Feb 18/15 – Don’t you (forget about me)

2015-02-18 10am EDT  |  #Greece #inequality #John Hughes #stocks #The Breakfast Club

This week-end John Hughes’ classic movie The Breakfast Club marked its 30 year anniversary. Although many great coming of age teenage movies have been made throughout the years, there is nothing that compares with The Breakfast Club. It probably doesn’t hurt that in February of 1985 when it hit the big screens, I was fourteen and a half years old and in the midst of my prime teen angst age. But even today when I watch Claire, Andrew, Brian, Allison and Bender spend the morning serving detention together in the Shermer High School library, I am struck by the brilliance of the movie.

For those who haven’t seen the movie, it is all shot in one location; at a local high school where five students, all from different cliques, gather to spend the morning serving detention. The principal instructs them not to speak, and assigns them a 1,000 word essay in which they are to describe “who you think you are.” Of course he then leaves the students basically alone for the entire movie. During the next nine hours the kids spend the time talking, arguing, dancing, falling in love and getting high. Doing everything except writing their 1,000 word essay.

At the end of the movie, as the kids head home after serving their detention, the Principal finds a single short essay left on one of the desks.

The movie is all about the kids realizing that their assumptions about themselves and each other were all wrong. Of course it is a little hokey that they can figure this out in the space of a day, but hey – after all, this a teenage coming of age movie – it’s supposed to be a little hokey.

Last summer, I argued that we had hit peak inequality (see this post). Since then, just like the kids in The Breakfast Club, I believe that the public has continued to realize that their assumptions about how society is run are flawed.

Over the past couple of decades, there has been a worshiping at the alter of crony capitalism. The people with power have ensured that the 0.01% takes an ever increasingly larger share of the spoils. Before you label me as some radical left wing nut job, make sure you understand that I believe strongly that capitalism and free markets (with a strong social safety net) are the best way for society to distribute resources. But the last decade has made a mockery of the idea that markets are free and that the ultra-rich don’t organize the rules to favour themselves at the expense of the little guy. How we can bail out the banks yet stick it to the average Joe is beyond me. I have been wondering how long this could continue. How much could the 0.01% take before the masses realize they are being fleeced.

But as I like to say, what should be done is irrelevant, all that matters is what will be done.

So whether you disagree with my analysis about whether the 0.01% have abused the system, is not really the issue. The only thing that matters is what is happening today.

When I look around I see signs that the majorities have experienced an awakening much like the kids in The Breakfast Club. They are realizing that the people in charge don’t have all the answers. There is a coming of age for the average citizen.

There is no better example than the Greek situation. The idea that the status quo of cutting your way to prosperity has been finally chucked out the window. The EU would love to continue with the current game of extend and pretend. They would love to continue to be the principal with all the power over the students. Nothing would make them happier than allowing the current situation of the rich getting paid at the expense of the little guy to continue indefinitely. Now don’t misunderstand me, I am not a big fan of societies refusing to pay their debts. But the money is already gone, and trying to get the Greeks to pay it back is simply burdening the little guy.

The important part to realize is that the majority has finally come to the conclusion that they can actually stick it to the man. This is a huge deal. It represents a monumental change in attitude. The 0.01% have lost control in Greece, and this about to play out all across the world.


And it’s not just Europe. Have a look at the minimum wage changes for 2015 and beyond for the various US states:

These are some big changes. This represents a massive shift away from the old attitude.

Even in China, the people in power realize that they cannot continue to plunder while the masses struggle to survive. On top of a fierce crackdown on corruption, there has also been an attempt to equalize the pay scale:

China has raised salaries for public employees sharply this year, after they had been frozen for years and after government officials had been leaving their jobs because of low pay.

It is the first time since 2006 that civil servants have received a salary increase.

The Ministry of Human Resources and Social Security said on Monday that the three notices issued on Jan 12 cover all civil servants, from village level to national level.

According to the plan, all civil servants will get a raise. The basic monthly salary for national-level officials, who are the seven members of the Standing Committee of the Political Bureau of the CPC Central Committee, including President Xi Jinping, will increase from the current 7,020 yuan ($1,130) to 11,385 yuan, a raise of about 60 percent.

A reversal in this trend has been a long time in coming. Have a look at this chart of wages as a percentage of GDP in the US over the past half a dozen decades:

The average Joe has been earning a smaller and smaller share of the economy.

Meanwhile, during this time, corporate profits as a percentage of GDP have been hitting new highs:

I believe that these two graphs cannot continue their current trend, and that the signs of a potential reversal are staring us in the face. Combined with the rock bottom interest rates that will eventually rise, I think there are some secular headwinds that will make stock gains difficult.

But hey, so far I am completely wrong. The stock market does not agree with my analysis. Even on a micro basis as the Greek government refuses to fold, the market continues to believe that somehow the current game will continue. Contrary to every signal emanating from the Greek talks, the market just keeps painting it in the most positive light.

Maybe I am wrong. Maybe the 0.01% will find some way to continue to pull the wool over the rest of society’s eyes. Somehow the people in power have convinced the public that bailing out the banks of their reckless behaviour while continually cutting services to the public makes sense. Or that waging wars overseas is a better use of money than upgrading infrastructure or spending money on education. They cloak their selfish policies in guise of being true to capitalism.

Yet their policies are anything but true to the values they espouse. But the public is waking up to this reality.

Remember as traders, our job is to not worry about what should be done, but to focus on what is being done. The market is so far ignoring all the signs of the shifting balance of power, but don’t count on that lasting forever. Sometimes some of the greatest trades are staring right at you, as obvious as the nose on your face. I think this might be one of those times…