The chart below shows the percentage of income received by the richest 10% in this country since the start of the 20th century. And as you can see, it has never been higher in the past 120 years than it is today.
Why is the income disparity so high now? There are a multitude of factors, but a major contributing force is the influence of the central banking system. For over a century, the Fed’s power has been a major force in our economy, and more recently has been wielded in ways that have widened the income gap.
The richest people in this country have been increasingly getting a larger share of wealth since the late 1970s, while most Americans have struggled with low wages and next to no savings.
As opposed to the continued new highs of the stock market indexes, this “income share of the richest 10%” chart is one that you don’t want to see hit new all-time highs – if you’re expecting a mostly peaceful, prosperous society.
When the gap between the rich and the poor is large and continuing to grow, an unexpected, panic-inducing event – like say, a pandemic – can spark major age-old stories and trends of violence, political and financial upheaval, or even war.
For instance, it started with the creation of the Federal Reserve in 1913, in the wake of the panic of 1907. After that, most Americans saw their wages fall in half.
It happened in 1933 after newly elected President Franklin D. Roosevelt passed an executive order to restrict gold ownership. Almost every American saw the value of their savings and their wages fall immediately by around 30% – setting off the worst aspects of the Great Depression and leading to violent insurrections in Washington.
And it happened most recently in 1971, when the U.S. dollar came off the gold standard. This began the financial crisis of the 1970s, which lasted a decade and spawned domestic terrorism all across the country.
The solution of the Federal Reserve, the Department of the Treasury, and Congress to our country’s ills is massive money-printing.
These are literally digital dollars that we may never actually see. Each round of stimulus “creation” has been more unprecedented than the previous one.
In 10 days in March, the Fed created trillions of dollars of free “fake money”, more than it had created in the previous 30 years before the financial crisis of 2008 and 2009.
As we write today, another huge round of “juice” – that is to say, debt kicked down the road to future generations, programs brainstormed by the economists of the Fed and approved by politically motivated members of Congress – is being introduced.
The price tag could be anywhere from $1 trillion proposed by Republicans in the Senate to $3 trillion suggested by Democrats in the House, and it very well could end up being in the middle at $2 trillion.
But do they really help “we the people” and the health of our country in the long term?
The U.S. dollar has lost 95% of its value since 1913, when Congress passed the Federal Reserve Act and “modern” central-bank policy began and since then, the Fed has only increased its interventions over time.
Those with fewer dollars to their name get relatively poorer every time a new one is created, and more frustrated whether they know it or not, since much of those funds go into the markets… for the wealthy.
The gap between America’s richest and poorest families had more than doubled from 1989 to 2016. The highest-earning 20% of families in the U.S. made more than half of all U.S. income in 2018, yet you can see rampant homelessness, and the challenges that come with financial insecurity.
…and the stock market hits new highs.
When it comes to the major industrialized Group of Seven (G7) nations, data from the Organization for Economic Cooperation and Development show that the wealth gap is greater here than in the United Kingdom, Italy, Japan, Canada, Germany, and France.
This American economy is largely unsustainable. The government has obliged with endless money-printing, socialist policies, and creating growing debt… future generations be damned.
We have societal and economic upheaval happening at the same time.
The rich get richer… and the poorest citizens, like broke and debt-saddled millennials, are again calling for a radical solution.
Millennials will be the country’s largest generation of voters for the first time this November. They largely blame capitalism for the world’s problems and could usher in a new era of socialist policies, including a debt Jubilee.
But this debt Jubilee will be different from the ones in 1933 and 1971.
This time, the Federal Reserve has “unlimited QE” at its disposal and has said several times that it will print digital dollars until its computers break to take care of every stakeholder of the financial system. But the only way that private debt of everyday Americans can be resolved is if it’s paid, defaulted, or forgiven.
But throughout history… almost on a schedule… times of 0% interest rates, seemingly endless money-printing, and populist pushes for change have eventually had unintended second-order economic consequences.
The Fourth Turning
Many are saying that “this” has never happened before, referring to the volatility attached to the COVID virus. However, if we take a step back and look at history of the past few centuries, we will see that… this has happened before.
