Wall Street’s unlikely populist prophet

Democrats take heed: When a Wall Street asset manager with more than $1 trillion under management starts talking…

Democrats take heed: When a Wall Street asset manager with more than $1 trillion under management starts talking about a populist movement sweeping the country, you know you’re on to a good thing.
Unlikely as it sounds, that’s exactly what Bob Doll, vice chairman and chief investment officer for equities at New York-based BlackRock Inc., said last week at a general session of the American Bankers Association’s Wealth Management and Trust Conference in Orlando, Fla.
Displaying charts showing a steady decline in workers’ compensation contrasting with a dramatic rise in corporate profits, Mr. Doll warned attendees at the annual gathering of the Washington-based trade group that the two statistics represented a catalyst for a “populist renaissance” that could affect the markets over the next few years. Specifically, he predicted that populist political victories could result in an increase in protectionist trade policies in the United States.
Overall, Mr. Doll took a measured view of equity prospects, noting the “Goldilocks economy — not too hot, not too cold.” Low global inflation was “the most bullish” trend for investors, he said.

Who’s getting what
Expect even more fireworks about class warfare from an outraged political left and a defensive political right.
Just three days after Mr. Doll’s prediction about rising populism, the New York Times ran a front-page story headlined “Income gap is widening, data shows,” by its Pulitzer Prize-winning economics reporter David Cay Johnston.
According to new tax data from the Internal Revenue Service, Mr. Johnston reported, income inequality grew “significantly” in 2005, as Americans with incomes of more than $348,000 — the top 1% of taxpayers — received “their largest share of national income since 1928.”
Per person, the top group — comprising 300,000 taxpayers — received 440 times as much income in 2005 as the average person among the bottom 150 million American taxpayers, nearly doubling the gap from 1980, according to the data.
“If the economy is growing but only a few are enjoying the benefits, it goes to our sense of fairness,” said Emmanuel Saez, an economist from the University of California at Berkeley who analyzed the IRS data. “It can have important political consequences.”

Carry that weight
Allan Sloan, Wall Street editor for Newsweek magazine, did some digging of his own into data relevant to the high end of the income spectrum last week.
Writing in The Washington Post, Mr. Sloan poked into the more than 300 pages of public-offering documents released by The Blackstone Group, a New York-based private-equity firm. It turns out that the firm’s “carry” — or portion of its investors’ profits it keeps as a fee (usually 20%) — is a whopping $1.55 billion, more than two-thirds of Blackstone’s “economic net income” of $2.3 billon.
The enormous “carry” figure, called “net gains from investment activities,” by Blackstone, is sure to get the attention of the Internal Revenue Service and Senate Finance Committee, since the “carry” income apparently is treated by hedge funds as capital gains — taxed at a 15% federal rate — rather than as ordinary income, which is taxed at 35%.

Correction warning
If you thought last month’s market jolt was unsettling, you ain’t seen nothing yet, according to William Rhodes, senior vice chairman of New York-based Citigroup Inc. and chairman, president and chief executive of its Citibank division.
A market correction is coming in the next 12 months, and “this time, it will be a real correction,” he wrote in a Financial Times column last week.
The United States is seeing lagging inflation and slower growth, Mr. Rhodes noted.
But the biggest worry of market makers and regulators, he said, will be the “coming adjustment and possible destabilization effect” that hedge funds, private-equity and credit derivative players may have on “the functioning of international markets as liquidity recedes.”