Good Morning,

It is getting dicey out there for investors, although stocks eked out a modest rise on Friday.

U.S. equities have been bouncing around lately. And the trend has been predominantly lower. Although it hasn’t been the sort of dizzying tumble for equities that would elicit an instant spike in fear, it has been, however, the kind of plodding descent that has the Dow Jones Industrial Average down nearly 300 points since the end of July.

In fact, the Dow and the S&P 500 index are on the verge of tallying three straight months of declines, with October shaping up to be the ugliest monthly fall since January—the month after the Federal Reserve raised rates for the first time in a decade. (Friday’s jump on better bank earnings will have to be factored after the close.)

Our Take: Nothing new this week as economic data was neither great nor poor. Lack of consensus at the Fed about what to do with rates continued. More than 80 S&P components are scheduled to report next week, including Bank of America, streaming giant Netflix, BlackRock, Goldman Sachs and United Continental and so the direction of fourth-quarter estimates will need to be observed. Look for strength in banking and technology.

This week, I found myself thinking about ethnic nationalism’s link to global economic weakness and the rise in inequality.

What got me thinking about this was the response an audience member got from Trump at the Presidential debate last Sunday when she essentially asked what it meant to be Muslim in America. Trump’s campaign has suggested that there is something wrong with Islam in America. Although fighting labeling with labeling isn’t ideal (“basket of deplorables”) we must ask: What is causing many among us in the developed world to retreat into hate and fear?

I’ve touched on this in other newsletters but this week I came across an excellent piece by Yale Professor Robert Shiller which goes a long way in addressing this issue.

Across the world economic growth (GDP) has been inching along at a reduced pace since the recession began in 2007. Combined with another factor: rising inequality, along with considerable fear about future inequality we get ethnic nationalism.

Looking at the data earnings for workers have been basically static since 1979 with the TOTAL INCREASE since then standing at 1.2 percent or 0.03 percent a year. The issue is that most of these miniscule gains have been going to the very top earners not the median wage earner. So we have a situation in which roughly half of full-time wage earners are doing less well in real terns than their parents.

Shiller draws on work from Ben Friedman from Harvard to say that although most people aren’t familiar with such data they are aware of what they personally are being paid.

If they realize that they are doing less well than their forebears, they become anxious. If they can’t see themselves or others in their cohort, especially their children as progressing over a lifetime, their social interactions often become angry, resentful and even conspiratorial.

Ethnic nationalism creates an ego-preserving excuse for self-perceived personal failure: Other groups are blamed for bad behavior and conspiracies.

There is a major shift going on moving economic power away from the working class. (Perhaps the “working class” is also expanding in size) and even those who have not lost out yet in terms of economic power are fearful that they might.

Why? The forces resulting in greater inequality: technological advances and low interest rates are not slowing down.

Interestingly, Shiller cites a 2015 study published in The American Economic Review by Michael Kumhof of the Bank of England, Romain Rancière of the International Monetary Fund and Pablo Winant of the Bank of England who found that both the Great Depression of the 1930s and the Great Recession of 2007-9 had their origins, in part, in rising inequality.

Before both these difficult periods low to middle income people borrowed more to maintain their standards of living. There was a shame that developed as the borrowing intensified. Are we seeing the same today? The ethnic nationalism we are witnessing may simply be a symptom of a powerful shame, mixed with fear and disillusion that is percolating in certain hearts and minds.

What can be done? Does the system have to go through a major shock to find another way? Will disaster be necessary to pave the way to change? Could fiscal stimulus be enough? A hand-out? In any event the next President (Repub. Or Democrat) will face a daunting problem that doesn't appear to be improving. For investors, we should be mindful of what credit markets are telling us (subprime borrowers are falling behind on their car loan payments at the highest rate in more than six years) and what history has (*we hope) taught us.

Thought of the Week

"A man willing to work, and unable to find work, is perhaps the saddest sign that fortune's inequality exhibits under this sun." - Thomas Carlyle

Stories and Ideas of Interest

Millennials don’t care about money. Oh wait they are just like everyone else and do. Interesting study done by American Advisors Group demonstrating that millennials have some things in common with boomers after all.

Reading novels teaches us humanity. Literary fiction improves our ability to comprehend that our beliefs and desires might not be the same as those of others. Interesting piece chronicling how literature has changed attitudes throughout history. Furthermore, what you spend your time reading changes your brain. Seriously, our sound bite culture is destroying our brains…

Where is tech headed? Reading a startup’s bio doesn’t usually make for interesting reading yet in aggregate, company descriptions reveal important trends shaping technology and innovation. CB Insights mines the data and identifies which technologies are trending up and which are falling out of favor. Finally….. “social” and “apps” are on the decline (bye bye Twitter) as well as “solar” and “Microsoft”. “VR” and “AI” are hot….

Silicon Valley isn’t visionary. ReCode on why today’s tech entrepreneurs are too busing trying to fix things that aren’t broken. How about more of a focus on things that are broken: Health care, education, homelessness and poverty, food waste, climate change....

Slow down on the happiness juice. The Economist puts forward the argument that companies that try to turn happiness into a management tool are overstepping their mark. Zappos is so happy with its work on joy that it has spun off a consultancy called Delivering Happiness. It has a chief happiness officer (CHO), a global happiness navigator, a happiness hustler, a happiness alchemist and, for philosophically minded customers, a happiness owl. Seriously? Great article here in Quartz suggesting that we weren’t meant to be happy all the time anyway. In fact, perpetual bliss may completely undermine our will to accomplish anything at all….

All the best for a productive week,

Logos LP