Most of America is Still in a Bear Market

by The Curmudgeon

This week, the CURMUDGEON has decided to ignore the market noise. In particular, the USA Today cover story “Bull Run Gets Solid Footing," consensus that the Fed will taper QE at their September meeting, rising intermediate and long term interest rates, Japan stock market decline, Hindenburg cross, sudden U.S. market selloff in last hour of trading on Friday, etc.


Instead we focus on Main Street, which has NOT participated in the so called "economic recovery" after the great recession officially ended in June 2009.


1.  Let’s first look at declining disposal income, which dropped at an 8.4 percent annualized rate (adjusted for inflation) from January through March 2013, compared with an estimated 5.3 percent decrease.  This was the biggest decline since the third quarter of 2008.  Real per capita disposable income is now at a level below where it was two years ago – confirming the consumer is getting pinched hard by payroll tax increase, low wages, and increased prices for gas, food, and other necessities.


Friday, May 31st WSJ - Ahead of the Tape column hit the nail on the head:


"The 3.3% growth in disposable personal income was the lowest since such records began in 1959, excluding the 2009 swoon. Stripping out December's surge in dividends and bonuses ahead of January's tax increases, income rose by a little less than 3% in 2012. This year is on track to be even slower.


Over the past five years through March, disposable personal income has risen 10.5% in total. That is the worst pace on record, reflecting not just a nasty recession but a lackluster recovery.  And it gets worse. Compensation from jobs increased only 8.2%, while investment income actually shrank 13.2% as the Federal Reserve's bond-buying programs squeezed those relying on interest payments. Offsetting this has been a 35.3% surge in government payments such as Social Security and unemployment benefits."




2. Next, we examine the Declining Labor Share of Income:


The declining labor share of overall national income is one of the most striking trends of our time. Tali Kristal in the American Sociological Review, argues that the decline was in sectors with a large labor union presence.




3.  Finally, we quote from a book review that highlights the ever increasing wealth inequality in America


NYT Book Review: A Nation, Its Seams Fraying - ‘The Unwinding,’ by George Packer


The Unwinding” begins like a horror novel, which in some regards it is. “No one can say when the unwinding began,” Mr. Packer writes, “when the coil that held Americans together in its secure and sometimes stifling grip first gave way.”


If you were born after 1960, Mr. Packer suggests, you have spent much of your life watching structures long in place collapsing — things like farms, factories, subdivisions and public schools on the one hand, and “ways and means in Washington caucus rooms, taboos on New York trading desks” and “manners and morals everywhere” on the other.


What has replaced them, he says, is organized money, as well as a society in which “winners win bigger than ever, floating away like bloated dirigibles, and losers have a long way to fall before they hit bottom, and sometimes they never do.”


If a solitary fact can stand in for Mr. Packer’s arguments in “The Unwinding,” it is probably this one, about the heirs to Walton’s Wal-Mart fortune: “Eventually six of the surviving Waltons,” the author writes, “would have as much money as the bottom 30 percent of Americans.”


Closing Comment:  What does it all mean?  It's that the middle and working classes are struggling to make ends meet. Most have little or no stock market investments and so have not benefited from rising stock prices.  The disparity between rich and poor in the U.S., AKA income inequality, has become more extreme the further one goes up in the income distribution.


The Bernanke Fed somehow thinks that rising stock prices (stimulated by its reckless QE programs) will cause a wealth effect which will spur economic growth.  We have shown before and in this post, that is not the case! The truth is that rising stock prices have done nothing to increase employment, raise wages, or disposable income. The cold, hard statistics speak for themselves.


Till next time.....................................


The Curmudgeon

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.