Seeking Alpha
Commodities, macro, gold & precious metals, long/short equity
Profile| Send Message|
( followers)  

The Oxfam report, which came out to coincide with the Davos conference this year, once again highlights the growing rift between the richest people on the planet and the rest of us. Some of the findings include the fact that the richest 85 people on this planet have more wealth than the bottom 3.5 billion people combined which was the main media attention grabber. Less attention was given to another important point, which was that 95% of all gains since recovery started in 2009 in the United States went to the top 1%. That explains in large part why median household income peaked in 1999 and is now almost 10% lower in real terms. It also tells us that the long-term downward trend will continue.

The myth of viable solutions

The growing pie:

As solutions to this problem go, very little has been offered by our elites in terms of actual viable proposals. Some countered that this is not a problem we should be concerned with, because while the rich are getting richer, they are taking a bigger slice of a growing pie, so it is not as if they are taking the wealth from the bottom. The stats on US median household income tells us a different story.

Fact is that even as the pie grows, there are currently constraints on the rate of growth of the pie. Oil prices going up about 500% since 2000 may have something to do with the lower rate of growth we are now witnessing. Food and other commodity prices also increased in the last decade or so, which is an indisputable drag on global growth, especially in very poor countries. Lower growth and instability in poor countries affects US growth negatively, as should be expected. Given that 95 cents of every dollar in new pie growth went to just one percent of all households, it leaves very little left for the other 99%.

However, the 99% are expected to spearhead consumer demand growth. Since there is little income growth for the 99%, there is muted consumer demand growth as well, causing an additional damper on pie growth. In conclusion, the pie is growing but it is very sluggish growth for the past few years now, and will continue to be for the foreseeable future. Given that so much goes towards the top, there is little relief in site for the bottom.

Education could level things:

It has also been suggested that the key to preventing the continued growth in income inequality is more education meant to train young people for the "jobs of today and the future". It all sounds well coming from people who neglected to take a look at a job site for the past few years, but once we take a look, we realize that it is not that simple.

Here is a brief summary of my local Omaha, Nebraska jobs available on careerbuilder.com. Of over 2,300 jobs available, almost 1,200 are in sales. The real number is actually slightly higher, because many sales positions are disguised as management positions, or some other category, such as finance. A great deal of these jobs are commission based jobs, or low-paid retail. Most of these jobs do not require higher education in order to successfully complete the task at hand. I recently had a college graduate come to my door, selling high-speed internet services. I do not believe that his college degree did in any way contribute to his performance on the job, but the position that was advertised to recruit him actually asked for one. I checked it myself and as it turns out the company that employs him is still advertising such positions.

We should not be surprised that so many sales jobs are being advertised, given that there is essentially no income growth for the 99% of the population, which should be responsible for most consumer demand growth. It is getting harder to sell goods and services, therefore there is a need for a more aggressive approach to sales. It is also a great way for companies to cut costs. The company providing the internet services that the college graduate was selling door to door is taking zero risk in this product promotion scheme. All the risk falls on the person accepting the commission-based job.

Of the over 2,300 jobs advertised on careerbuilder.com for the Omaha area, only a few hundred of them are decent paying qualified jobs, which require higher education skills. There are over 200 IT jobs, which makes up an impressive 10% of the total. Engineering positions also make up another 10%, but I should point out that IT and Engineering positions sometimes overlap. There are also positions in health care, construction, maintenance and other fields, which do require some qualification. Reality is that more than half the jobs do not require any post high school knowledge, even if some positions are advertised as needing it.

Everyone rushing to get a higher education diploma or certificate will do little to change the composition of jobs on offer. The only thing it might do is drive down wages for skilled labor due to over-supply. As far as the jobs on offer situation goes, increasingly we are looking at commission-based or low-wage jobs even in high-skill fields as is the case in biological-medical research for instance where an oversupply of PhD graduates is now pushing wages in the field to surprisingly low levels. It is not uncommon for PhD graduates to accept research positions for $25-30,000 a year. In fact, many of them consider themselves lucky to land such a position, which is something I was made aware of through my social circles, especially in Canada.

