Four Charts Prove The "Economic Recovery" Is Just A Fed-Induced Entitlement Program For The Wealthy

"Economic recovery" in America no longer means what it used to mean.  Historically "economic recovery" was largely characterized by job and wage growth, distributed across the income spectrum, and a rebound in GDP growth to north of ~3%-5%.  These days, the notion of "economic recovery" has been hijacked by the Fed and bastardized in such a way that they celebrate "asset bubbles" rather than real growth in economic output.

Presented as "exhibit A", here is the Fed"s modern-day definition of "economic recovery" (chart per Bloomberg):

Of course, digging a little deeper you quickly realize that the problem is even worse than what the data in the chart above might suggest.  While overall average wage growth has been anemic since 2009, to say the least, it has been almost nonexistent for those on the bottom end of the income spectrum.

Soaring markets helped the top 1 percent of Americans increase their slice of the national wealth to 39 percent in 2016, according to the Fed’s Survey of Consumer Finances. The bottom 90 percent of families held a one-third share in 1989; that’s now shrunk to less than one-quarter.

 

The current one has helped millions of people find work; it’s also benefited asset-owners far more than people who trade their labor for a paycheck. Income distribution, already the most unequal in the developed world, is getting worse. And that’s starting to influence everything from America’s spending habits to its elections.

In fact, those in the bottom quintile of wage earners in the U.S. basically haven"t experienced wage growth, on a real basis, since the late 1970"s whereas those in the top quintile have nearly doubled theirs.

Of course, none of this should be particularly surprising to those who are paying attention as the top quintile of earners are the only ones financially positioned to benefit from Yellen"s economic recovery asset bubbles...

Meanwhile, the growing wealth disparity has seemingly put America on a collision course with political chaos as fringe candidates on both the Left and Right increasingly promise to have an "easy" solution for the seemingly inescapeable economic plight of the poorest households. 

Unfortunately, the sad truth just might be that there is no solution, absent some transformational technological advancements, and that the U.S. has just reached the maturity phase of it"s "business cycle"...and while the Fed may try to cover up that fact by repeatedly blowing assets bubbles, per the charts above, they"re only making the problem worse with each successive iteration.

Economic Recovery - But For Who?

Authored by Chris Hamilton via Econimica blog,

How to judge the effectiveness of the economic recovery since 2008 is a challenge?

Many laud the Federal Reserve for it"s actions to stave off a possible depression.  The Federal Reserve"s policies have certainly helped to promote new record highs in financial assets across the spectrum.  These policies have resulted in a great rise in household net worth yet has created the fewest net new full time jobs and real income increases since WWII.  The chart below shows the household net worth (the combined valuation of all privately held stock, real estate, bonds, etc.) as a percentage of disposable income (what is left after paying taxes) and calls out the decelerating full time job creation.

But as Ray Dalio noted yesterday HERE, the recovery is only a recovery for the wealthy.  As the chart below from the Fed"s own Survey of Consumer Finances shows, all the record growth in household net worth has gone to the top 20% of income earners since 2007 while the remainder have seen declining net worth.

A means to detail the impact of this lopsided recovery is the record low US fertility rate.  During each of the previous run-ups in HHNW, there was a parallel rise in the fertility rate as young adults felt more confident and capable of forming or growing a family.  However, since 2007, the collapsing US fertility rate vs. surging HHNW puts the truth of who is recovering in stark contrast.

And below, the US fertility rate vs. all publicly traded US equities represented by the Wilshire 5000.  Clearly, the recovery was not a recovery for those of childbearing age but in fact an ongoing depression.

The Federal Reserve is protecting, enabling, and rewarding a shrinking number simply for being asset holders (not for doing anything with those assets) while punishing the growing majority for having few or no assets... and ensuring the vast majority never will be asset owners as asset prices surge versus stagnant wages. 

This is all because a flawed economic model premised on perpetual population growth (turning into consumer growth) has now gone off the tracks as growth of the consumer class is collapsing.

