I heard yesterday that the S&P 500 stock index set a new record.
Congratulations to stock owners!
Most American households don’t own stock. Of those that do, most are involved in a small-time way via retirement accounts like IRAs which may be passively managed by a brokerage. Maybe a tenth of the stock capitalization is accounted for by these small fry investors whose average stock value is $40,000.
The richest 1 percent of Americans owns half, and richest 10 percent own roughly 88 percent, of all stock equity.
So, the overwhelming benefit of the surging S&P 500 extends primarily to the folks who were already filthy rich. Way to go! Enjoy your fancy cars, mansions, and $100 cigars. Life is good.
By the way, the top 1 percent of Americans own more wealth than the bottom 90 percent of Americans. Wealth includes assets such as cash, bonds, stock, business ownership, property and other tangibles less debt.
That is a staggering statistic.
Here’s another one: Since 1978 (that’s 42 years), CEO compensation has risen 940% while typical worker compensation has risen approximately 12%. The only reasonable explanation for this phenomenon is greed.
As investor Gordon Gecko in Wall Street said, “Greed is good.”
During those same four decades, prices for consumer goods increased by 297% while the value of the dollar increased by only 140%. This means that the average working Joe is, financially, worse off now than in 1978.
It’s better to be rich.
Most Americans can’t afford to own stock or a home. Their finances are month-to-month and, in some cases, day-to-day. Food, shelter, and utilities are their priorities. Many households use, and abuse, consumer debt to get from paycheck to paycheck. This is the reality of blue-collar America.
Between 25 and 30 million of these Americans, depending upon the statistical source, are now out of work thanks to the Covid-19 pandemic and our government’s feeble response. Those folks are in danger of losing their homes and having to beg for food for themselves and their families. Any of them who previously had medical insurance probably lost it with their job and now have to pray that they or their children don’t get sick or injured.
A good proportion of these unfortunates were previously employed in the Hospitality/Leisure sectors of the economy. These low-income workers were the cooks, waitresses, busboys, dishwashers, janitors, maids, bartenders, hostesses and such that kept hotels, restaurants, bars, clubs, arenas, stadiums, theaters, casinos and theme parks running. Also laid low by the economic crash are support industries (to the Hospitality/Leisure sector) like agriculture, horticulture, dry cleaners, beverage providers, and suppliers of all manner of items. In addition, the airline industry has been laid low, as conventions, vacations, and in-person business travel has plummeted. Car rental companies are going bust.
Interestingly, the S&P 500 Index doesn’t reflect much on this sector of the economy, which accounts for perhaps 2/3 of the folks who are currently unemployed. That may be why the word “disconnect” is often used when describing the relationship between the stock market euphoria and the overall depressed economy.
The market capitalization (dollar value) of the S&P 500 is dominated by a small number of companies. Four of them (Apple, Microsoft, Amazon, and Facebook) account for roughly 20 percent of the S&P 500 capitalization. And roughly one-third of the market value of S&P 500 firms comes from only 15 companies, none of which has much to do with the Hospitality/Leisure sector of the economy.
Thus it is possible for the Hospitality/Leisure sector to take a grievous beating, causing as many as 20 million Americans to lose their jobs… and the S&P 500 to actually surge upward…during a deep recession.
Typically it is bad news, politically, to be in a recession or, worse, a depression. That’s what’s occurring now as, according to one poll, as many as 40 percent of Americans who have jobs are worried about losing them in this pandemic/economic collapse.
In a cruel irony, many parents who have not yet been fired from their jobs are having to give them up to stay home and babysit/home-school their children because so many K-12 schools are closed due to the pandemic.
And, yet, President Donald Trump continues to boast about “his” economy.
Evidently, as long as Apple, Microsoft, Amazon, and Google are doing okay, the rest of the economy can go to Hell and the American economy will still being doing “great”, according to the 1 percenters…like Donald Trump. Billionaires lose sleep at night worried about share prices, not making rent payments or wondering what they will have to eat the next day.
But what happens when 32 percent of households fail to make their monthy rent or home mortgage payments? That would be an enormous hit on the banking industry.
And that is exactly what happened in August 2020.
Even though perhaps “only” one-fifth of working-class Americans are currently jobless, virtually all of those folks have monthly housing payments. Accordingly, the impact on landlords and mortgage bond holders is magnified. Recent Federal, State, and local actions requiring lenders to show forbearance during the pandemic are sunsetting within the next month or so. At that point, it will be hard to sustain stock market exuberance when the financial sector goes into freefall.
This scenario is eerily familiar, harkening us back to 2008 when the mortgage finance sector of the economy imploded. Following that debacle, the Federal government bailed out the wrongdoers (i.e. the greedy 1 percenters) because…they were “too big to fail”.
In the past six months, the Trump Administration has spent an unbudgeted $5 trillion to prop up the crashing economy. Regardless of who wins the 2020 Presidential election, simply printing new greenbacks to bail out failing businesses and households is not sustainable in the long run.
Some real pain is coming.
And you can bet who will have to endure it and who won’t.
As Marie Antoinette once said about the starving masses who couldn’t afford bread, “Let them eat cake.”