The combination of the dot.com mania and the housing bubble has effectively wiped out a wide swath of middle class investors; the damage inflicted in most cases is irreversible. This is the new reality; a shrinking middle class, a rising class of impoverished individuals and an elite class (the top 1%) that is growing and is controlling more and more of the pie.
The economic fallout has been massive. More than 28% of homeowners in the US have negative equity or put in another way, more than 1 out of 4 borrowers owes more on his/her home than it's worth. One could make the argument that the American dream ended as early as 2000 but the Fed by artificially manipulating interest rates and providing easy credit created another bubble. Americans appear to have very short memories; within a few years of losing more than 7 trillion dollars in the dot.com bubble, they were ready to embrace another bubble. Those who do not learn from history are doomed to repeat it again. The fallout from the housing bubble has surpassed the $9.1 trillion mark.
Factors clearly illustrating that the American dream is over
Nearly 1 in 6 Americans lives in poverty, according to the latest census data; the divide between the rich and the poor continues to widen. What most of the world does not realise is that the United States is both a 1st word country and a 3rd world country. An ever decreasing portion is 1st world, but the rest is for all intents and purposes is a 3rd world country. For example, almost no bridge in the US received a grade above D, almost all of them received grades of D or below. It would take trillions of dollars to bring the infrastructure up to speed.
According to a 2009 ASCE report card. The United States' roads, bridges, drinking water systems and other infrastructure received a cumulative grade of D on the Washington-based American Society of Civil Engineers' (ASCE) 2009 "Report Card for America's Infrastructure." Unless all levels of government and the private sector invest more than $2 trillion in the nation's infrastructure, ASCE officials say the economy's recovery will continue to be threatened. As this report was issued in 2009, the cost associated with improving the natures infrastructure has definitely risen since then.
Nearly 1 in 6 Americans is now classified as poor or put another way, 46.2 million Americans now live in poverty - the most on record dating back to when the census began to keep records in 1959. The number of Americans without health insurance is roughly 50 million and increasing.
Unemployment rate is now at 9.1% officially, but unofficially it is probably well over 20%. An article in the NY Post puts the unemployment rate at over 22%. The government does not count those who have stopped looking for work as part of the unemployed.
"The American Dream has been under assault for 30 years," says former President Bill Clinton
The first decade of the 21st century will be remembered as the decade the American middle class took a step backward. On inflation adjusted basis incomes of the middle class have barely budged since the mid 1970s, but the scary part is that incomes actually declined from 2000-2010. Americans have actually been earning less and less in the past 10 years. Over the 10-year period incomes have fallen by 7%. The divide between the rich and poor is at multi decade high. In 2003, the top 1% controlled just over 35% of the wealth; today the top 1% controls over 42% of the wealth in America and the percentage they control is increasing at an alarming rate. The super rich do not make their money from working. Only 19% of the income reported by the 13,480 individuals or families making more than $10 million came from wages and salaries.
At the same time that Americans had less cash to spend, they were also being hit with rising prices for some crucial items. Even accounting for inflation, it still costs more to buy a home, fill your gas tank, go to the doctor and put food on the table than it did only 10 years ago. And not only is it more expensive to live a middle-class life, it costs more to get there too. The price of a college education -- still considered the ticket to higher wages and a better lifestyle -- has surged over the last decade, even in spite of the recession. Facing these burdens, the American Dream is undergoing stark changes, with fewer people choosing to buy homes and more young people postponing their own independent lives. The census data showed about 14.2% of all young people ages 25 to 34 are still living in their parents' homes this year, compared with about 11.8% before the recession began in 2007.
More mortgages require a down payment of 20% or more and to make matters worse banks have now significantly tightened credit standards; any blotch on your credit report no matter how minor it is will most likely disqualify you. From asking next to nothing and lending money to anyone banks have now moved to the opposite end of the spectrum where they ask for everything and want 500% more as a down payment (in the heyday of the housing boom, one could have purchased a home with shoddy credit and with 3% or less as a down payment) before even considering your application. In a tight economy this is a recipe for disaster.
Some other disturbing factors
Real GDP when adjusted for inflation peaked in the second quarter of 2008.
Disposable income on per capita basis also peaked in 2008, almost around the same time the GDP peaked.
46 million Americans are now on food stamps, an increase of roughly 75% since 2007. History illustrates that if year-over-year GDP growth drops below the 2% mark, that there is an above-average chance that a recession will follow within a year. We are now below this mark.
