Wednesday, June 25, 2014

$26 Trillion In Wealth Added - But Almost All To The One Percent

The article 'The Asset Rich, Income Poor Economy' (WSJ, June 20, p. A13) was a shock and wake up call for any ordinary citizen hoping the economy will favor them at some point. The evidence, instead, is that the richest have continued to make out like bandidos while the rest of us suck salt.

Let's again get our terms straight here: "asset rich" means bountiful in terms of stock or mutual fund ownership, including dividends and capital gains arising therefrom. It also includes real estate, for example owned and then flipped, or owned for later profit at re-sale.  "Income" means basically what it implies, any and all income - say from labor (where wages have stagnated since 1973) or from bank savings interest. Since the Fed has kept interest rates near zero, the latter group has had to not only suck salt but sand as well.  Thus, "income poor".

Meanwhile, the stock owners are doing well, thanks to the Fed - including under Janet Yellin now - continuing the misplaced quantitative easing program. According to the article cited above:

"The Fed assures us that long term rates need not move higher - even with improving inflation dynamics, credit markets priced for perfection and stock prices at record levels."

Indeed, the stock market (DOW, specifically) is in serious bubble territory and I personally would take every last cent out if I saw it hit or surpass 17,000. It is just a matter of time before that bubble pops  from some external shock (e.g. oil prices skyrocket over Iraq) even if the Fed keeps up its QE crack infusions. Meanwhile, as the authors (Kevin Warsh and Stanley Druckenmiller) observe:

"The aggregate wealth of U.S. households, including stocks and real estate holdings, just hit a new high of $81.8 trillion. That's more than $26 trillion in wealth added since 2009. No wonder most on Wall Street applaud the Fed's balance sheet recovery strategy. It's great news for those households and businesses with large asset holdings, risk tolerances and easy access to credit."

And that group is precisely the 1 percent, against which Occupy Wall Street so vigorously protested a mere three years before. It is this group that is benefiting from the Federal Reserve's QE crack infusions, and which also has the "risk tolerance" by virtue of having the disposable income to sustain sudden market dives (and losses) which most of us lack. They also have the easy access to credit and often hold real estate as well as stocks. In addition, they are often the beneficiaries of flash trading so can buy and sell before the hoi polloi can even pick up a phone. Hence, they will make more money on any redemptions, even as they will be able to pick up cheaper stocks before the ordinary bloke can say 'buy'.

As the authors note the current conditions "provide little solace for families and small businesses that must rely on their income statements to pay the bills."

They also point out that "about half of American households don't own any stocks" -  but I'd say the aggregate stats are even less asset -based. That is,  perhaps 75 percent of the half that DO own stocks (as mutual funds) don't have the disposable income to cover losses. We saw that play out back in 2008 with the crash incepted by the housing meltdown and credit crisis.

The bottom line is the Fed is not stimulating the real economy but the speculative one. It is playing a dangerous game of feeding a giant asset bubble via cheap money that will also hurt the real, Main St. economy if and when it bursts. (The Bank of England has already recognized the danger which is why they plan to raise interest rates.)

The authors are thus correct when they state: "Asset wealth is sustainable only when it comes from earned success, not fiat. Wealth comes from strong, sustainable growth that turns a proper mix of labor, capital and know how into productivity..."

The danger of feeding asset wealth to the exclusion of income is that the speculative economy then makes the whole economy unstable. A critical tipping point has already been identified by none other than stats guru Nate Silver.   In his book, his book, The Signal and the Noise- Why So Many Predictions Fail But Some Don’t , he writes (p. 347):

"Of the eight times in which the S&P 500 has increased at a rate much faster than its historical average over a 5-year period , five cases were followed by a severe and notorious crash, such as the Great Depression and the Black Monday crash of 1987”.

Already we are well into this treacherous territory.

George P. Brockway, author of  The End of Economic Man’‘ has written that any given Bull market's purpose is to suck the savings and nest eggs from the ordinary investor and transfer it into the hands of the richest speculators who know the small fry will never be able to resist rapidly rising share prices.  The longer the Fed feeds the stock market to the exclusion of helping income-based people the closer we come to yet another re-enactment of the collapsing Bull.

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