Sunday, February 20, 2011

Has America Gotten too Expensive?

Here is the new reality in America:

My Take:

Wages have gone nowhere for a decade for 95% of the people in this country.  Meanwhile the upper 5% has flourished during the same period.

Folks, no matter how Wall St spins it, the economy isn't coming back until the bottom 95% of this country sees more jobs and higher incomes.  To date we have seen nothing of the sort.  

Unemployment remains at around 20% depending on who you listen to.  Housing remains deader than dead.  Jobless claims are now back on the rise.  Inflation is becoming a huge problem, and it's creating chaos around the world.  Oil is up close to $3 tonight as the Middle East remains in complete turmoil.

Corporate earnings are better but it's not helping the job situation.  In fact, it's having the opposite effect IMO.  Companies are not hiring because they feel pressured by the pigmen on Wall St to keep profits growing.  Since the economy sucks, companies are forced to cut costs and increase productivity in order to meet the streets ridiculous profit expectations.

The problem is you can only "layoff" your way to prosperity for only so long before there is nowhere else to cut.  This means earnings become flat and as input costs rise thanks to inflation I expect you are going to see earnings begin to fall in the very near future.

After a 100% rally in equities I think many are going to start questioning the idea of staying long.  This doesn't mean that the market will crash.  The algos now control a lot of the liquidity in the market so it's made it very difficult to anticipate where stocks go.


Let me switch gears here for a second.  I thought I would share some weekend discussions that I had.  I spent it with some Wall St folks and we had a few long discussions about the markets.

Many things were discussed.  The one I found most interesting was the long discussion we had about the effects that the HFT's, algos, and quants(whatever term you prefer) are having on how equities trade.

The conclusion was everyone agreed that the speed traders are having a dramatic effect on the price action of the market.  Most of them concluded awhile ago that there is no investing on Wall St anymore.  One of them said "Jeff, when the average trade is held for 11 seconds how could you possibly call buying stocks investing?".

They all agreed that it's all about speed now versus fundamentals.  I asked them if they thought this could last, and everyone agreed that it would eventually self destruct via a flash crash or some other Black Swan type event.

This was also interesting:  Many of them sit in cash, and some of the ones who have large cash positions believe the dollar is toast.  Thats how crazy this market is! The ones that hate the dollar and sit in cash think they will be able to move it into currency hedges before the dollar gets flattened.

The group generally agreed that the next big profit opportunity will be to the downside in stocks, bonds, and the USD.  All of them are petrified of inflation.  Interestingly, many of them don't like the commodities right now because they think too much "hot money" has already flowed in them.  

For the most part they were all extremely bearish and scared.  One of them noted that the recent money flows from the retail investor into stocks is a definite sign that we are nearing a top.

For the most part they believe sitting on your hands and waiting for a trend change is the thing to do right now.  Food for thought.

Back to My Take

The oligarch of this country will never admit it but they need the middle class in order to turn around the economy.  The truth is that they do because the top 5% represent a very small part of the population.

The biggest problem our economy has is reflected in the wage earning chart above.  Incomes are dropping and they have remained flat for over a decade now.  However, during this same period of time, the cost of living has SOARED!

The harsh reality is middle class can no longer afford to live here anymore.  Americans can't afford the $400,000 house that they got suckered into buying from 2003-2007.  They can't afford to spend 50k a year on a college education. 

In fact, with the way food costs are rising, they can barely afford to eat anymore.  I think the consumer is about to once again fall off a cliff.  The consumer numbers we got last week were 50% short of expectations.

Should we be surprised????  Incomes today are the same that they were in the late 1990's, and the recent data shows that they are actually beginning to decline once again as the economy suffers.  One of the most startling things that I read this week is 50% of Americans now make less than $505 a week. 

Good luck trying to get them qualified to buy a house!

One way I like to emphasize the whole wage point is by telling people to go back to the late 1990's and look at how much it cost to live on the same wages versus today.  Houses in the bubble markets were one third of what they are today.  That's right folks, homes have doubled or tripled in cost in certain markets.  Slower housing markets saw less appreciation, but prices are still up significantly versus 10-12 years ago.

College is up around 30% in price.  Gas is triple what it was back then. 

How in the hell can we recover when salaries have not increased at the same pace of our cost of living?

How is this sustainable?  Answer:  It isn't.   Add in a bad job market and it's even more frightening when you think about it.

The Bottom Line

The Fed can POMO up the stock market all they want.  The problems are not being fixed which means our economy is only going to get worse.    

The Fed's zero interest rates policy/money printing combination is making the cost of living in America unaffordable.   Zero interest rates are also hurting us in more ways than one.  Most people love to focus on the inflation that this policy creates and it's a very valid point. 

IMO,  people are forgetting that this policy has absolutely destroyed people who depend on fixed income.  People who used to be comfortable living off of their 5% CD's are getting pummeled as they are now forced to eat into their principle.  This is crippling many senior citizens.  I would love to see the actual income destruction from this policy.  I bet the numbers are devastating.

The Fed is basically punishing the people who did things the right way all of their lives with this zero rates garbage.  The fixed iincomers in this country are the ones who worked hard all of their lives in order to save enough money to comfortably retire and live off of the interest from their principle.

These people did things the right way and they now they are getting SCREWED by the Fed because the banks need to be saved.  Their lives have been turned upside down by this.  Millions of seniors are now worried that they might outlive their money.

It's really disgusting when you think about it.

Moving forward I just don't see how the consumer can recover under such brutally expensive living conditions. 

The only conclusion that I come to when I look at all of this is that the system will collapse.

If the Fed continues to print then we are going to see a brutal inflationary period that will eventually take down the consumer.  Since the consumer represents 70% of our economy it means the system itself will likely go right down with it.  I can't tell you when this all happens.   What I can say is that in my opinion is it's inevitable.

It's going to suck going through this difficult time but down the road I think it will be good for all of us.

After all, who wants to live in a country where you can't afford the simple pleasures in life? 


getyourselfconnected said...

Great post. At some point the extreme effort required just to keep a normal family afloat financially is going to cause resentment when nthe top 5% party it up with government backstoips of their games.

Jeff said...

Thanks Get


The tipping point is right around the corner the way I see it.

If oil moonshots here we are in a world of trouble.