The chart below shows annual yoy US 15+yr/old population growth broken down by age groups.  Dark green is growth in 15-24yr/olds, aqua blue 25-54yr/olds, yellow 55-64yr/olds, and red is the growth in 65+yr/olds.  The deceleration of growth among the 15-54yr/old segment from the late 1980"s until growth ceased in 2007 should be pretty obvious.  However, both the quantity and quality of population growth, particularly among the 55-64yr/old cadre (in yellow) is thinning out...this is leaving all population growth coming among the 65+ and 75+yr/old segments.  Periodic spikes in chart are "one time" Census adjustments, not true population growth spikes.

The portion of the population growing is so important because average income and spending peak as the head of the household hits 45-54yrs/old and begins to really decelerate once the head of household hits 65yrs/old.  By the time the head reaches 75yr/olds, their average income and spending are halved and their willingness to use credit to amplify their consumption collapses (chart below).

Below, a close-up of the US 15+yr/old annual yoy population change since 2001.  Take a close look at the dynamics that led up to and culminated in the 2008 "great financial crisis" (first dashed circle).  Compare that to the dynamics since "08 really intensifying now in 2017.  I"m pretty sure the farce that is the present moon shot in asset prices (with central bank thumbs, elbows, and who knows what else on the scale) has aserything to do with this.

Lastly, the collapse of the 20-65yr/old population growth across N. America (US/Canada) is only accelerating and most if not all population growth will be among the 65+yr/old population (data from US Census and UN).

While presidents and political parties have swept in and out of "power", the Fed hasn"t changed a bit for decades and is protecting the wealthiest 20% of families (though really it"s more like the top 1% to 2% truly raking in the benefits) and punishing the other 80% holding minimal or no assets. 

And America"s aging population will not allow America to grow her way out of this hole. 

Only an outright, "revolutionary" change from the current paradigms and removal of "powers that be" will save the bottom 80% from watching the American dream race ever further away.  But of course, better make sure any "new boss" isn"t the same or even worse than the "old boss".

Household Net Worth Hits A Record $95 Trillion ... There Is Just One Catch

In the Fed"s latest Flow of Funds report, today the Fed released the latest snapshot of the US "household" sector as of March 31, 2017. What it revealed is that with $110.0 trillion in assets and a modest $15.2 trillion in liabilities, the net worth of the average US household rose to a new all time high of $94.835 trillion, up $2.4 trillion as a result of an estimated $500 billion increase in real estate values, but mostly $1.78 trillion increase in various stock-market linked financial assets like corporate equities, mutual and pension funds, as the stock market continued to soar to all time highs .

At the same time, household borrowing rose by only $36 billion from $15.1 trillion to $15.2 trillion, the bulk of which was $9.8 trillion in home mortgages.

The breakdown of the total household balance sheet as of Q2 is shown below.

And the historical change of the US household balance sheet.

And while it would be great news if wealth across America had indeed risen as much as the chart above shows, the reality is that there is a big catch: as shown previously, virtually all of the net worth, and associated increase thereof, has only benefited a handful of the wealthiest Americans.

As a reminder, from the CBO"s latest Trends in Family Wealth analysis, here is a breakdown of the above chart by wealth group, which sadly shows how the "average" American wealth is anything but.

While the breakdown has not caught up with the latest data, it provides an indicative snapshot of who benefits. Here is how the CBO recently explained the wealth is distributed:

• In 2013, families in the top 10 percent of the wealth distribution held 76 percent of all family wealth, families in the 51st to the 90th percentiles held 23 percent, and those in the bottom half of the distribution held 1 percent.


• Average wealth was about $4 million for families in the top 10 percent of the wealth distribution, $316,000 for families in the 51st to 90th percentiles, and $36,000 for families in the 26th to 50th percentiles. On average, families at or below the 25th percentile were $13,000 in debt.

In other words, roughly three-quarter of the $2.4 trillion increase in assets went to benefit just 10% of the population, who also account for roughly 76% of America"s financial net worth,

Even worse, when looking at how wealth distribution changed from 1989 to 2013, a clear picture emerges. Over the period from 1989 through 2013, family wealth grew at significantly different rates for different segments of the U.S. population. In 2013, for example:The wealth of families at the 90th percentile of the distribution was 54 percent greater than the wealth at the 90th percentile in 1989, after adjusting for changes in prices.

• The wealth of those at the median was 4 percent greater than the wealth of their counterparts in 1989.