Not the pandemic. It comes from the work that author William Strauss and demographer Neil Howe published almost 30 years ago in 1991 in the book Generations… and more notably in their 1997 book, The Fourth Turning.
In brief, Strauss (who passed away in 2007) and Howe – the guy who actually coined the term “Millennial” – looked back at the past five centuries of world history (and the shorter history of the U.S.) and found a compelling, undeniable pattern of recurring eras.
In roughly 20- to 30-year periods dating from 15th-century England until today, Strauss and Howe say you can see the patterns play out in order.
And the four eras fall neatly into “saeculums” – a label that traces back to the Etruscan civilization of ancient Italy and describes periods each lasting about 80 or 90 years, roughly the length of a long human life.
The idea is that this “saeculum” is a period of time from the moment that something happened, like the founding of a city, until the point in time that all people who had lived at the moment had died.
At that point, a new cycle would start.
What’s more, the four “turnings” each have their own distinguishable characteristics.
- First Turning: The High
- Second Turning: The Awakening
- Third Turning: The Unraveling
- Fourth Turning: The Crisis
As Strauss and Howe write, “Each turning comes with its own identifiable mood. Always, these mood shifts catch people by surprise.”
Here’s where it gets interesting…
During a high, the national mood can’t be better… A sense of optimism grows that things are moving forward… For example, the era when the Baby Boomers were born.
Then comes a cultural awakening, a time usually marked by individualism, like what happened on U.S. college campuses in the 1960s.
An unraveling is the opposite of a high, where government begins to be seen as weak and untrustworthy. And finally, a crisis is an era of dissolution and destruction. A crisis typically ends with “total war,” as Strauss and Howe write.
For instance, the Protestant Reformation happened during a 16th-century awakening era from 1517 to 1542. And the French and Indian War was an 18th-century unraveling. The American colonies declared independence from England in the ensuing crisis era from 1773 to 1794, and the U.S. Civil War and World War II were both fought during “fourth turnings,” too, according to the theory.
Most recently in the U.S. these eras have been marked by the post WWII high – notice how people love to say “postwar boom” – the “consciousness revolution” of the 1960s and 1970s, the “culture wars” unraveling of the 1980s and 1990s… and today, another crisis era.
In fact, Strauss and Howe suggest in their book – which, again, was written in 1997 – that America’s next crisis era would peak in exactly 2020, when the Millennials started to come of age in earnest. (They also say this era will reach a “resolution” sometime around 2026.)
We’re not born with the perspective of an 80- or 90-year-old who has lived an entire saeculum. So, most of us will live our lives as we see fit, shaped by our circumstances, personality, and what we learn and see along the way.
The “secret sauce” of this demographic theory explains why certain generations behave the way they do.
Strauss and Howe say each generation has one of four “archetypes” or the way they see the world, which also appear in order, on schedule, for hundreds of years.
They are hero (meaning civic hero), prophet (idealist), nomad (reactive), and artist (adaptive).
For instance, the “Greatest Generation” is a hero generation. And today, believe it or not, so are Millennials.
Generation Xers are nomads. They came of age during a third turning. Their slogan was, appropriately, “Works for me.” The Silent generation, kids of the Great Depression and WWII, are considered “artists”… as are today’s children.
And because these archetypes arrive, in order, they predictably interact with and view other generations in regular patterns, too. As Howe says, the theory considers “how generations are shaped differently and how on predictable timetables they shape history as mid-life parents and leaders.”
Right or wrong, Millennials uttering the phrase “OK, Boomer” are like Americans of the mid-1700s thumbing their noses at the King George lineage of England… Perhaps this is why the Broadway play Hamilton has been so popular today.
With this framing, events that might seem unprecedented at the time are very clearly linked in the bigger picture.
And that’s the point I’m trying to make today.
Howe went on about what’s to come.
This next decade is critical. The 2020s is going to be an absolutely tumultuous decade. We’re going to see politics run off the rails. Parties are going to feel the future is at stake, that it’s now or never time.
It’s not just that the COVID crisis is hitting us economically, but it accentuates the blue zone, red zone perception of “If we don’t dig in now, it’s gone forever for us.” That is the fourth turning mood.