Goldman Sachs has a rule that states that “if the three-month average of the un-rounded unemployment rate increases by 35 basis points from a trough, the economy has either entered recession already, or will do so within six months.” The only exception to this rule is in the early stages of an economic recovery, and we are far away from that point. In simple terms, this means that if the jobless rate surged past 9.3% for the month of Oct. and remained at or above this level through Dec., it would be a very good indication that the economy was stalling and another recession was just around the corner. The current 3-month average is roughly 9.07%, so we are getting dangerously close to the mark.
According to the Wall Street Journal there are more officially unemployed Americans than the combined populations of Vermont, New Hampshire, Wyoming, Idaho, DC, Maine, Alaska, South Dakota, Delaware, Montana, Rhode island, and Hawaii
One metric is now worse than that experienced during the great depression; the housing crisis that began in 2006 is now worse than the Great Depression. Prices have fallen some 33 percent since the market began its collapse, greater than the 31 percent fall that began in the late 1920s and culminated in the early 1930s, according to Case-Shiller data.
Businesses in America have almost 2 trillion dollars on their balance sheets and they are not spending. Businesses are in business to make money so when they start to hoard cash it makes one wonder. When inflation is factored in (currently 3.8%) business are losing money. Business must be hoarding so much cash because they feel that the outlook is going to get worse before it gets better. To put this in perspective 2 trillion is twice the size of Turkey’s GDP and it is larger than combined GDP of Greece, and Spain. It is larger than Italy's GDP and only 1.3 trillion less than Germany's GDP. This is a huge sum of money.
Business and large investors appear to be very nervous as the Bank of New York Mellon (BK) has decided to take the unprecedented step of charging its clients for storing cash.
The Baltic Dry Index (BDI) is a leading economic indicator and as such if all was well then it should be trending upward. The BDI peaked at 11771 on May 21, 2008. After that the highest point it ever reached was 4669 and this was achieved in Nov., 2009. Currently, it is trading at 1835, which is more than 85% below the May 2008 peak. This indicator is clearly pointing out all is not well and has been doing so for quite some time. While the majority of the experts were busy proclaiming all was well In Europe back in 2010, the BDI was clearly indicating that the opposite was true as early as late 2009.
The most tangible sign of our hollow economic growth is the shortage of jobs. The economy has regained its peak output with about 6.4 million fewer jobs than there were in 2008. If the economy had continued to create jobs at its prior pace instead of plunging into recession, we'd have about 12 million more jobs right now. That's an enormous deficit that could transform American society in ways we still can't foresee. The percentage of adults who are working or looking for work, for example, has plunged over the last two years, and is now back to the same level as in the early 1980s, before large numbers of women stormed into the workforce. Such a stark change in the labor force, if it lasts, could permanently alter the way families earn and spend, while also straining the nation's social and economic safety nets. These distressing sub trends explain why many Americans are still experiencing a recession, even though the economy is growing. In sum: While the nation's economic output has eclipsed its prior peak, GPD, income, spending, and employment are still far below prior peaks when measured across the whole population. With growth in jobs and GDP as weak as it is, those measures could remain depressed for years.
There has to be a light at the end of the tunnel; everything cannot look so bleak. Indeed there is a light for those who are willing to take certain measures. History illustrates that most disasters (at least financial disasters) proved to be very fruitful for those who did not panic and instead of jumping out of the markets deployed money into key sectors and held onto these stocks for the long haul.
As the US is printing money at a mind boggling rate, it is just a matter of time before investors start demanding higher rates. The loss of the vaunted triple A credit status should have served as a wakeup call for the US but it appears to have fallen on deaf ears. As a hedge against inflation one should allocate a certain percentage of one’s funds into precious metals. Distribute this money into silver, Gold and Palladium bullion. Those seeking more leverage could look into opening up positions in certain Gold and Silver mining companies. In the Gold sector we feel that Rand Gold resources (GOLD), Royal Gold (RGLD) and Nemont mining (NEM) would make for good long-term investments. Speculators can look at Richmont Mines (RIC) and Drd gold Ltd (DROOY). Compania Mina Buenav (BVN) and Silver Wheaton Corp (SLW) make for good plays in the Silver Sector.
The demand for oil and energy is set to rise in the years to come and as such it would be wise for investors to have holdings in this sector. Chesapeake Energy Corp (CHK), Apache Corp (APA), Cabot and Oil Gas Corp (COG) are examples of some companies investors can consider in this sector. As the commodities bull is expected to last several more years opening up positions in the precious metals, oil, gas, and other related sectors could prove to be very profitable in the long run.
The general secret though is to spread your money into several sectors and not just put everything into one sector. Another very good strategy is to put some money into stocks with a long stable history of increasing their dividend payments. My last article titled Dividend Champions could be used as a starting point in terms of spotting companies with stellar dividend payment histories.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.