Sunday, June 14, 2020

Inequality On Rise - Many Of 99% Dirt Poor As Rich Gain

Inequality has soared over the last several months with billionaires seeing huge gains in their wealth while many people are getting slammed. Much of the adverse effect on the average American has so far been masked by trillions of dollars flowing from the government in the way of temporary stimulus checks. The covid-19 crisis and how it has been handled by the governments and the central banks have resulted in creating a twilight-zone economy. The moment the current $600 a week federal unemployment benefits run out at the end of July, many people will find they are caught in a financial vise with few options. Getting that unemployment money is the biggest reason many people who've lost jobs are able to keep a roof over their heads. Knowing many of these people are not going back to work is a big problem. You are not alone if you are having difficulty reconciling the growing divide between Wall Street markets that seem totally ignoring economic reality.

"Most Shorted" Stocks Soar As Bears Cover
Many market watchers and pundits are troubled and confounded by the recent market action. Several explanations exist with each one having some validity but great uncertainty remains. In a manipulated environment such as we have today where markets are propped up and manipulated with no true price discovery, all investments have become risky. The markets are reflecting a V-shaped recovery that Citigroup warns may be far too optimistic.

A slew of new investors, most inexperienced, have stepped into the breach and bought the dip under the impression it will lead to prosperity. This is evident in the area of the most shorted stocks which are on such a rant as those most negative on the economy are forced to capitulate to a soaring market. This is occurring while Citi writes its model still shows that a greater than 70% probability of a down market in the next 12 months remains.

Another area where this can be witnessed is in how a newly IPO'd company has exploded to become the most valuable truck-maker in the world, despite having no sales ever. Stock in Arizona-based Electric trucking startup Nikola soared last week, more than doubling in one day. This gave the company a market value of over $30 billion. This occurred after Nikola founder, Trevor Milton, tweeted about taking in reservations for the company’s light-duty truck called ‘Badger’ starting in late June. Its medium-duty truck is due in 2021, and a heavy-duty truck in 2023.

Proposed Badger Truck Not Yet Produced
To put this in context, during 2019, Ford with a lesser market cap of $28.7 billion sold 5.5 million cars while Nikola sold none. This type of major disconnect from reality strengthens the argument that much wealth is an illusion financially manufactured and related to positioning. The idea you can become a billionaire in a matter of hours is hard to comprehend at a time many Americans are worried about losing their job. 

Many questions remain unanswered when it comes to the economy and many potential risks could affect the markets in the coming months. Biden could defeat Trump and the Democrats sweep Congress. Covid-19 could unleash a second blow setting back the reopening of businesses. Another big issue is the protest and civil unrest could grow much worse when the real impact of unemployment shows its ugly face. The fact that many older experienced traders are appalled at the stupidity and euphoria of this market does not matter. None of these issues seem relevant to those arguing that substantial Fed-induced liquidity has rendered traditional fundamental analysis moot.

Circling back to growing inequality, it is important to remember some stock indexes are making new highs at the same time NPR reports Americans are skipping payments on mortgages, auto loans, and other bills. Wealth inequality has soared in recent years and now stands at the worst it has been during the entire U.S. post-war period. Simply put, statistics show many Americans lack the money to pay for a $500 repair. Driving a decent car doesn't make a person middle-class or economically equal, especially if they are up to their eyeballs in debt to do so. While companies have temporarily put collection activities on hold due to the covid-19 pandemic, this will likely lead to a huge number of foreclosures, evictions, auto repossessions, and credit downgrades. 

The explosion in the national debt only bolsters the masses for a moment before finding its way into the pockets of the .01% that pulls the strings in Washington and controls our fate. Inequality has been growing and it is far worse for society and the world than first thought we are witnessing the further collapse of the middle class. The number of people living on government transfers of wealth has grown over the years, the National Debt Clock provides some rather shocking data concerning the number of people that are currently "receiving benefits" from the government or are unemployed. Many of the American's that are now experiencing the slip into this economic quagmire and rough times will tell you, "I never thought it would happen to me." In the end, it is likely a great number of these people will become a burden to society.

A More Recent Chart Hard To Find! click to enlarge
In a piece titled; "The Morass That Swallowed the Middle Class" Matthew Shaw delves into how much of the inequality debate focuses on the gains of  the "1%,” while far less attention has been paid to the economic well-being of others. What is broadly termed the middle class is all too often just lumped into a diverse group labeled the 99%. In truth, many of these people are dirt poor. Much of this centers around just how out of touch our "professional elite" are with the general population and the economy. By our professional elite, I refer to those who make the rules and their minions, their aids, the academics, the financial institutions, economists, and the media, all of which have tied their wagon to the status quo. Conflict and corruption also enter into this because we often find those setting the rules also tend to want a bigger piece of the pie.

