On Taxing the Top 1%, Tapering and Forward Guidance, and the Blue Zones of Longevity – Part VI!

From: aditya rana
Date: Sun, Nov 10, 2013 at 2:15 PM
Subject: On Taxing the Top 1%, Tapering and Forward Guidance, and the Blue Zones of Longevity – Part VI!

Hi!,

Bill Gross, who co-heads the well known bond fund manager PIMCO, writes a monthly investment outlook which, in addition to articulating his views on prospects for bonds and other asset classes, covers a broad range of topics including broader economic and socio-economic issues. In his latest note, he makes the case for why it is time to increases taxes on the rich and reverse the growing inequality in the U.S. to achieve sustainable growth in the economy (http://www.pimco.com/EN/Insights/Pages/Scrooge-McDucks.aspx). To summarise:

-Instead of focusing attention on the large percentage of total taxes that the top 1% pay, the focus should shift to how much of the total income accrues to the top 1% – which has doubled from about 10% in the 70s to 20% today. This has largely resulted from riding a stupendous credit wave over the last three decades, rather than building it.

-Sure, people have worked hard for their success but the time has now come to pay higher taxes and supporting policies which favour economic growth and labour. The era of "taxing" capital lower than "labour" has drawn to an end, which implies higher taxes on carried interest and capital gains (readjusted to existing marginal income tax rates).

-While companies have grown earnings and earnings, their revenue growth over the last decade has been at a meagre 1% per annum. Profits have increased by cutting expenses (i.e. labour) and earnings per share have increased even more by using part of cash-flow to buy back shares rather than invest in plant and equipment (see chart below).

-This phenomenon applies at the country level as well – the five-year moving average of nominal GDP has slowed from nearly 7% to just above 3% over the last 10 years (see chart below). However, wages (i.e. "expenses") have declined from 47% of GDP to 43% over the last decade, while profits as a share of GDP have increased from 10% to 14%.

-Against this backdrop, the U.S. government (via the Fed) has been effectively engaged in a massive "share buyback" operation of a trillion dollars a year, with the buying of treasuries eventually funding the purchase of stocks and other risky assets rather than investment in plant and equipment.

-It seems that the recent prosperity of the U.S. and many other countries has been based on money printing, credit expansion and cost cutting rather than investment in the real economy.

-Ultimately, the long-term prosperity of a country depends on investment and demand for its products, not on financial alchemy.

-Investment (ex housing) as a percentage of GDP has declined from 14.6% to 12.2% over the last 13 years (see chart below) , while the net savings rate declined below zero before rebounding back a bit after the financial crisis. Low savings implies low investment which in turn implies low growth.

-The capital to fund the investment has to come from foreign investors, U.S. corporations and the top 1% – perhaps including a private-public partnership in a infrastructure bank to modernize airports, roads and water systems.

-Developed countries require relatively low income inequalities to prosper, and currently the U.S. ranks only 16th on the basis of a Gini coefficient for developed countries – barely ahead of Spain and Greece. Tax reform which equalizes tax rates on capital gains, carried interest and nominal income is essential to address the inequality issue and provide part of the capital to fund investment, resulting in higher long-term growth.

Succinct and to the point – it is clear that we have reached the end of an era of a rising share of income accruing to the top 1% of the population, and are now entering an era of wealth redistribution which will provide the basis for more sustainable (albeit lower) growth going forward. This applies not just to the developed world, but to developing countries as well. It is likely to be a contentious period, and countries which have a robust political system which allows for debate are likely to manage this transition process better than countries which do not. Fascinating times ahead!

Tapering and forward guidance:

With the stronger than expected GDP and employment data this past week, the market focus has shifted back to tapering of the Fed’s asset purchase program, possibly commencing in December. In this context, it is important to note that two of the Fed’s most senior economists presented two papers at the IMF meeting this past week, which signal a significant shift in the Fed’s thinking under Janet Yellen. As Gavyn Davies puts it:

"The first paper extends the conclusions of Janet Yellen’s “optimal control speeches” in 2012, which argued for pre-committing to keep short rates “lower-for-longer” than standard monetary rules would imply. The second paper argues that the Fed needs to act aggressively to prevent temporary damage to US supply potential (caused by a fall in demand) from becoming permanent. The overall message implicitly seems to accept that tapering will happen broadly on schedule, but this is offset by super-dovishness on the forward path for short rates."

"They imply that the first hike in short rates should be in 2017, a year later than before. More interestingly, they experiment with various thresholds that could be used to persuade the markets that the Fed really, really will keep short rates at zero, even if the economy recovers and inflation exceeds target. They conclude that the best way of doing this may be to set an unemployment threshold at 5.5 per cent, which is 1 per cent lower than the threshold currently in place, since this would produce the best mix of inflation and unemployment in the next few years."