• The wealth of families at the 25th percentile was 6 percent less than that of their counterparts in 1989.


• As the chart below shows, nobody has experienced the same cumulative growth in after-tax income as the "Top 1%"

The above is particularly topical at a time when either party is trying to take credit for the US recovery. Here, while previously Democrats, and now Republicans tout the US "income recovery" they may have forgotten about half of America, but one entity remembers well: loan collectors. As the chart below shows, America"s poor families have never been more in debt.

The share of families in debt (those whose total debt exceeded their total assets) remained almost unchanged between 1989 and 2007 and then increased by 50 percent between 2007 and 2013. In 2013, those families were more in debt than their counterparts had been either in 1989 or in 2007. For instance, 8 percent of families were in debt in 2007 and, on average, their debt exceeded their assets by $20,000. By 2013, in the aftermath of the recession of 2007 to 2009, 12 percent of families were in debt and, on average, their debt exceeded their assets by $32,000.

The increase in average indebtedness between 2007 and 2013 for families in debt was mainly the result of falling home equity and rising student loan balances. In 2007, 3 percent of families in debt had negative home equity: They owed, on average, $16,000 more than their homes were worth. In 2013, that share was 19 percent of families in debt, and they owed, on average, $45,000 more than their homes were worth. The share of families in debt that had outstanding student debt rose from 56 percent in 2007 to 64 percent in 2013, and the average amount of their loan balances increased from $29,000 to $41,000.

And there is your recovery: the wealthy have never been wealthier, while half of America, some 50% of households, now own just 1% of the country"s wealth, down from 3% in 1989, while America"s poor have never been more in debt.

Brace Yourself For The Coming Economic Transformation

Authored by John Mauldin via MauldinEconomics.com,

If the average person in the US feels as though they are going nowhere fast, there is a real reason for it.

Federal Reserve data shows people are earning less than they did 17 years ago. But the real story is even worse than that.

The chart below shows that median income in the US is actually down over the last 17 years and is only 3% higher now than it was 30 years ago. Those are inflation-adjusted numbers.

But the reality is that, for the average person, inflation has been much higher than the average of 2% per year over that time. This is because the things that the average person actually buys—like housing and education and health care and all the other necessities of life—are rising at a much faster rate than 2%.

Source: FRED: St. Louis Federal Reserve

So this chart reflects the fact that life has gotten much more difficult for average Americans. If people’s incomes haven’t grown beyond what they were 30 years ago, they struggle just to make ends meet and to maintain the lifestyle they had.

Growth Is An Illusion For More Than Half Of Americans

The Census Bureau updates its income figures about once a year, and the last real update we had was last fall (taking us through 2015).

Doug Short did an analysis of those numbers. He breaks the country into quintiles, calculates the average household income for each quintile, and then also shows the top 5%. Notice that the average income for the top 5% is $350,000.

Source: Advisor Perspectives

It looks like everybody’s income is rising, especially those in the top 20% and 5%. But if we inflation-adjust those numbers, the illusion of growth goes away.

What we see now is that there has been almost no movement for the bottom 60%. The middle quintile has grown somewhat, and—this won’t surprise anyone—the top 20% and 5% have done very well.

Source: Advisor Perspectives

The next chart shows what that growth looks like in percentage terms. We find that the bottom quintile saw their income grow by only 25% over the last 49 years. That’s less than 0.5% per year.

Interestingly, the fourth quintile grew even less than the bottom one, at around 19%, mainly because of government programs that supported those in the lowest 20%.

Source: Advisor Perspectives

But what about the 1%, I hear you asking? Investopedia gives us that answer:

To be certified as a one-percenter, you needed to bring home an adjusted gross income of $465,626 or more for the 2014 tax year, according to data from the IRS. The Washington Center for Equitable Growth put the average household income for this group at $1,260,508 for 2014.

But as the saying goes, your mileage may vary. It turns out there is quite a lot of variation among counties around the US as to what it takes to qualify for the top 1%. The chart below illustrates this well.

Source: howmuch.net

People Worry About Sliding Down The Class Scale

Not only are people making less, more people are worried about staying where they are financially (or not sliding down) than are trying to figure out how to get up to the next level.

