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Zach Tripp
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Certified program manager (PMP) with a background in engineering. Fundamental investor who's portfolio consists of buy-and-hold dividend growth companies, growth companies (short-term) and index fund portfolio management (retirement / long-term savings).
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  • The Minimum Wage Debate By The Numbers & Plan To Permanently Fix

    The next election cycle of mid-term elections followed shortly by the presidential election has started, and one of the key issues being cued up is the federal minimum wage. President Obama has requested an increase in the minimum wage from $7.75/hour to $10.10/hour in his 07-Mar-2014 (link) weekly address. This seems much more palatable than some of the other recommendations, like that of Senator Elizabeth Warren (D-MA), who believes the federal minimum wage should be as high as $22/hour (link).

    Without getting into the debate around the merits of the federal minimum wage, I would like to discuss whether the current federal minimum is reasonable, meaning, has it kept up with inflation? If the federal minimum wage keeps up with inflation, the minimum wage worker keeps his or her purchasing power over time. The following graph shows the federal minimum wage since 1978.

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    Here is the Consumer Price Index for all urban consumers since 1978.

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    The following is a series of graphs that show what the minimum wage should have been if it were adjusted for inflation (CPI-U). I show each federal minimum wage increase as a starting point. Naturally, since the federal minimum wage has been unchanged since July 2009, it has not kept up with inflation. The rest of the graphs are a better representation of the inflation-adjusted federal minimum wage.

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    Even when using the hyper-inflationary period of the later 1970s as a starting point, the inflation-adjusted minimum wage is still not as high as President Obama's request for $10.10/hour. It does come close though. If you use January 1978 as your starting point, the inflation-adjusted federal minimum wage would be $9.97/hour as of December 2013. I will have to admit that "ten-ten" is a snappy campaign slogan and makes it much easier for everyone to remember.

    What if you use a long time frame that is representative of current (recent) inflation? A good starting point would be July 1983, which is the date the CPI-U is set to 100.

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    The current federal minimum wage is still within a $1.00/hour of the inflation-adjusted minimum wage.

    There should be two main reasons for increasing the federal minimum wage. The first is that the wage itself is not high enough to support a certain lifestyle or level of expenses. The second is that the federal minimum wage has become too common as a salary for workers, meaning employers are paying only the minimum wage and nothing more. Increasing the federal minimum wage "forces" a pay raise for those workers. I am not going to address the first issue (and I am not going address the creates-or-destroys-jobs issue); I am not an economist and I am not going to play one here. The federal government does publish some data that can address the second concern, though.

    Below is a graph that shows the percent of wage and salary workers receiving the federal minimum wage.

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    Interesting results. The percentage was essentially flat from 1978 to 1983, probably because of the recessionary nature of that period and transitioning from the high inflationary period. Even though the federal minimum wage was unchanged from January 1981 to April 1990, the percentage of workers getting paid that rate decreased steadily from 1983 to 1990. Phrased another way, more and more workers were being paid more than the federal minimum wage. Is the increase in the percentage of workers receiving the federal minimum wage in 1991 a result of the increase in the federal wage from $3.35/hour to $3.80/hour in 1990? Followed by an increase from $3.80/hour to $4.25/hour in 1991? Well, yes and maybe. Yes, because if a worker was making $3.80/hour in January 1990 (13.4% over the federal minimum wage), he would be making minimum wage after the increase. Maybe, because the increase is also probably due to the recessionary period of that time. It does appear that during economic expansion, workers get paid more than the federal minimum wage.

    Conclusion / Recommendation

    You can see from the graphs that there have been long periods with no increase in the federal minimum wage, but since those periods were during times of economic expansion, it did not matter because workers got paid more (decreasing the number of workers receiving the federal minimum wage). When the next recession hit, so did the number of workers receiving the federal minimum wage, but, the federal minimum wage increases (for the most part). As opposed to having unpredictable increases in the federal minimum wage and increasing it during recessionary periods (when businesses can absorb it the least), I recommend we set a schedule for the increase, like every five years, and have it adjust according to the Consumer Price Index for all urban consumers (CPI-U).

    Here is a representative example of such an automatic increase in the federal minimum wage.