This growth in inequality is a "pox on the house" of society. For decades the rich and powerful have been increasingly grabbing a larger slice of the economic pie. A great deal of growing corporate profits come from cutting back on the greatest expense businesses have to pay and that is labor. This is and will substantially increase in coming years as robots displace humans in the workforce. Robots are here and more are being deployed each day, soon this will prove to be a big deal. The topic of our future and culture always circles back and is directly linked to the issue of jobs vanishing as automation and an army of robots march into our workplace. Rest assured when push comes to shove those displaced from the job market will find they are only given enough to scrape by and ensure they remain docile and behave. If and when this becomes an issue conflict and violence will arise it is possible that someday they will be brought to heel by an army of robots designed to keep them under control. 

The reality is the vast majority of people face diminishing prospects. This concerning trend is highlighted in an IMF report focused on data showing how middle-income households have continued moving down, rather than up, as income distribution in the United States has shifted since the 1970s. The U.S. middle class has never recovered after being “hollowed out” when manufacturing jobs fled America and incomes fell. Current trends indicate the "equality gap" is not expected to narrow in the future. Growing income inequality is not just an American problem but it is an issue across the globe and no magic or silver bullet exists to address the conundrum brought about by this concentration of power and wealth. The images of cities burning and widespread looting as a result of police brutality are also being fueled by rising economic inequality. Today's social unrest reflects just how broken our culture and the economy have become. The sad thing is, many of those that have taken to the streets in protest will say that whatever actions society takes, "It ain't enough."


  1. The rich have always been able to do well, unless they're idiots, because the more money you have the easier it is to make a lot more. Nothing new there. Most of the ignorant masses don't know anything about finance or economics, plus many are irresponsible and shortsighted, so they will continue to blow their paychecks buying more stuff made in China they don't need and eating out every day instead of investing. Again, nothing new there.
    As far as money pouring into stocks, well, where else are you going to put it if you want a return? Because of bankrupt govts. printing money and manipulating interest rates down govt. bonds are crap, corporate bonds are risky and don't pay enough interest, and CDs don't pat squat. Stocks in good companies and real estate is the only way to go.
    Where inequality is concerned, I agree that we have a problem. The solution to it, however, is elusive. You can try the quasi socialist high tax route like Europe, but that is clearly failing in front of our eyes. I discount anything the IMF says because it is a biased globalist organization which promotes the quasi Socialist policies of Europe, so they love to criticize the United States.
    Our politicians are too cowardly to make Americans actually pay for all the welfare, entitlements, massive defense spending, and other federal govt. largesse. Instead they just borrow or print the money to make up the increasing revenue shortfall, which IMO causes price inflation which is a hidden tax. Either way you look at it there is a cost to everything and we will all pay it sooner or later. There is no free lunch as so many like to believe and politicians are quick to promise.
    Bottom line: there's nothing new under the sun. The world has been through similar periods before. Human nature never changes. We'll get through it, but there will be some suffering, mostly on the part of the middle class who always get screwed.
    Thanks for your articles.

    1. One third of eu countries are not high tax socialist. In fact Belgium has no capital gains tax. Want to make a million bucks in USA stocks ? Be a Belgian resident! Ditto for Switzerland, Croatia , Cehia, Cyprus, Malta . Netherlands has a low annual tax on wealth , no tax on gains. The EU offsets tax on labour and big corporations. Not private investors. As such the eu îs actually kinda capitalist for the individual.

  2. I have long been of the opinion that we focus too much on the .1 and 1% people, we know that they have been overcompensated for at least the last 30 years mostly through rent seeking. You make an important point, Bruce, about the all the rest of the folks in the country and how the financial pie is split. I recently made a post myself regarding median family income in this country and effectively the bottom 50% are relegated to a very difficult life. The next 25% live lives that most have thought of as middle class, not flashy but reasonably comfortable. The top 25% are really the drivers of the American economy. They are the market for most companies - upscale shops, upscale apartments and houses, upscale cars, nannies, private schools. . . Sorry, lost my head there a bit! Anyway another very timely and accurate post!

  3. Well, the marginal tax rates for income in most EU countries are much higher than those in the U.S. and start at much lower income levels. I won't even mention the high VAT tax rates and gasoline taxes. Lastly, many EU countries have very high levels of debt just like the U.S. despite their high taxes. My point is that govt. will never have enough money no matter how much tax it imposes.