Are stock investors coming back in at another debt induced peak? How regular stock investors are horrible at market timing.
The media is falling over itself with articles on how fantastic the stock market is. The fact that the S&P 500 is now up from the March 2009 lows by over 100 percent seems to put the financial crisis in the annals of history. Yet for most investors, the stock market is largely a casino. For example, if we take a look at the fundamentals we realize that much of the meteoric rise has come courtesy of big institutional funds trading on low volume. The retail investor has been largely absent because first, nearly one third of this nation has no actual savings. It is hard to save with no money. Next, you have the median household income at $50,000. With the rise in tuition, healthcare, and now housing values once again the cost of living is getting more expensive. But of course, just like at the peak of the tech boom, the average investor is now inching slowly back into the waters only to realize that much of what has occurred has been on the backs of giant piles of digital dollars printed by the Fed. Are investors making another investing mistake?
The coming pension crisis: States face a $3 trillion funding gap. Only about 10 percent of Americans now covered by pensions.
Many Americans look at the crisis in Greece and shake their heads wondering how it is possible for an entire country to derail the future of its younger generation. One big problem in Greece was massive government liabilities funding very generous pensions. Yet this came at an enormous cost. The US is facing a different crisis but the markets have already responded over the last few decades. In the early 1980s, roughly 60 percent of private sector workers had a pension. Today, it is down to 10 percent in the latest data and will likely continue to decrease. For young Americans entering the workforce, the self-funded 401k is likely the only path to having a nest egg and any sort of retirement. This is why so many people get angry when they hear about some in California that retire in their early 50s pulling in annual pensions of $100,000. Over 20 to 30 years this can range from $2 to $3 million of payouts. And we wonder why states face a $3+ trillion funding gap with pensions. Are we simply ignoring another looming crisis?
The relentless punishment of the American saver. Fed policy has encouraged spendthrift attitude and yield seeking behavior from Americans.
The Federal Reserve has actively pursued a policy that punishes American savers. The drive to push interest rates lower has inflated both the stock market and housing market once again. Yet little of this gain has trickled down into household income for Americans. The primary reason for this is that most Americans do not derive a significant portion of their wealth from stocks. In fact, a large portion of Americans are living paycheck to paycheck so if the Fed was really interested in boosting wages, they would have looked at income first instead of making it easier for banks to borrow money. Since 2008 savings rates at banks have been below one percent. In many banks, they have hovered slightly above 0 percent. Unfortunately the slow eroding power of inflation has eaten away at the purchasing power of Americans. For many, the choice has been to simply spend income as it comes in or try to chase yields in other markets. Ultimately the prudent saver has been punished.
The United States of Debt Addiction: Our reliance on debt has created an entire economy fortified in the fires of moral hazard and fiscally dangerous leverage.
16 point 7 trillion dollars. That is our current national debt. 12 point 8 trillion dollars. That is the amount households carry in mortgage and consumer debt. We are now addicted to debt to lubricate the wheels of our financial system. There is nothing wrong with debt per se, but it is safe to say that too much debt relative to how much revenue is being produced is a sign of economic problems. At the core of our current financial mess is how we use debt as a parachute for any problem. We’ve been masking the shrinking of the middle class by allowing households to take on too much debt for a couple of decades. The results were not positive. Too this degree, we have now created a massive moral hazard economy where savings are punished into oblivion. There is very little incentive to put your money in a bank account yielding zero percent interest when real inflation is eating away at your money like a hungry wolf. So what do people do? Well many simply cannot save and therefore choose to go into debt to finance cars, housing, and education with very little down. Where does this debt addiction lead us?
Young riding out recession by going into debt for college: Millennial unemployment jumps by two percent.
As the animal spirits of the economy rage wild, there are still difficult challenges ahead for younger Americans. While the stock market is up highlighting corporate euphoria, many companies are doing this with 4 million fewer workers. So the economic recovery is not evenly distributed and they rarely are. Yet younger Americans are still facing tough challenges ahead. One major trend has to do with many people going back to college. While education is positive, the costs are becoming incredibly high and many simply cannot afford it. This is why total student debt outstanding is now over $1 trillion. Why is this so important? Well for one, we are seeing data showing that recent graduates, those in the last decade, are not yielding solid gains from their ventures into college. With 4,000 colleges in the US, many are subpar and many are designed as vehicles to extract student loans. How is this economy treating younger Americans?
Are we reaching a tipping point in the stock market? 4 million fewer jobs from peak but corporate profits at record levels. Consumer confidence dips yet stocks keep moving up.
As the Dow flirted with 14,000 and the S&P 500 hit 1,500 the typical American is losing their confidence and also reflects a stock market that diverges from the interests of the Americans worker. Given that many of the S&P 500 companies earn a sizable portion of their profits abroad, it is hard to see a direct correlation to the health of the American worker. In fact, the middle class continues to face a difficult future. It was interesting to see consumer confidence fall while stock prices move up. But what we do see is a growing class of Americans stuck in poverty. The startling high number of Americans on food stamps does not seem to be inching lower (we are over 47 million). Yet corporate profits are at record levels. Goldman Sachs for example earned $2.8 billion in the fourth quarter of 2012. How is it feasible that stocks continue to move higher while real wealth gains to working and middle class Americans seem stagnant?
Inflation unchained: US dollar down 23 percent from 2000, Tuition up 72 percent, and home values up 44 percent. Incomes adjusting for inflation are back to 1990s levels.
It is hard to believe that people in the US are still denying the obvious impact of inflation. The slow erosion of purchasing power has occurred for many decades now. What people tend to forget in a completely fiat based system is that the Fed can print as much money as it likes. And they have in digital format but also monetizing debt via mortgage backed security purchases. When the crisis hit in 2007 debt was being destroyed via foreclosures and bankruptcies. Debt in a fiat system is money. That is why the Federal Reserve injected trillions back into the system to revive it. Yet this money did not trickle down to most people. However, today, we are seeing where debt is present prices will soar. Just look at student debt and housing prices again. How is it that college costs and housing prices are moving back up a nice pace when actual household wages are stagnant? Because inflation is hitting the system and more debt is accessible to these sectors.