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    Here is the same graph with the actual federal minimum wage included, but the CPI-U data removed for clarity.

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    Using a long time frame that is representative of current (recent) inflation, the proposal to adjust the federal minimum wage every five years to match CPI-U would look like the following.

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    I feel this plan for adjusting the federal minimum wage every five years to match CPI-U is valid and would help employers properly plan for such an increase (like McDonald's (MCD), Wal-Mart (WMT), Aramark (ARMK), Macy's (M), Kohl's (KSS) ), would ensure the federal minimum wage kept up with inflation over the long term, and would remove federal minimum wage from the political arena.

    Disclosure: I am long MCD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: ARMK, KSS, M, MCD, WMT, economy
    Mar 17 2:51 PM | Link | Comment!
  • Income Inequality Math

    The President made more comments in regards to income inequality during his State of the Union and again during his budget release.

    It is not that I don't think income inequality exists, I wonder if it is natural. Is income inequality just a function of math?

    For example, you have two families, Family 1 and Family 2. Family 1 has a take-home pay of $100,000 per year and Family 2 has a take home pay of $50,000 per year. Both families have firm budgets and live within their means. Both families invest 5% of their take home in dividend producing securities. Matter of fact, they invest in the exact same stocks at the exact same time.

    The stocks have an initial yield of 3% at the time of the investment and between dividend raises and the effects of compounding, the distributions increase by 5% per year.

    After ten years, family 1 has an income of $1,887 per year and family 2 has an income of $943 per year.

    Is this income inequality? Does family 1 has too much dividend income? Or is it just a function of math. More disposable income that can be saved or invested and have the potential to grow over time?

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    Mar 07 11:32 AM | Link | Comment!
  • Diversified ETF Portfolio Performance For 2013-Q3

    Here is a "better late than never" update of my diversified ETF portfolio for Q3-2013. As a reminder, here is the past performance of this portfolio, with and without quarterly rebalancing.

    Q1 Performance: (link)

    Q2 Performance: (link)

    Overall, this portfolio still underperformed the S&P 500 (as measured by Vanguard's S&P 500 Index Fund ETF, VOO). The S&P 500 was up 5.52% for the quarter (including dividend reinvestment). All holdings except the Equal Weight S&P 500 ETF (RSP) underperformed the index.

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    The portfolio as a whole gained only 2.68% as compared to the 5.52% of the S&P 500. The income-producing REIT Index (VNQ) underperformed as investors continued to shift allocation away from income-producing equities. The yield on the 10-year treasury continued to rise as "taper talk" became louder. Pundits even talked themselves into thinking the Federal Reserve was going to start the taper in September 2013 (which it did not).

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    Even though being weighted toward yield-producing ETFs (an interest rate-sensitive market such as Emerging Markets [VWO] ) has hurt overall capital appreciation, the effective annual yield of our portfolio continues to be greater than that of the S&P 500: 3.54% as compared to 2.21% for the S&P 500 Index fund.

    So far, rebalancing quarterly has not helped a whole lot. As I've sold the Equal Weight S&P 500 ETF, which has been performing better than the S&P 500 index, the overall portfolio performance has lagged in the near term. The performance of Emerging Markets this quarter does show the power of rebalancing, however. In the regular portfolio, Emerging Markets was up a respectable 4.33%. In the rebalanced portfolio, it was up 10.58%.

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    Overall, the rebalanced portfolio was up 1.55% as compared to 2.68% for the traditional portfolio and 5.52% for the S&P 500 ETF for the quarter.

    For rebalancing, this quarter I sold Business Development Companies (BDCS) and Emerging Markets (VWO) and bought Equal Weight S&P 500 (RSP), REIT (VNQ), and Bonds (BOND).

    Year to date, the S&P 500 is up a very impressive 17.56%, the traditional portfolio is up 4.03%, and the rebalanced portfolio is up 2.24%.

    Summary of the non-rebalancing portfolio:

    Summary of the rebalanced portfolio:

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    The end of the year is quickly approaching. I will provide an end-of-the-year summary in a more timely manner. Happy New Year to everyone.

    Disclosure: I am long BDCS, VNQ.

    Dec 30 2:10 PM | Link | Comment!
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