Tuesday, July 21, 2015

Rising wealth inequality can be explained by asset inflation

Bloomberg News recently noted-
"Even though wages are improving, the rate of growth in what companies pay employees pales in comparison to what stocks have handed investors over the last six years. In fact, with equities rising 20 percent annually and wages up 2 percent, the gap has never been wider in any bull market since 1966."
 “Earnings have been so strong in part because wage growth has been so weak" said Mark Zandi, chief economist at Moody’s Analytics Inc. in Philadelphia.

Bloomberg also quotes Michael Shaoul (I visited Israel recently with Michael, who is CEO of Marketfield Asset Management, worth US$10 billion), who opined that the gap between wages and stocks since 2009 is partly a statistical illusion that reflects the severity of the bear market and how little wages fell during the credit crisis.

According to Shaoul, a comparison of their respective growth rates since 2000 or 2007 (I should point out that these were peak years in stock prices) shows pay rising more closely with shares. As with all statistics, he says, “A lot of this depends on starting points…. Time is the main ingredient missing with regards to this wage cycle. Many factors are coming back into the employees.”

I fully agree with Shaoul that all statistics depend for their meaning “on starting points.” Furthermore, statisticians can show anything they want with statistics, but I need to remind Shaoul that we can take practically any starting point over the last 50 years and show that an inflation-adjusted total return index (including the reinvestment of dividends) has vastly outpaced real median wage growth.

Furthermore, it is easy to show that, even in nominal terms, wages haven’t kept pace with the rise in the S&P 500 Index (not the total return index, which would include dividends) if we look at how many hours of work are needed to buy the S&P Index.

From the figure, it is clearly visible that, aside from the 1966-1982 period when workers had the upper hand because their wages rose while the S&P 500 was flat and declined in real terms, workers’ salaries haven’t kept pace with the rise in the S&P Index (and even less so with the S&P inflation- adjusted total return index).


So, as much as I like Michael Shaoul, as much as we enjoyed travelling together through Israel and on to Petra (Jordan), and as much as I agree that with statistics everything “depends on starting points,” in this particular instance all the evidence would suggest that part of the wealth inequality can be explained by the huge asset inflation we have had since the early 1980's.

Furthermore, it is easy to show that, even in nominal terms, wages haven’t kept pace with the rise in the S&P 500 Index (not the total return index, which would include dividends) if we look at how many hours of work are needed to buy the S&P Index.