Are You in the 1%?

I have been in the much-talked-about and often despised 1% for most of my adult life.

I started my relentless march towards wealth and financial independence when I was 11 years old and landed a job delivering newspapers for the Los Angeles Herald Examiner, an old Hearst rag, earning $30 a month.

I’ll never forget the weight of 30 pounds of newsprint on my shoulders as I delivered them around my neighborhood in the dark on my Schwinn bicycle.

I eventually got fired because I found the stock pages so enthralling that I was always late delivering the papers. The Herald was run out of business by the Los Angeles Times in 1989.

My next step towards success came with a job in the snack bar at the May Company, a Los Angeles department store that also no longer exists, earning the untold sum of $1 an hour, then the minimum wage.

The really smart thing I did there was that whenever a customer paid for a hot dog with a 40% pure Kennedy silver half dollar, which in 1967 was still in widespread circulation, I would switch it for paper money.

Eventually, I accumulated 100 of these half dollars.

At age 15, I was willing to bet that someday the US would go off the gold standard and all precious metals would rise in value.

President Nixon did exactly that in 1971, and the value of my stash rose 100-fold to $5,000.

I still have those silver half dollars. I understand that Texas hedge fund manager Kyle Bass owns the rest.

I finally made it into the 1% when I was 33, after spending two years at Morgan Stanley. By then, my pay there had rocketed from an entry level $45,000 to $300,000 a year.

It helped that I won the betting pool for picking the best performing stock in the world two years running.

Back then, nobody had ever heard of an obscure electronics company in Japan called Sony (SNE) which rose in value 85-fold in dollar terms over the following seven years.

Nor had they heard of Honda Motors (HMC). When the other traders saw their little eggshell shaped cars for the first time, they laughed.

The pitiful vehicles had to make a high-speed run to make it to the top of an American freeway onramp. Its shares rose 45 times in dollar terms.

This was back when $300,000 could buy you a luxury two-bedroom condo on the 34^th floor on the upper east side of Manhattan. That is exactly what I did, right next door to corporate raider Carl Icahn, and across the street from Henry Kissinger and Ginger Rogers.

A London mansion followed, located between other homes owned by Jacob Rothschild and Sir Richard Branson.

After a few more years at Morgan Stanley, and then founding the first-ever dedicated international hedge fund, I soon found myself in the much-vaunted 1/10^th of the top 1% of American earners.

I stayed there for quite a while.

However, I recently got the bad news from the New York Times that I have been kicked out of the top tier.

According to their research, to prove I have grabbed the brass ring, I have to have an average annual income of $9,446,793. Only 115,000 taxpayers can meet this elevated standard.

I am still in the top 1%, where I only need to earn $2,107,531 to qualify and can remain with my 1,128,000 friends.

My Brioni suits, Turnbull & Asser Sea Island Silk shirts, and Bruno Magli shoes will not be found for sale on eBay anytime soon.

Which left me to ponder why I had lost my position at the apex of US earning power.

It turns out that the concentration of wealth at the top has vastly accelerated since the stock market bottomed in March 2009.

Risk takers, like those who owned stocks, bonds, and real estate, were tremendously rewarded by the recovery of asset prices.

Those who don’t own any assets, about 40% of the country, were left behind in the dust.

So, the low tax leveraged longs, like those running big hedge and private equity funds, started to greatly outpace my own earning power.

Concentrating so much wealth at the top is a problem for the United States. As any financial advisor can tell you, the richer people become, the more conservative they get with their investments.

Eventually, it all ends up in the bond market, where positions are never sold to avoid paying taxes. In other words, it stagnates and is one of the causes of our present low 2.5% GDP growth rate.

It is also where the 1.46% ten-year Treasury bond (TLT) comes from.

It is usually NOT placed with higher risk, job-creating, equity type investments. For more on this, click here for “The Bond Market and the 1%”.

This always happens when you have a big bulge generation retire all at once, like the 85 million baby boomers.

Another reason I lost my guarantee of the best table in every restaurant I walk into is that I am paying a lot more in taxes than I used to.

This is because I shifted careers from the hedge fund business, where I paid a bargain 15% tax rate on my realized carried interest, to the newsletter game where I am tagged for a heart-rending 43.4%, including the Obamacare add on.

As a result, I pay more in taxes in a single year than most people earn in a lifetime. In other words, for the first time in my life, I am paying taxes like everyone else.

Ouch, and double ouch!

Want to know why I am so interested in what happens in Washington? BECAUSE IT’S MY MONEY THEY’RE SPENDING!

It is also why I have come to learn so much about our arcane and abstruse tax system, and how I am able to periodically pass on insights to you.

I have to pay my accountants tens of thousands of dollars to ferret this stuff out, for your benefit.

When I had dinner with former Federal Reserve Chairman Ben Bernanke, he told me that “rising income inequality is the biggest structural problem we face.”

To find out where you stand in the country’s multi-tiered income structure, I have reproduced the New York Times data below.

Who has seen the greatest accumulation of wealth since the 2009 low? The Koch Brothers, whose combined net worth has soared from $26 billion to $90 billion since then.

Go Figure.

For one more piece on the 1%, please click here for “Mixing With the 1% at Pebble Beach”.

These days, I get to download my papers on my iPad every morning no matter where I am in the world, which then update themselves throughout the day.

I now get up even earlier than when I delivered the papers by bike.

Come to think of it, that “Horatio Alger Effect” that Ben Bernanke mentioned to me over dinner the other day applies to me as well.

I bet it has worked for a lot of you too.