The possibility that we might slide down the class scale is the source of much angst. Upper-income people worry they will decline to mere upper-middle-class status, while the middle class doesn’t want to join the ranks of the lower class.

It’s not so much that those upper-income people are worried about being middle class. It’s that they have created expenses and lifestyles around a certain level of income. If that income falls, they will have to change the lifestyle they have become used to.

That is remarkably difficult for many of us to do. Our sense of self-esteem and emotional well-being are, it seems, tied to our lifestyle.

Whether your worries are groundless or real, those fears are greater if you know you’re at the lower end of your peer group. The wealthiest .001% don’t have to worry—they’ll be fine in just about any scenario. But people in the 85^th–95^th percentiles are in danger of taking a fall in the next big market and economic upheaval.

And of course, the lower middle in the 25^th–50^th percentiles are very vulnerable to downward mobility.

The Transformation Is Coming

Whatever our income or class, we all face challenges over which we have some influence, yet we may find ourselves subject to a fate that we can’t control. The challenge that we have today is to recognize that the political, economic, and investment forces that we have become used to dealing with over the last 70 years are getting ready to shift more radically than we can even imagine.

We will have to think more deeply and creatively than ever about how to prepare for the changes—the transformation—coming to our lives.

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This wildly popular newsletter by celebrated economic commentator, John Mauldin, is a must-read for informed investors who want to go beyond the mainstream media hype and find out about the trends and traps to watch out for. Join hundreds of thousands of fans worldwide, as John uncovers macroeconomic truths in Thoughts from the Frontline. Get it free in your inbox every Monday.

How "Superstar" Companies And Technology Are Killing The American Worker

We"ve frequently written in recent months about the unintended consequences of politicians meddling in labor markets by setting artificially high minimum wage rates (see "State Minimum Wage Hikes Already Passed Into Law Expected To Cost 2.6 Million Jobs, New Study Finds").  Of course, the combination of higher wages and declining technology costs are wreaking havoc on labor markets as they serve to significantly improve the return on invested capital profile of new labor-replacing capital projects.  Here are just a few examples:

There"s the Big Mac ATM...

Uber"s autonomous vehicle, which is sure to put a dent in the number of taxi drivers needed over the next decade...

And there are even autonomous tractors that come complete with cameras, radar, GPS and a tablet remote control but it"s missing 1 key thing...a seat for a driver.

In fact, as Bloomberg points out today, total compensation as a percent of GDP in the United States has been on the decline for decades with a sharp decline corresponding with the tech boom of the 2000s.

But, it"s not just technology and labor-replacing capital investments driving aggregate wages lower.  As a working paper for the National Bureau of Economic Research notes, market share consolidation has also had a huge impact on aggregate wages as larger companies are able to defray the impact of fixed labor overhead. 

Autor and his fellow authors say superstar companies, because they"re big, can defray fixed labor costs such as headquarters staff over a bigger base of revenue and profits.  But why are there more such companies now than in the past? One theory they discuss is that new "competitive platforms," such as the ability to compare prices on the internet, make it easier for the best companies to set themselves apart. Or it could be the proliferation of "information-intensive goods" such as software, which require relatively few people to produce in volume.

Using data from 676 industries in six sectors in the Economic Census, the authors find that the share of revenue controlled by the top four companies in an industry rose on average from 38 percent in 1982 to 43 percent in 2012 in the manufacturing sector; from 24 percent to 35 percent over the same period in finance; and from 15 percent to 30 percent in the retail trade. Concentration also rose in services and wholesale trade while falling slightly in utilities.

Next, the authors showed that the labor share fell the most in the industries with the greatest increases in concentration. They found no evidence that the superstars" gains were ill-gotten. The increasing concentration seemed to be a sign of business success, not lobbying: The industries in which concentration increased the most, they found, were the ones that had the strongest growth in workers" productivity.

Per the charts below, the study found that industries with the highest growth in market share concentration also had the worst performing labor markets over the past three decades.

Conclusion: Technology and markets "increasingly concentrate rewards among firms with superior products or higher productivity—leading to better quality or lower costs—thereby enabling the most successful firms to control a larger market share."

Unfortunately, we"re likely in the early innings of this downward spiral.

