| | | This should be mandatory reading for everyone above the age of 12...
A BIFURCATED ECONOMY
The never-ending discussion about the upper end of the economic ladder versus the Lower rungs has been part of the investment scene for DECADES. While it does deserve attention, it often becomes a topic that doesn't always consider all the data.
In 1984 (40 years ago), the US poverty rate was 14.4%. In 2005, the poverty rate was 12.6%; 20 years later, the official U.S. poverty rate is now 10.6%. Given all of the macro challenges that came along (Financial crisis, Covid pandemic, mass Migration, etc.), lowering poverty rates significantly takes time. While some are not satisfied with the results, progress has been made.
In contrast, the poverty rate in the EU in 2024 was 16%, and 20 years ago, it was 17%. There is little doubt that the EU is more aligned with socialism than the US, even if they chooses to call it "social democracy." Whatever it's called, the poverty rate is higher there, which isn't surprising. It's more evidence that handing out money and ramping up government-sponsored programs to individuals solves NOTHING. Quite the opposite, there is more pain for more people, as the middle class and above have to bear the burden of those programs.
Then there is the poster child for Socialism and destruction. A country like Venezuela has staggering negative statistics. As of 2024, around 86% of households live in poverty conditions, and around 50% in extreme poverty.
So, let's fast-forward to this year, and once again, the Bureaucratic nature of our economy takes center stage. If we take a realistic and authentic view of this topic, most will conclude that what the McDonald’s CEO, Chris Kempczinski, said earlier this month during an appearance on CNBC, is very accurate.
"If you are upper income, earning over $100,000, things are good. Stock markets are near all-time highs, you are feeling quite confident about things, you are seeing international travel – all those barometers of upper-income consumers are doing quite well. What we see with middle and lower-income consumers is actually a different story."
It has also been the story and part of the never-ending transition from LOW to MIDDLE to HIGH for decades. Inevitably, there will always be a LOW end that has to cope and seek improvement. Unless any reader inherited wealth, I suspect just about everyone reading this has experienced the transition. Therefore, elevating this and citing it as a problem for the economy as we advance is disengenuous.
So far, the continued spending from the top down has been sufficient to keep things afloat, and that is ALWAYS the case. The top 10% of consumers are responsible for 50% of spending. Let's call this for what it is: the contribution that the LOWER end makes to the economy is always a NON-issue. This is confirmed by the fact that the bottom 50% of taxpayers pay 3% of the federal taxes collected. This bifurcation is meaningless when it comes to measuring the health of the economy. It's nothing more than a 'talking point."
On the flip side, it is always the WEALTHY and the WEALTH effect that prop up sentiment and the economy itself. The argument that this model cannot be sustained comes from the socialists, and it has been proven wrong for decades. Don't believe me? Please show me a socialist model ANYWHERE that has helped the middle and lower income classes. The fact that financial assets have remained near their highs has made a big difference in the last four months. When people feel wealthy, they tend to spend more and borrow against their assets, especially for big-ticket items such as home purchases and upgrades, new automobiles, and travel. With an additional 75-basis-point reduction in rates expected in the next three or so months, optimism among those aligned with the administration's growth policies will rise.
Therefore, those who continue to highlight the challenges and then form an opinion on the economy based on the challenges that the lower cohort face are being disengenuous. They continue to dismiss the other, more critical side of the equation. This year, the majority of the analyst community has been as wrong as the BLS jobs reports, and in doing so, have misled market participants. That opens the door to a topic that no one wants to discuss.
THIS is a DIFFERENT ERA for FINANCIAL MARKETS
The reason the analyst and economist community keeps shying away from the topic is that they have been guilty of letting their disdain for the current administration cloud their judgment. It's not anyone's opinion; their own words, advice, and actions belie that, and place them in that camp. At one time, "politics" never played a part in the investment world. But just as the entire investment landscape has changed, so too has the political scene. Algo trading, proliferation of ETFs, short-term option trading, and the addition of crypto assets to the mix, among other factors, represent vast differences from when stocks were traded in "eighths" and research was conducted using the Standard & Poor's investment research handbooks.
In the past, the two political parties in the US were more aligned with each other. Today, the parties' ideological differences are as wide as the Grand Canyon. There is no need to get into speculation or invoke a particular bias. It's right in front of us; there is no gray area, it's black and white. All one needs to do is go back to President Clinton's presidency to see the chasm that separates that Democratic party from todays version. From an economic standpoint, Clinton's presidency was one of the greatest in modern history. Curtailing Welfare and handouts, lowering the Crime rate, eliminating unnecessary spending, and incentivizing work programs, etc., all contributed to reducing unemployment for everyone. In today's backdrop, Mr. Clinton would be viewed as a far-right-wing extremist. These accomplishments came with a Republican Congress, indicating that the parties were indeed more aligned. Not so today, not even close. Therefore, to actually believe that an investor can dismiss what is taking place today is a HUGE mistake. When we see a party that embraces extremes (socialism, soft on crime, open borders, etc.), it represents a MAJOR potential issue for the US MACRO scene. continued...
Full text and context here
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