A Large Middle Class Isn’t Necessarily Normal


By David Merkel of Aleph Blog

This is not likely to be a popular post.  Just warning you.

I have a bias that modernity is more fragile than commonly believed.  One aspect of that is income/wealth distributions.  Inequality was far more pronounced in the past, and was fairly stable in being so.  So why should the last 150 or so years not be viewed as a possible aberration?

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Let me give you five or so reasons why the middle class should shrink:

1) Education — middle classes in the developed world were relatively large when the education systems produced a large portion of the educated people of the world.  That is no longer so, and relative education levels have tipped against the US.  Any surprise that we fall behind?

2) Lazy choices for majors/jobs — “follow your bliss” is stupid advice if no one wants to fund your bliss.  All prosperity comes through serving the needs of others.  Follow their bliss, not yours, and you will do well.

3) Technology — some technological advances aid equality, and some aid inequality — we have been getting more of the latter lately.  If a technology aids one person to serve many at low marginal costs, it will aid inequality, unless the technology is broadly shared and used.

4) Global Conditions — Resources are scarce.  Capital is somewhat scarce.  Unskilled labor is not scarce.  Skilled labor is somewhat scarce.  For those that have not prepared themselves to be productive by having needed skills, it is a tough time.  You won’t be carried along by the prosperity of your nation, because there are many others competing against you overseas, which was not true in the 50s, 60s, and 70s.  (Nor even the 80s and 90s, in degree…)

5) Personal Ethics — Societies that tolerate many children conceived out of wedlock, and no-fault divorce create an underclass of poor women with children, and the children are far less able to compete because they have no father figure.

6) Politics won’t change things — this is yet another hard reality.  People may vote, but money/resources “vote” more.  Especially in societies where education has slumped, power gravitates to those that will better the whole, even if it means the elites get more.

Someone please send the memo to the “Occupy” crowd, and tell them that have succeeded at being the “freak show” amid changing times, but utterly irrelevant to the changes happening around the globe.  If they have jobs, get to them, if not, go find one.  You might be relevant then.

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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