Two Election Winners

Two Election Winners
David R. Kotok,
November 5, 2014

Two winners emerge after the election.

One is the Gini coefficient. It measures the income divide of the population. It has been widening. Those at the top income level have improved their wealth. The middle income level has been eroding and is experiencing some pressures because of it. And, the lower income-level cohort has arguably grown in numbers and is confronting a host of issues.

The Gini coefficient’s upper levels rejected increased taxation and experienced an anti-business attitude conveyed by Washington. They voted.

The lower levels stayed home. They elected to give up and not participate. The pundits are busily debating why.

The middle level was promised a lot of attention and support but did not receive either. The polls show they do not approve of either party. Many despise Washington. When faced with election choices, they elected to reject six years of old and worn promises with no delivery. The Gini coefficient tells part of the election story.

The second winner is the labor participation rate. It has been falling for 15 years. It peaked when the dot com era attracted an extra 1.5 to 2 million folks into the labor force to participate in businesses that were new, exciting, and in many cases not profitable. Those businesses were funded by speculative equity money. Most of them subsequently collapsed. The jobs they had generated also collapsed. Since the tech bubble, the labor participation rate has been in a constant decline. Since the financial crisis of 2008–09, it has accelerated downward to levels not seen since the 1970s.

The US also has record numbers of people receiving permanent disability benefits. We have not seen any breakdown of voters by disability category, so we don’t know how they voted or if they voted. We are only guessing that they did so with a sense of insecurity about the status quo.

Meanwhile, the US has an older population worried about future income and financial security. Older Americans have experienced financial repression because of the sustained very low interest rate policy. Any older, retired saver and investor who voted yesterday did so with the experience that a 5- or 10-year bank CD has rolled over into the new interest rate environment. Twenty-five million Americans know that their old 5% and 6% municipal bonds have rolled over into 2% and 3%. We do know that the older voter turnout was high and voted decisively against more business as usual in Washington.

The result of this election may have been foretold in the economic statistics that we see. The Gini coefficient gave us guidance. So did the declining labor participation rate.

Cumberland Advisors’ clients, staff, consulting professionals, and network of colleagues in financial services are involved in daily business activity at the upper level of the Gini coefficient. Our daily does not often encounter victims of a declining labor participation rate. Most of our clients work if they choose to do so. We are in the business of managing portfolio assets.

Poor people do not have portfolio assets. Those with middle-class incomes have limited portfolio assets and are worried about them. The top level of the Gini coefficient has had a remarkable recovery in asset values. The middle class and the poor have not.  That widening of the Gini coefficient worries us.

This election outcome was about the divisions within our society. Those divisions will continue for the next two years. They are likely to be just as profound in 2016. That presidential race started in earnest last night.

Let’s get to the business issue. We remain fully invested in the US stock market in our exchange-traded fund (ETF) strategies. We believe US and worldwide stock markets have an upward bias. We continue to see the short-term interest rate at very low levels worldwide for an additional period of months or years.

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David R. Kotok, Chairman and Chief Investment Officer