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Wien’s World: Another Billionaire Detached From Society

Lance Roberts
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Byron Wien, Vice Chairman of Blackstone Advisory Partners, LP and senior advisor to the firm, recently penned an interesting article entitled "Exploring 4 Myths."

Within the first part of the article Byron discusses the viewpoint of the decline of American exceptionalism:

"There are some good reasons for this belief. In 1947 America accounted for half of the world’s GDP; that percentage has declined to 24% now, but the global GDP is much larger. Europe and Asia, which were devastated after the war, have fully recovered. China has risen to become the second largest economy in the world from being virtually pre-industrial in the 1940s. There is a widespread belief that the mobility of Americans has declined: children born to those in the bottom two quintiles of income are likely to remain there, and the same is true for the top two quintiles. Even though America boasts many of the best universities in the world, our public school system has produced disappointing results. The United States spends more per pupil than only three other countries (Norway, Switzerland and Luxembourg), according to an OECD study of 34 systems, yet it is in the middle of the pack in reading and in the bottom half in science and mathematics. There are many other measures that would support the view that America is no longer the “exceptional” country it once was, but I thought I would explore whether there were some offsetting positives that might result in a different conclusion."

The decline of American exceptionalism is due to several factors that can never be replicated. Following World War II, there was little left of Europe and Japan in terms of manufacturing and industrial capacity. The U.S. was the beneficiary to a world ravaged by the war that needed rebuilding. However, as the world matured and became self-sufficient once again, that manufacturing "hub" shifted to lower cost labor sources. As globalization, due to increased efficiencies and communications due to technology, gained traction the need for America's "exceptionalism" became much less important. The chase for financial profits at the expense of real economic prosperity became the new "American dream." This can be clearly seen by the chart below of corporate profits as a percentage of wages as compared to GDP.


However, the advent of financial engineering and the chase for corporate profitability beginning in the 1990's has been a huge boon for stock market asset prices.


This is why Byron's supporting evidence that America remains exceptional is based solely on the financial components of the American economy:

  • Stock market has risen by over 200%
  • Dollar has risen sharply (only because the rest of the world has won the "crash the currency" game)
  • GDP is 12.9% above its 2009 trough (sounds much better than 2.15% annual growth)
  • Residential construction and exports are higher than those of the Europe and Japan
  • Unemployment has declined significantly (he ignores shrinkage of labor force participation)
  • US accounts for 52% of worlds publicly traded equities
  • EPS growth has been the best in the U.S. (Thanks to massive stock buybacks due to low interest leverage)

All of these factors, while certainly positives, are NOT what makes a country exceptional. This is particularly the case when all of these factors, in one form or another, have been impacted by massive monetary interventions or Governmental support programs. Artificial boosts in activity are not the same as organic growth.

However, an exceptional economy, one where the vast majority of its citizenship is benefitting from its increase, is far different from a exceptional stock market that only benefits the top 10-20% of the populous that have liquid assets available to invest. Or, in Byron Wein's case, those in the top .01% that are directly compensated by surging assets prices. For him, in particular, a surging stock market and his "personal economy" are indeed one in the same. That is not the case for the vast majority of Americans as I discussed previously:

"While the mainstream media continues to tout that the economy is on the mend, real (inflation-adjusted) median net worth suggests that this is not the case overall."


 "'Savings are depleted for many households after the recession,' it found. Among those who had savings prior to 2008, 57% said they'd used up some or all of their savings in the Great Recession and its aftermath. What's more, only 39% of respondents reported having a 'rainy day' fund adequate to cover three months of expenses and only 48% of respondents said that they could not completely cover a hypothetical emergency expense costing $400 without selling something or borrowing money."

"Of course, for those in the top-10% of wage earners - 'it's all good.'"


However, he does go on to make a reasonably "bearish" case for the financial markets:

"As we have all learned over time, sometimes painfully, an exceptional economy, just as an exceptional stock, does not always mean exceptional investment performance. Markets and stocks become overvalued, and many think the strong performance of the U.S. market over the past several years means that the indexes will have lackluster performance or even suffer a decline. The bull market has lasted 72 months; the average since 1950 has been 57 months. Investor sentiment is very optimistic, which is usually a danger sign. Interest rates are likely to trend higher, usually a market negative. Finally, earnings are important drivers of stock performance, and overall S&P 500 and company earnings estimates are being marked down. Many companies are guiding analysts to lower their estimates even further."

But then dismisses his own case with one simple argument:

"In spite of this, I believe 2015 will be a favorable year for U.S. equities, primarily because market valuation, in my view, is not excessive."

Really? With both Tobin's Q Ratio and P/E valuations pushing their second highest level in history, it is hard to suggest that valuations are not even just a little bit excessive. When a company like "GoDaddy" which has been in business for 18 years and has generated no profits is the next "hot" IPO, valuations might be just a bit optimistic.


Or, as John Hussman recently penned:

"The chart below shows the ratio of market capitalization to final sales (gross value added) for non-financial companies. (See Do the Lessons of History No Longer Apply? for a broader range of historically reliable and similarly overextended measures.)"


"It’s tempting to assume that the “normal” level of valuations has simply increased over time, and that presently rich valuations have no implications for expected stock market returns. But even a cursory examination of market returns argues otherwise. While annual market returns always vary considerably over the market cycle, stock market returns in the pre-bubble period averaged 10-12% annually as a result of the lower average level of valuations. In contrast, the S&P 500 has enjoyed average annual nominal total returns of less than 4% since the 2000 peak, and even then, has only achieved those returns thanks to a bubble advance that has taken valuations back to similar extremes."

Of course, for Byron, who directly benefits from rising asset prices, he certainly has motivation to see the silver lining to every cloud. And even if he is wrong, and asset prices plunge, we will continue to be compensated rather handsomely.

However, for the rest of working "smurfs" who are trying to "save" our way into retirement, we are not afforded such luxury. The failure to correctly assess the risk of the financial markets at this particular juncture will have a meaningful impact on the ability to meet retirement goals as projected.

The American economic and financial landscape is vastly different than it was following World War II. The wealth gap between the rich and the poor has shifted sharply to the upper 10% of the population. For that group, the economic picture is considerably brighter than for those in the bottom 80%. For Byron, whose personal net worth is in the billions, this is truly a "Picasso economy," for the majority of everyone else it is more like a "starving artist sale." 

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