Record US Stocks Drive Wealth Inequality

According to a recent poll, US stocks at record levels seems like a nonevent for the average Americans.

From Bloomberg: (bold mine)

More than three-quarters of Americans say the five-year bull market in U.S. stocks has had little or no effect on their financial well-being, according to a Bloomberg National Poll.

Seventy-seven percent of respondents dismissed the 176 percent rise in the Standard & Poor’s 500 Index (SPX) since its March 9, 2009 financial crisis low, according to the poll, taken March 7-10. Barely one in five -- 21 percent -- said the market’s gains have made them “feel more financially” secure.

Divergent distribution of equity ownership equals asset based wealth inequality, from the same article.

The poll’s findings reflect the concentration of financial assets among better-off Americans. About half of Americans own stock, either directly or through retirement accounts, according to the Fed’s 2010 Survey of Consumer Finances.

Stock ownership that year fell to levels not seen “since the late-1990s,” the Fed said. Even those who participate in financial markets through 401(k) retirement plans often have only modest sums invested. Half of Fidelity Investments customers have less than $25,600 in their 401(k) accounts, according to Michael Shamrell, a spokesman…

The wealthiest 10 percent of families earn 11 percent of their annual income from capital gains, interest and dividends, according to the Fed. The poorest three-quarters get less than 0.5 percent of their income from such sources.

“Many moderate- and middle-income households have seen little benefit from recent stock market gains and are still grappling with the implications of home prices that, despite recent progress, remain well below their previous highs,” the White House economic team wrote in a March 10 blog post.

Main street sentiment versus Wall Street:

The poll also found continuing unhappiness with the direction of the country and ebbing optimism about the recovery’s staying power. By 62 percent to 30 percent, respondents say the nation is headed in the wrong direction.

Wow. The above dynamics, from the redistributive “inequality” effects from a central bank engineered stock market-real estate boom to the gaping divergence of public sentiment (main street sees little economic benefit as against Philippine version of Wall Street’ worship of bubbles) loudly resonates on the Philippines. 

Yet booming stocks in the US has led to a record rise in household assets. 

Austrian economist Joseph Salerno at the Mises blog remarked “total net worth of U.S. households has set an all time record in 2013 in terms of both nominal and constant dollars. In 2013 alone , total net worth climbed by $10 trillion from $70.86 to $80.66 trillion, the largest annual increase in household wealth in U.S history. More to the point, in 4Q 2013 household wealth adjusted for inflation — i.e., the constant-dollar value of financial assets plus the value of residential real estate net of all debt owned by U.S households–shattered the old record set in 1Q 2007 at the height of Greenspan’s bubble economy.”

As noted in poll, only about half of US households have exposure on US stocks, yet level of ownership has inequitably distributed. Based on US census data as of 2007, the bigger the income bracket the larger the scale of stock market ownership (red arrow). The lowest 3 percentile, with about 35-39% in stock ownership echoes on the Bloomberg poll where “stocks has had little or no effect” on them .  

Yet record stocks have not only has “failed abysmally to stimulate consumer spending, job creation, and economic growth via the “wealth effect” beloved by Greenspan and Bernanke. Ironically, what Fed policy under Bernanke has done is to put the U.S. economy in the improbable position where another financial crisis appears likely to occur without first producing even the illusion of prosperity and economic growth among the average American” according to Professor Salerno, but also driven the wedge of the wealth gap even wider, “Last week it was reported that the 167,669 ultra-high net worth individuals (UNHWI), a category covering those people who have accumulated over $30 million in net assets excluding their principal residence, experienced an increase in their combined net worth to $20.1 trillion in 2013, up from $19.5 trillion in 2012. In 2013, the UHNWI, most of whom are from Asia or the Middle East, were busy plowing their wealth into global commercial real estate. They spent a combined $11.2 billion on hotels, office buildings, warehouses, and shops, up from $7 billion in 2012. The average price of an office property rose from $63.9 million in 2012 to $162.7 million in 2013. The latter price is more than double the price of an office property at the height of the bubble in 2007.”

And not only has the Fed subsidy benefited the wealthy asset holding class, this has supported Wall Street through above average pay and fat bonuses, where the latter has reached 2007 levels. 

'Fat Bonuses" from Reuters:

The average bonus on Wall Street jumped 15 percent last year to the highest level since the 2008 financial crisis and was the third largest on record, New York State's budget watchdog said on Wednesday.

The cash bonus pool swelled to $26.7 billion in 2013, pushing the average cash bonus to $164,530, a post-2008 high in a industry shrunk by the financial crisis, according to the New York state comptroller's annual estimate.

The Zero Hedge notes (bold mine) that the “Average compensation for securities industry professionals in New York City ($360,700) were 5.2 times greater than the rest of the private sector ($69,200).” [bold original]

So Fed policies have been funneling money from the main street into the asset markets and Wall Street which underscores the redistributive wealth effects from the non-asset holders (debased currency holders and savers) to the asset holders, the latter financed by debt.

And more signs of déjà vu in the context of pre-crisis mania, as IPOs with negative earnings soar to its highest since Feb 2000, again from Zero Hedge.

And like all mania anchored on “this time is different” as I pointed out last week, add to this the record levels of penny stocks traded.

And this as leverage loans flies to the moon (from Acting Man). Phenomenal.

Record credit used to push up stocks to record levels. 

Unfortunately phony booms that has inspired by policies that has driven a massive wealth divide will eventually morph into a bust. 

The boom bust cycle as described by the great the dean of the Austrian school of economics, Murray N. Rothbard:

bank credit expansion under fractional-reserve banking (or "creation of counterfeit warehouse receipts") creates price inflation, loss of purchasing power of the currency unit, and redistribution of wealth and income. Euphoria caused by a pouring of new money into the economy is followed by grumbling as price inflation sets in, and some people benefit while others lose. But inflationary booms are not the only consequence of fractional-reserve counterfeiting. For at some point in the process, a reaction sets in. An actual bank run might set in, sweeping across the banking system; or banks, in fear of such a run, might suddenly contract their credit, call in and not renew their loans, and sell securities they own, in order to stay solvent. This sudden contraction will also swiftly contract the amount of warehouse receipts, or money, in circulation. In short, as the fractional-reserve system is either found out or in danger of being found out, swift credit contraction leads to a financial and business crisis and recession. There is no space here to go into a full analysis of business cycles, but it is clear that the credit-creation process by the banks habitually generates destructive boom-bust cycles

Since the bank credit fueled asset bubbles has been globalized, we should expect a periphery to core dynamic where the reversal of emerging market bubble cycles will eventually land in the shores of the US.

But again in a bust, the wealthiest will most likely be bailed out. This implies of a furthering of the wealth divide which may fuel unrest via the deepening of political polarization.