A bear market is defined by a 20 percent drop in the stock market from recent highs. For some, the memory of the last crisis is now but a distant echo. After all, we’ve been in a rather strong bull run for 6 years. But bear markets happen more than most people think. Since 1940 the Dow Jones Industrial Average (DJIA) has had 12 bear markets. On the flip side we have had 13 bull runs. This current bull run has been particularly strong. A good portion of this rally has come in easy money flowing into Wall Street courtesy of the Federal Reserve and from cutting employee benefits and wages keeping profits flowing up. The market is looking extremely frothy. Easy credit is permeating into the economy in all corners including subprime auto debt, a massive amount of student loans, and people tapping into credit cards to get by. Why? Half the country lives paycheck to paycheck despite the loud stock rally. If we look at a chart of bear and bull runs, we are due for a bear market.
Driving our way into financial poverty with six-year car loans: Once a minority, six-year or longer auto loans now make up one third of all new loans.
Taking on debt for buying a car is a risky proposition. Taking on subprime debt for buying a car is simply a bad financial decision. The subprime loan market is booming for auto loans. Cars can last longer, require basic maintenance, and typically run better than older models. That brings up challenges for the auto industry that needs people buying newer and more expensive models. But consumers always want the newest car or gadget so financing is the best way to get people to purchase an item. This is why the iPhone which would sell for $600 or more is usually bundled with a contract instead of the consumer paying for it all at once. You pay for it slowly over time. The same applies to car loans. However, the typical auto loan used to be 36 or 48 months. Now, we see 72 months and 84 months (6 or 7 years!) of car payments. This is such a bad financial move especially if you want to plan wisely for retirement. Taking on a depreciating asset is just not a good move especially with risky debt.
Fed doublespeak and the dismantling of the middle class: Fed states dropping “patient” word doesn’t mean it is impatient on rates. In 1970 roughly 7 percent of all income was earned by the top 1 percent. Today it is closer to 20 percent.
The Fed has taken a page out of George Orwell’s 1984. Doublespeak is all the rage and the Fed’s statements are analyzed as if sifting for gold. Even when they don’t do anything markets jump. The Fed sets the tone on our debt addiction. The Fed dropped the word “patient” in terms of increasing interest rates but then goes on to say this doesn’t mean that it will be impatient. Say what? The Fed hints at tapering and balks because it claims there is “low inflation” but when we look at real inflation, the price of many items is shooting up dramatically. Many of these items were staples of the middle class including an affordable college education, a home, and being able to earn a good wage. Back in 1975 roughly 7 percent of all income earned went to the top 1 percent. Today it is closer to 20 percent. The last time it was this high was during the years prior to the Great Depression.
The next bailout will be with student loans: White House takes first steps in allowing a bankruptcy option for student debt. $1.2 trillion in student debt outstanding.
It truly is absurd when you hear people moralizing that people should pay their student debt when virtually every other debt class can be discharged through bankruptcy. You can go to Las Vegas, run up $50,000 in credit card debt for a wild night, and if you are unable to pay it back, no problem. Sure, your credit is ruined but no one is going to garnish your wages. Can’t pay your mortgage? Foreclosure. Can’t pay your auto loan? Repossession. Can’t pay your student debt? Lifelong debtors’ prison for you. Student debt is the largest non-housing related debt class in the US. It makes sense that bankruptcy should be an option here. There is one problem, however. Most of the debt is government backed meaning the bill is going to be taken on by the government (aka the people). This is something that should have been done over a decade ago when total student debt was $200 billion, not $1.2 trillion like it is today. However, rising delinquencies show something needs to be done here.
The young, broke, and indebted American: 45 percent of 25 year olds carry student debt and the median net worth of those 35 and younger is one month of expenses.
It is clear looking at economic data that young Americans were not sent the memo regarding this economic recovery. People do realize that the “Great Recession” officially ended in the summer of 2009, right? We’re heading into year six of this recovery but many are simply seeing lower paying jobs, a deeper reliance on debt, and inflation hitting in important segments of our economy. For example, some of the top employment sectors in our country are in the form of food services and retail that tend to hire a disproportionately large amount of young workers. But with more people going to college and taking on record levels of debt, working retail is not going to cut it. Back in 2000 about 25% of 25 year olds carried some form of college debt. Today that percentage is up to 45%. That is a major jump and shows that for many, simply going to college requires some form of debt assistance. And that is why we now have over $1.2 trillion in outstanding student debt across the country. But young Americans are also seeing hits to their net worth. Let us look at the “recovery” for young Americans.
Low wage jobs and the increase in non-working America grow: Half of jobs added last month were in low wage fields and those not in the labor force jumped by 354,000.
If we look at the labor force in sheer numbers we find a couple growing themes. The number of low wage jobs continues to dominate employment growth. Of course this will only add additional burdens to an already cash strapped young American worker. Financial pundits would say any job is better than no job. Speaking of no jobs, the next theme is that of the massive number of Americans not in the labor force. This number continues to trump any job gains. For example all the current headlines are saying that the US added 295,000 jobs. A nice number but where is the headline saying that the nation also added another 354,000 Americans to the “not in the labor force” category overshadowing any net gains in jobs? The reason this isn’t reported is that those not in the labor force are somehow relegated to the national safe of unreported secrets. Nearly 93 million Americans are not in the labor force. The spin is that many are older Americans retiring but the data shows otherwise. Many older Americans are too broke to retire. Low wages and exiting the labor force seem to be the continuing trend.
The 35 year drought in real wages for American workers: American workers really haven’t had a raise since 1979.
Economic recoveries take on a variety of shape and sizes. With stock markets reaching new highs you would expect that some of the fruits of this boom would trickle down to American workers. But some of the booming trends are continuing on the path of low wage labor and certainly, of turning people into contract workers. Think of a business like Uber that turns regular people into taxi drivers if they wish to become one. For some, the pay is good but the benefits are non-existent. For the founders of Uber, an untapped world of wealth is the reward. This seems to be a big trend with technology. Outsourcing many good paying jobs that bring wealth to a few but displace millions of workers. Maybe this is simply unavoidable. When we look at the top 10 occupations in the US, we see all of them in the low wage service sector outside of nursing. It is hard to outsource janitorial services or someone making your food at a local restaurant. A recent EPI study found that in the overall scheme of things, the American worker really hasn’t had a real raise since 1979.