The big question looming over the coming few months is how successful will the Fed be in shifting market focus from tapering to forward guidance that rates will remain very low for a long time. While this might create some turbulence in markets (as we saw during the summer), it is likely to be only temporary as the Fed will be forced to reverse course if we do get a significant sell-off in markets. As noted in a note earlier in the year, the requirement for QE has been declining with the falling fiscal deficit, so a tapering will not have a negative impact on liquidity in the market, while forward guidance on keeping short-term rates low for a long time will keep rates anchored and prevent a large increase. Lastly, as noted by Bill Gross in his October letter, a highly levered economy like the U.S. is unable to withstand higher rates (witness the sharp fall in housing starts and mortgage refinancing in the aftermath of the summer rate increases) in order to achieve a "beautiful deleveraging", and that history points to a low rate environment (for short to intermediate maturities) persisting for decades.

The Blue Zones of Longevity- Part VI:

This is the sixth part of the summary of the recent book: "Blue Zones: Lessons for Living Longer From the People Who’ve Lived the Longest" written by Dan Buettner, an internationally recognized explorer and educator. The Blue Zones are five specific towns or regions around the world, where people are up to three times more likely to live to be at least 100 years old, while remaining active, with a significantly lower rate of disease. The Blue Zones include the Barbagia region of Sardinia in Italy, Okinawa in Japan, the community of Loma Linda in California, the Nicoya Peninsula in Costa Rica, and the Greek island of Ikaria.

The final chapter of the book presents the "Power Nine" -the lessons from the Blue Zones, distilled from the world’s best practices in health and longevity and suggestions on how to optimize your lifestyle for a longer, healthier life.

-Start with completing the "Vitality Compass" from www.bluezones.com , a tool that asks you 33 questions and then calculates 1) your potential life expectancy, 2) your healthy life expectancy – the number of good years you can live, 3) the number of extra years you can expect to gain if you optimize your lifestyle, and 4) customized suggestions which can help you with the plan.

Research shows that if you stick with a new practice for as little as 5 weeks, it has a high likelihood of becoming a habit. For addictive behaviour (overeating, gambling, drug use) making it past 3 months significantly reduces the risk of a relapse.

-Start by picking the low hanging fruits from the Power Nine (not more than 3 initially) , and then gradually increase the number. Enlist a friend or family member in the program to hold each other accountable for the 12 week period. Don’t worry about the slip-ups and celebrate the small victories.

-Lesson 1: Move Naturally.

-Longevity stars don’t run marathons or become weekend warriors – they engage in regular, low-intensity physical activity, often as part of a work routine. Walking is the one activity which all centenarians do almost daily. Balance is also important (falls are a common cause of injuries and death and one in 3 adults over 65 has a fall) and just practicing standing on one foot every day can help. Yoga can help as well.

-Lesson 2: Hara Hachi Bu (Eat until 80% full):

-Okinawan elders, even today, have a daily intake of about 1,900 calories (Sardinians intake 2,000) – they eat until they are no longer hungry rather than eating until they are full. This also helps in losing weight – loosing 10% of your weight lowers blood pressure and cholesterol which are linked to heart disease.

-Avoid special diet programs – research shows that no diet program works for most people and 90% of people drop out after 6 months. The secret to eating right for the long run is emulating the environment and habits of the world’s longest-lived people – their food comprising whole grains, vegetables and beans has the same volume but 1/5th the caloric density of a typical western meal. We can eat 20% more or 20% less without being aware of it and this swing is the difference between gaining or losing weight.

-Weighing yourself daily is one of the best ways to keep your weight down over the long run (in a study – women who weighed themselves daily were 17 pounds lighter over 2 years than those who never weighed themselves).

-Eat slowly, focus on the eating, sitting while eating and eating early (biggest meal being midday or breakfast and a light early evening dinner) are all time-tested ways to lose weight.

-Lesson 3: Eat more plants and avoid meat and processed foods.

-Most centenarians in the Blue Zones had no access to processed food and ate meat only on special occasions ( few times a month). They ate what was produced in their gardens and fields- vegetables and whole grains (wheat, maize or rice).

-Six different studies of thousands of vegetarians show that restricting meat is associated with longer life. Research has demonstrated that humans over 19 years need only 0.8 grams of protein for every kilogram – which amounts to only about 50-80 grams of protein. Any excess protein cannot be stored, if not needed for activity it becomes fat. We can get our daily requirement of iron from fortified grains, and too much iron can generate oxygen-free radicals.

-Whole grains give us fibre, anti-oxidants, potential anti-cancer agents (insoluble fibre), cholesterol reducers, clot blockers and essential minerals. Beans (legumes) are associated with lower heart disease , less colon cancer, have healthy flavonoids and fibre and are a good source of protein.

-Nuts are an impressive "longevity food" – a large study of Seventh-Day Adventists showed that those who ate nuts 5 days a week ( 2 ounces per helping) had half the heart disease rate (and lived about 2 years longer) than that of those who rarely ate nuts. Nuts are a good source of monosaturated fats and soluble fibre (which reduce cholesterol) and Vitamin E.

-Eat 4-6 servings of vegetables daily, limit intake of meat to twice weekly in small quantities (a deck of cards), make beans the centre-piece of meals and eat nuts daily (a word of caution – 2 ounces of nuts has 400 calories).

To be continued!

Here’ to adopting the Power Nine into your life- gradually!

Regards,

Aditya

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