When asked how a “total war” that ends the crisis might present itself this time around, Howe didn’t give a specific answer. But he did say that most of the rest of countries around the world are on similar schedules as the U.S.
The Federal Reserve left policy unchanged as it monitors the virus spread. It will be some time before the labor market recovery warrants a rate hike. The US dollar declined further in response to the Fed’s cautious stance.
The US Stock Market
There is still a vast disconnect between the markets and the underlying economic fundamentals. Given the divergence was driven by unprecedented monetary policy, the eventual reversion could be ugly.
Market sentiment is extreme. Investors remain aggressively positioned in equities, providing additional fuel for a market correction.
The last time forward valuations were this expensive was at the peak of the “Dot.com” bubble:
Plus, we have the added headwind of being in the most seasonally unfavorable period for stocks as we head into August and September.
You may have noticed a bit of manic activity in the stock market. You may have also noticed inflation (as measured by various government agencies) is quite low, despite a supply interruption in numerous goods and services.
These aren’t separate events. Both are consequences of the pandemic. Specifically, they result from the government and central bank response to the pandemic. As necessary as their actions may have been, they have side effects, many unintended and some of which will not be known for years. These hastily conceived programs have even more side effects than usual.
I think we actually have high inflation, but due to these side effects it is showing up in stock prices instead of consumer prices. I believe this, not V-shaped recovery expectations, is the main reason stocks are up.
We can pretty much assume that earnings will be worse (because, after all, it is a recession) than projected below, but even that leaves 1999–2000 bubble-level valuations.
Another way to look at valuations is the ratio of price to sales rather than earnings. Here again, we have exceeded the 1999–2000 bubble.
As was widely expected, the second-quarter GDP contraction was severe.
It was one of the worst quarterly declines over the past century.
The 10yr Treasury yield is at the lowest level since the start of the crisis.
Will the economic growth stall after the US debt-to-GDP ratio exceeds 100% as it did in Italy and Japan?
It is the total debt that weighs on the economy.
The current pause and in some places a reversal, of business reopening has consequences beyond the US domestic economy. Samuel Rines explains how the combination of US pause with European progress may be bad news for US dollar bulls.
- US reopening progress is slowing and high frequency data shows the economic bounce is slowing as well.
- The bond market is adopting a “lower for longer” mentality as recovery hopes fade.
- Meanwhile, economic activity is accelerating in Europe, where the virus is now a far smaller threat than the US faces.
- These activity differentials affect the US dollar and euro, which is moving higher.
- European growth next year is projected to outpace the US by the biggest margin since 2007.
- Inflation is not a threat due to both economic weakness and low velocity of money.
With the US still unable to control COVID-19 without constraining business activity, and other developed countries well on their way to recovery, this probably won’t be just a European story. Others may outpace US growth as well. This would be a major reversal of recent trends, with currency and market consequences. Investment strategies may need to change because this new trend seems likely to last.
- Despite the furious rally in some stocks in recent months, there are still fewer than 60% of S&P 500 stocks holding above their 200-day moving averages.
That certainly seems an apropos statement after watching the financial markets plunge 35% in March to recover back to positive territory by July. Interestingly, this is the fastest rebound in the market since 1938 but is occurring against a near economic depression.
Here are some current stats:
- -34.7% Annualized GDP Growth (-8.675% for Q2) via Atlanta Fed GDPNow Estimate
- ~50-million people unemployed
- -4.2% personal income
- -104.2 billion decrease in international transactions for Q1 (Q2 will be markedly worse)
- -54.6 billion decrease in international trade of goods and services.
- ~30% decline in corporate profits
- ~35% decline in corporate earnings based on current estimates
There is no precedent for such a dichotomy between the markets and the economy. Yet, as stated, this is the fast recovery in the market since 1938. Just not so much for the economy.
- The latest survey from the Conference Board shows that despite a huge jump in stocks in recent months, fewer consumers expect stock prices to increase than decrease in the future. This is highly unusual after a rally, and with stocks so close to their highs.
All content is the opinion of Brian J. Decker