Generation R – Millennials are largely living at home or opting to rent. What happens when homeownership is less accessible to younger Americans?
There is a big challenge when someone comes of age during an economic crisis. Millennials, the children of baby boomers born between 1982 and 2000 have largely grown into an economy that was fully in shambles. This is a generation that grew up with parents talking about the middle class as if it were a foregone conclusion. Their parent’s went to school when it was affordable, came of age when jobs were plentiful, and housing costs were reasonable relative to incomes. Those days are largely gone. While some in the real estate industry scratch their heads as to why homeownership for younger Americans is so low, they should spend some time analyzing the cross-currents that are hitting this cohort. The older Millennials are well into their first home buying years yet their homeownership rates are far below those of previous generations. It was thought that once the Great Recession ended in 2009 that somehow these people would be back at it and buying homes. Yet growing up during a time of massive uncertainty leaves a psychological impact on how you view your future goals. Many are opting not to buy homes and many others simply cannot afford to leave home. The apt title for this cohort is Generation R, as in a new generation of renters.
Crony capitalism and the cult of borrowing: As the banking sector is fully bailed out, Americans push aside history and begin to leverage into debt to compensate for stagnant wages.
Banking should operate as a utility by providing businesses and consumers a source of funds for projects that will add real growth in the real economy. Unfortunately, the current banking system favors speculation and banking for the sake of banking. It also favors creating a non-working class that merely lives off of speculation and their easy access to debt. For example, many banks used special privileges with the Federal Reserve to borrow cheaply, take over other firms with incredibly generous benefits, and ultimately were never made accountable to the public by being saved. There have been multiple examples as to how these bailouts have failed the American public. Americans continue to face a dwindling middle class. We have a plethora of low wage jobs, little benefits, and a financial system that forces people into massive debt. Going to college has put Americans into $1.2 trillion of student debt. Buying a home is only feasible for most Americans with a low down payment since they hardly have any savings. Banks are paying ridiculously low interest rates on savings accounts making it unattractive to save and plan for a rainy day. It is no surprise that borrowing on credit cards is up again. Yet many banks are seeing peak bonuses, peak profits, and peak cronyism.
The economic war on the young: young Americans are being priced out of the housing market, pushed into student debt, and many see no growth in wealth.
The job market continues to be depressed for young Americans. As graduation season comes to an end, many are going to start getting letters in the mail from their friendly student debt service organization. Other recent graduates continue to live at home facing a failure to launch as rents rise and the prospect of home ownership continues to fall beyond their reach. In fact, we have many people in their 30s and 40s living at home because of financial constraints. This isn’t exactly what older parents had in mind but many are battling their own lack of retirement funds as they enter into old age. Young Americans are facing a trifecta of economic depression that wasn’t present in the previous generation; they are unable to compete in this investor heavy housing market, many of the decent paying jobs of today require a college education that is becoming more expensive by the day, and finally many are unable to find a good paying job stunting their savings plan. On many fronts, while orchestrated or not, it appears to be an economic war on the young of this country.
Temporarily embarrassed millionaire Americans go back into credit card debt: Credit card debt begins to tick up as tapped out Americans re-leverage once again. Average household has $7,000 in credit card debt.
It is hard to believe that a large part of the nation has already forgotten the Great Recession. A crisis created by too much debt and the financialization of global markets is now once again unleashing high levels of debt to keep consumption going. This makes sense given that 1 out of 4 working Americans is actually in a job that pays less than $10 per hour. Instead of confronting the storm clouds of low wage economics, banks after getting their bailout fill are now handing out credit cards to induce Americans to spend money that they really don’t have. There is a very reasonable place for debt in any economy. It becomes dangerous when we constantly rely on debt versus real economic growth to move forward. Credit card debt contracted severely during the Great Recession. Most of this came at the hands of bankruptcies. With the memories of the Great Recession fading away in this fast paced instant media culture, we are seeing credit card borrowing picking up. Without a doubt, solicitations for credit card offers are coming in at a steady flow in 2014.
The slow process of turning the US into a low wage McJobs nation: US breaks even with jobs lost since 2007, those not in the labor force jumps nearly 13 million, and 1 out of 4 is working for $10 an hour or less.
The US is slowly becoming a McJob nation. While the press jumps up and down that the US is now finally at a breakeven point from the jobs lost since the recession started in 2007, they fail to mention that those not in the labor force is up by nearly 13 million. Even looking into the recent employment report, we continue to find a heavy trend of hiring in low wage employment sectors. For example, 32,000 jobs were added in “leisure and hospitality” bringing the annual total of jobs added to 311,000. Another 21,000 jobs were added in social assistance which pay very little but will grow as demand for health support grows by an aging population. The system at least in the eyes of Wall Street and the government is working perfectly fine. We have a plentiful supply of low wage labor while laws and bailout mechanisms are in place for the financially and politically connected. The middle class continues to fall off the bandwagon one by one and enters a labor force of permanent low wage labor with very little prospect of a decent retirement. In fact, most will be working until all the wheels come flying off. We also find that 1 out of 4 Americans are working in jobs that pay $10 or less per hour. How about trying to earn the Americans Dream on that McJob salary?
Central banks and a global soft default: Current interest payments on public debt now exceed $415 billion per year. In 2000 $1 trillion in Fed debt was held by foreigners while today it is up to $6 trillion.
Global central banks are fully addicted to the opiate of debt. The financial system has created a rentier class that chases investment yield even when the economy isn’t necessarily growing. Think about that for a second. Why should someone expect a guaranteed return at any point in an economic cycle if the real economy is actually contracting? The U.S. for example while trying to play the role of responsible manager of debt is going full throttle when it comes to debt issuance. We have a spending, revenue, and financial system problem in the way incentives are structured. For example, all talk of the Fed tapering is really just hollow rhetoric. The Fed now has a balance sheet well into the $4 trillion range (or twice the size of California’s annual GDP). There is no sign of pulling back. U.S. debt to the penny is now at $17.5 trillion and growing as we spend more than we take in. People do realize that this principal is never going to be paid back right? This is why inflation is occurring in many areas of the economy even though the CPI understates inflation in many categories including housing, tuition, and healthcare. Global central banks are fully aware that most countries are already in a soft default. In other words, the trajectory ahead is to inflate our way out of this debt mess.
Stock market flashing red at an overvaluation of 68 percent: Looking at Crestmont, Cyclical, Q Ratio, and S&P Regression all suggest market is in for an upcoming correction.
The stock market continues to make record highs even though profits do not warrant current valuations. Looking at four standard valuation models we find that the stock market is highly overvalued relative to earnings. For most Americans with little stock ownership, this is merely a sideshow as to what is unfolding in the real economy. Based on an average of four popular valuation models we find that the S&P 500 is overvalued by 68 percent. Typically you want to see earnings justify current valuations but something else is going on here. Either stocks are being priced at very optimistic future levels or hot money from the Fed is flowing into the stock market to avoid the slow erosion brought on by inflation. It is interesting to see some people falling for the myth that inflation is muted when housing values are up, college costs are soaring, energy costs are high, and healthcare costs continue to go up. Of course the CPI measure tends to understate inflation so it might be the case that market participants are diving into the game even with high valuations because they realize underlying inflation is much higher than what indicators are noting. One thing is certain and that is the current stock market is highly overvalued.