The Eight Forces That Are Pressuring Profits

Submitted by Charles Hugh-Smith via OfTwoMinds blog,

These eight forces are structural, and cannot be erased by tax cuts or policy tweaks.

If there is any economic assumption that goes unquestioned, it"s the notion that profits will remain robust for the foreseeable future. This assumption ignores the tidal forces that are now flowing against profits.

Any discussion of corporate profits must start by noting the astonishing rise in U.S. corporate profits since the heyday of the late 1990s dot-com boom. From $800 billion to $2.4 trillion in a few years is not just extraordinary--it"s unprecedented.

Yet rather than wonder if this incredible spike higher is temporary, the financial media assumes nosebleed-lebvel profits are a new and wonderful plateau that can only move higher in the future.

This confidence ignores the systemic tidal forces working against profits.

1. Higher costs of capital. Another blithe assumption is that capital will cost almost nothing to borrow, as far as the eye can see, and that the demand for low-yield corporate debt will remain insatiable.

The yield on bonds is rising in important markets, and while many observers reckon rates will soon return to zero (or less than zero), others see the potential for a trend change from declining rates (a 45 year trend) to rising rates.

Rising borrowing costs pressure profits.

2. Rising wages and labor overhead. Even if wages remain stagnant, the overhead costs of labor--healthcare, workers compensation, pensions, etc.--are increasing for structural reasons. Factor in global pressure to raise minimum wages and competition for the most productive labor/skillsets, and the cost of labor is rising on multiple fronts. Rising labor costs pressure profits.

3. Urbanization. An unprecedented number of working-age people have migrated from largely self-sufficient rural economies to high-cost urban economies that require much more cash income. As Immanuel Wallerstein has observed, urbanization pushes wages higher, regardless of the era or the nation experiencing the urbanization.

While cheerleaders focus on the higher income of these tens of millions of new urban dwellers, and on the potential for corporations to sell them more products and banks to lend them money, low-wage workers spend the vast majority of their income on rent, food and transport. Beyond these essentials, opportunities to earn fat margins selling to the urban poor are scarce.

4. Expanding competition and market saturation. Have you noticed how companies are getting into everyone else"s business? You see all sorts of non-building supplies being sold in Home Depot, for example. With sales stagnant in the developed world and in emerging markets hit by recession or currency devaluations, expanding into established markets is seen as one of the few ways to grow sales and profits.

There is an upper limit to this trend, of course. McDonalds can grow sales by opening branches in Walmarts, and Starbucks can expand sales by opening a shop in every Target, but we"re clearly reaching saturation on retail outlets everywhere. As for online sales--everybody"s trying to expand their online sales, but often at the cost of lost bricks-and-mortar store sales.

5. Trade wars and de-globalization. Profits have soared for corporations that have mastered long global supply chains that serve a wide range of regional markets. Any disruption in these long supply chains due to geopolitical tensions, trade disputes or domestic pressures to relocate production back in the home country will increase costs incrementally.

6. Higher taxes. The rotation from relying of monetary expansion (quantitative easing, bond purchases, etc.) for growth to fiscal expansion (borrow and spend for infrastructure, etc.) will eventually require higher taxes on labor and capital to fund the higher fiscal spending. Higher taxes pressure profits.

7. Debt saturation. Debt has been rising across the board for the eight years of "recovery," and a slowing of debt expansion means there will be less money available to spend on goods and services. Slowing debt and slowing sales pressure profits.

8. Decline of the wealth effect. Most of the wealth effect--the psychological sense of feeling wealthier and thus more prone to borrow and spend--is concentrated in the top 5% of households that own most of the assets that have bubble higher over the past eight years. (A lesser wealth effect has trickled down the next 15%.)

The wealth effect"s influence on consumption is readily visible in this chart that shows spending by the top 5% has pulled away from the spending of the bottom 95%.

Should the bubblicious asset classes that have experienced strong gains--stocks, bonds and housing-- suddenly encounter turbulence or an actual downdraft (gasp), the wealth effect will quickly wear thin, potentially impacting the biggest spenders that have been driving corporate profits.

These eight forces are structural, and cannot be erased by tax cuts or policy tweaks.