a mandate for auditing reform, demonstrated by the overwhelming congressional vote in favor of the Sarbanes-Oxley Act, has no serious opposition in either political party.
The same forces that initially inspire reform, the large institutional shareholders, buttressed by a broad-based public revulsion to the accountability-based scandals of the past few years, remain in place. And the simple logic underlying the reform — that better management monitoring by corporate boards leads to better corporate results — is pretty difficult to assail and seems to know no political boundaries.
What has always fascinated me about the corporate governance movement has been the incredibly diverse coalition of groups supporting it, from union and public pension fund managers, federal and state governmental and legal officials, to mutual fund executives, senior corporate management and significant private investors. These individuals are as diverse politically as they are economically, which probably partially explains the difficulty in sorting out how our two major political parties substantially differ on the issue. Thus, while Nov. 2 may bring change on a wide variety of important social and economic issues, corporate governance reform, in all likelihood, will not be among them.
Michael P. Barry, president, Plan Advisory Services Group, Chicago: If George W. Bush wins, expect continued pressure on defined benefit plan sponsors to increase funding; advocacy of a yield curve to solve the 30-year rate problem; a revision of the defined benefit funding regime to take into account the financial stability of the sponsor; and continued (but probably ineffective) advocacy of the administration's proposals for the Lifetime Savings Account and Retirement Savings Account.
Some in the Bush administration view the defined benefit system as a legacy — the challenge is not to "revitalize" it but to simply get current liabilities paid off. There is also a wing of the Republican Party that would like to reduce the employer's role in retirement savings generally — hence the advocacy of LSAs and RSAs.
If John Kerry wins, expect a less aggressive approach to defined benefit funding issues — Democrats like defined benefit plans. The yield curve proposal might be dropped. Action on company stock legislation (which of late has taken a back seat to defined benefit funding) is likely.
Don't expect any change on cash balance. The Bush administration has already adopted a "pro-employee" position. Major opposition to recognizing participant "expectation rights" in cash balance conversions comes from House Republicans, not the administration.
