I read an article last month that struck me in such a disturbing way that I felt a duty to respond with an article of my own. It was titled "The US Is Richer Than Ever." I mean no disrespect to the author, known as Calafia Beach Pundit, despite vehemently disagreeing with his views. It wasn't the data presented in this article with which I took issue, but the author's interpretation of it, which exemplifies a philosophy that has pervaded for more than three decades. It is one which I see as a cancer on our societal health and a roadblock to faster rates of economic growth, which, in turn, has weakened financial market fundamentals.
Through my own comprehensive interpretation of this data, I will show that while the US is richer than ever, most Americans remain relatively poor. It is this inconvenient truth that is undermining our economy's ability to grow. It has led to the political upheaval we are now witnessing in both the Republican and Democratic parties. It is also the impetus behind my bearish outlook for the performance of the US economy and stock market.
Last month the Federal Reserve issued a report with its estimate of the balance sheet of US households as of the end of 2015. The collective net worth of US households reached an all-time high of $86.7 trillion, as can be seen in the chart below provided by the author.
According to the author, "we can complain all day about the fact that we are living in the weakest recovery ever, and things could and should be a lot better, but it is still the case that today we are better off than ever before." The operative word here is "we," because it implies that all of us are equals in sharing this record amount of household wealth. The reality is that "we" are not, which is the main reason why the economic recovery is so weak, and things should be a lot better.
The author also shows that the average net worth of a person living in the US reached a record $270,000 on a real, per-capita basis, as can be seen below. This measurement of net worth has been rising for decades, which is supposedly proof that life in the US has been getting better and better for generations.
This interpretation of the data equates to suggesting that when Jamie Dimon walks into a Wal-Mart (NYSE:WMT), everyone shopping in the store is on average a millionaire. It may be statistically accurate, but it has absolutely no real-world relevance. The author addresses this issue by claiming that even if all of the wealth is held by a very small group of people, "we" all benefit because this wealth is what "provides jobs and the wherewithal to run and maintain our economy."
This is a woefully inaccurate statement. Wealth does not create jobs, nor does it run or maintain our economy. It is the consumption of goods and services fueled by income growth that creates jobs and grows the economy. How many jobs will be created with the $365 million (predominately stock) that Yahoo (NASDAQ:YHOO) intends to reward Marissa Mayer with over a five-year period? The answer is none.
Lastly, the author shows that the "typical household has undergone a significant deleveraging since the onset of the Great Recession in 2008." As a result, the author suggests that the surge in household wealth is not built upon a mountain of debt, as it was prior to the last recession.
What the author fails to acknowledge in this analysis is that this debt did not magically disappear. Instead, it was simply transferred from the balance sheets of US households to the balance sheet of the federal government, and it was financed by the Federal Reserve. Additionally, while the average household may have reduced its amount of leverage over the past seven years, the federal government continues to accumulate unfunded liabilities for retirement benefits of more than $20 trillion. This is debt owed by each and every American household in one form or another, but it is unaccounted for in this analysis.
My interpretation of the Fed's report on the balance sheet of US households is very different because I am viewing it from the bottom up rather than from the top down. I am also looking at medians rather than averages. This is because I believe that US economic growth is a team sport and if everyone is not participating, then it is a game that "we" will eventually lose. Unfortunately, this is the path that we are on right now.
It may be true that the collective net worth of US households reached an all-time high at the end of last year, but the distribution of that wealth was extremely concentrated, which grossly skews the averages. According to Sentier Research, median household income in the US is approximately $57,000, which means that on an inflation-adjusted basis it has been flat for more than fifteen years, as can be seen below. This does not support the view that life in the US is getting better and better.
If we focus on financial wealth, the data is even more disturbing. Consider the fact that the financial assets held by upper middle-income households (50-100k), aged 40-55, have been stagnant for years.
This is a far cry from the average net worth of $270,000. Most households have less than one year's income in savings, which includes retirement accounts. If we subtract the financial wealth held in retirement accounts, then the data is even more alarming.
This reveals that upper-middle-income households have virtually no savings outside of retirement accounts, and it suggests that the 50% of US households earning less than the median income of $57,000 have even less. It also suggests that those at the very top of the income scale have accumulated a massive amount of financial wealth in recent years, lifting the overall average.
If we focus our attention on the leverage ratio for this demographic, you will notice that the amount of debt relative to assets is more than double the percentage previously shown for overall US household leverage. This signifies that the balance sheets of the majority of households in the US are far more distressed than what can be seen below.
One such demographic that is hemorrhaging from debt is our youngest generation of Americans who have borrowed from the government's student-loan program over the past decade. According to The Wall Street Journal, more than 40% of some 22 million Americans with student loans amounting to $1.2 trillion are now delinquent. This is our future, and they are clearly not benefiting from the record amount of US household wealth that has been created as of the end of last year.
So while it is true that the US is richer than ever, it is also true that the majority of Americans are relatively poor in comparison. This is a conundrum because it is this growing disparity in income and wealth between the rich and poor that is bringing the rate of economic growth in the US to a standstill.
It is consumer spending that fuels the majority of the growth in the US economy. Income growth is what drives consumer spending. When an increasing percentage of overall income goes to the wealthiest Americans, who are more likely to save or invest what they earn rather than spend it, the rate of consumer spending growth declines and the rate of economic growth follows.
Additionally, when financial wealth is more evenly distributed, it improves the leverage ratios and balance sheets for a larger percentage of US households. In turn, this allows households to reduce debt, lowers the cost of servicing remaining debt and increases the disposable income available for the consumption of goods and services.
The Federal Reserve has played a central role in increasing wealth and income disparity. Its policies have served as the primary catalyst for inflating financial asset wealth over the short term at the expense of investments that increase productivity over the long term. As a result, the value of financial assets has increased well above historical averages, while at the same time the rate of economic growth on which the value of those financial assets is ultimately based has slowed dramatically. Investors are finally beginning to recognize that valuations are well above what is consistent with a slowing rate of economic growth that is accompanied by declining corporate revenues and earnings.
I am not proposing a massive wealth transfer from the rich to the poor, nor am I proposing a continuation of the status quo. The solution lies somewhere in between. The bottom line is that we will realize faster rates of economic growth if wealth and income are more evenly distributed. As we move further in the opposite direction, it is clear that the health of our economy erodes and the strength of the fundamentals that serve as the foundation of our financial markets weakens.
The majority of American households are searching for a solution, as evidenced by their support for political candidates that are considered extreme in their views. We have Bernie Sanders on the left and Donald Trump on the right, both of whom are redefining the values of their respective parties. The reality is that Hillary Clinton will most likely be our next President, and we will have four more years of the status quo. I suspect that little will change as a result.
I have come to the realization over many years that solutions are only born out of crises. Therefore, I think we need to have another one in order to hit the reset button. It will surely be accompanied by a recession, a significant decline in market valuations or some combination of the two. My hope is that this will eventually result in an America in which the majority of US households are richer than ever, as opposed to one where the majority of US households are waiting for a record amount of US wealth to trickle down to them. That will be what signifies that we are on a path to progress.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.