The fact that we get such misguided suggestions coming from our media and political elites as solutions should not come as a surprise. Most of the people commenting in the public sphere on this issue are people who entered the job market in very different times. Times have changed drastically since then, while perceptions of reality are not keeping up. In reality, higher education is no longer a guaranteed or even a good bet for a leg-up for young people. A college degree in a field that is in demand is no longer always enough. Having connections is increasingly a prerequisite, as well as the ability to do parallel volunteer work in a work environment related to the field of study in order to get work experience as well as build connections. These volunteer positions also increasingly require people to be connected in order to land in the right spot, not to mention that those who work to get themselves through school do not have time to also work countless hours for free. In conclusion, education as a social mobility tool is increasingly a myth for a growing number of people. It is also a myth that it is a way to stop the growing gap between rich and poor.

The real endgame

As I already pointed out, US real median household income declined by 10% since 1999. While there is a chance of a small increase in the next few years before the next recession hits, reality is that the next recession will most likely see median household income blow past the low made in 2012 and take us even further down, most likely beyond the point of economic sustainability. As I pointed out in a previous article, low interest rates made up for lack of real income growth, making continued growth in consumption possible since 1999. The next recession will find us with interest rates already at low levels, so no chance of a boost coming from monetary stimulus. Fiscal stimulus has limits as well, both financial and political, so all the classical conventional options for stimulating the economy out of another recession will be gone.

With all other options exhausted I believe there will be an attempt to finally address the problem of income inequality, regardless of political shade in power at the time. It will be done in a massive way through measures such as aggressive increases in the minimum wage and perhaps a federal sales tax on non-essential goods as well as perhaps a luxury tax on goods and services consumed by wealthier consumers. Extra money will most likely go to government hiring as well as strengthening the social safety net.

The end result might be some growth in consumer demand thus economic growth initially, but by far the biggest impact given that this will be done suddenly, not gradually as it should be done, will be on inflation. It is at this point that all the money printed by the Federal Reserve since 2008 will finally start to make its way into the economy, at which point it will get very interesting. It is impossible to predict the magnitude of the wave of inflation coming our way, but it will most likely be massive given all the money that was already printed, and is yet to be printed in the current monetary environment, which is still focused on stimulus.

Many people believed that inflation was on its way as soon as the Federal Reserve started its monetary stimulus policy. It did not happen, because the money never made it into the pockets of the consumers. That part of the equation still needs to be fulfilled and I believe that given the lack of foresight on behalf of the political and business elite, it will not happen. They should have accepted a long time ago that the growing rift between rich and poor, which is translating in depressed consumer demand, should have been dealt with. They did not, so it will happen as soon as the next recession will hit. The reactive approach, which will be the only thing left to do once the realization will set in that there is nothing else to get us out of it, will not have the desired approach. On the contrary, it will create an additional problem, which will need to be addressed, which will in the long-run cause additional pain for all involved.

Opportunity:

It is impossible to predict when the next recession will hit. We are now half a decade into a recovery, therefore the next recession cannot be more than half a decade away if we are to take into consideration the average length of an economic cycle in the past few decades. The most important thing may not be to focus on when it will happen but rather on how it will play out given the circumstances. Given that inflation will likely be one of the major outcomes, gradually positioning one's financial assets into a direction that might do well in such circumstances might not be a bad idea. Some inflation hedge assets are now selling at a decent price given that fewer and fewer people believe that we are likely to have inflation coming our way any time soon.

For those people who are not looking to buy into the classic inflation hedge, which of course is gold (for disclosure purposes I want to mention that I own some gold), looking for companies which are likely to do well in tough economic times such as Kimberly-Clark (NYSE:KMB), which I covered about a week ago may not be such a bad idea. A stagnated economy coupled with high rates of inflation will crush those who are not prepared for it. I learned that growing up in post-communist Romania. I also learned that some people can actually thrive in such chaotic times. The key is to be prepared and in my view, there are now enough reasons to start building a hedge position against the possibility of this scenario becoming reality.

Source: Inflation: Oxfam Report Key To Understanding When It Will Happen