3 Things: No Money, Wall Street’s Big Scam, Bottom 80%

by Lance Roberts
Much of the commentary from the more liberal leaning media has continued to tout that the rise in asset markets over the last few years are clear evidence of economic prosperity in this country. However, is that really the case?
In order for rising asset prices to be reflective of overall economic prosperity, the“wealth” generated by those rising asset prices should impact a broad swath of the American populous. Let’s take a look to see if that is the case.

“Mo Money” Or No Money

In September of last year, I discussed the Federal Reserve’s 2013 Survey of household finances which showed a shocking decline in the median value of net worth of families across all age brackets.

While the mainstream media continues to tout that the economy is on the mend, real (inflation-adjusted) median net worth suggests that this is not the case overall.
image: http://streettalklive.com/images/1dailyxchange/misc/Fed-Survey-2013-NetWorth-091014.PNG

However, Shane Ferro from Business Insider posted a stunning piece on what has happened to American families as asset prices have surged higher. To wit:

“Nearly half of American households don’t save any of their money.
If it isn’t obvious, this has a broad range of implications. People who don’t save won’t have any buffer should the economy turn, and they lose their jobs. Longer term, people who don’t save won’t have the capacity to retire. It’s not good.“

image: http://streettalklive.com/images/1dailyxchange/misc/Households-Zero-Savers.jpg

What is clear is that rising asset prices, which have been induced by the Federal Reserve’s monetary policy and suppression of interest rates, has indeed benefitted those that have assets to invest.

The findings are strikingly similar to the U.S. Federal Reserve survey from last year.

“‘Savings are depleted for many households after the recession,’ it found. Among those who had savings prior to 2008, 57% said they’d used up some or all of their savings in the Great Recession and its aftermath. What’s more, only 39% of respondents reported having a ‘rainy day’ fund adequate to cover three months of expenses and only 48% of respondents said that they could not completely cover a hypothetical emergency expense costing $400 without selling something or borrowing money.“

In other words, the rich have gotten richer as rising asset prices have been a major benefit to stock-option based executives who have raked in billions. However, for the majority of the working class, it has remained primarily a struggle to survive much less actually save.

401k Plans – Wall Street’s Biggest Scam

Beginning in the 80’s and 90’s, Wall Street lobbied heavily to change the rules to allow companies to scrap pension plans in exchange for employee contribution plans known as 401k plans. Supposedly, this was to be a grand bargain for individuals to take control of their own financial futures.
This was a HUGE win for Wall Street as companies such as Vanguard, Fidelity and others gathered trillions of dollars in assets from company employees who contributed to those plans. It was also a win for companies which benefitted from the reduction in costly contributions required by pension plans which boosted net incomes and compensation to business owners and executives.

It all worked out great….right? Turns out, not so much for individuals.

According to a recent study, the results of shifting the responsibility of retirement savings, not to mention the risks of investing, to the individual has been grossly unsuccessful. To wit:

“$18,433 is the median amount in a 401(k) savings account, according to a recent report by the Employee Benefit Research Institute.
That’s the median amount in a 401(k) savings account, according to a recent report by the Employee Benefit Research Institute. Almost 40 percent of employees have less than $10,000, even as the proportion of companies offering alternatives like defined benefit pensions continues to drop.

Older workers do tend to have more savings. At Vanguard, for example, the median for savers aged 55 to 64 in 2013 was $76,381. But even at that level, millions of workers nearing retirement are on track to leave the workforce with savings that do not even approach what they will need for health care, let alone daily living. Not surprisingly, retirement is now Americans’ top financial worry, according to a recent Gallup poll.

But shifting the responsibility for growing retirement income from employers to individuals has proved problematic for many American workers, particularly in the face of wage stagnation and a lack of investment expertise. For them, the grand 401(k) experiment has been a failure.
“‘In America, when we had disability and defined benefit plans, you actually had an equality of retirement period. Now the rich can retire and workers have to work until they die,” said Teresa Ghilarducci, a labor economist at the New School for Social Research.'”

Of course, for those in the top-10% of wage earners - “it’s all good.”

image: http://streettalklive.com/images/1dailyxchange/misc/Fed-Survey-2013-AssetsbyPercentile-091014.PNG

The Problem For The Bottom 80%

One of the recent diatribes by the media was that falling gasoline prices would spur consumption. As I have repeatedly discussed, this is far from the truth as shifting spending from one area of the economy to another does NOT increase consumption but is rather like “rearranging deck chairs on the Titanic.”

The only thing that ultimately increases consumption, or savings, is an increase in incomes. Unfortunately, for roughly 80% of American’s, wage growth, and actual employment, have been an elusive reality.
When it comes to actual employment, it is hard to rationalize the mainstream media’s obsession with the U-3 unemployment rate. Particularly, when it is clearly being obfuscated by the shrinkage of the labor force. As I wrote in August of 2013:

“While the Fed could certainly claim victory in achieving their ‘full employment’target; the economic war will be have been soundly lost.”

The Federal Reserve did ultimately achieve their target unemployment rate. However, as I have shown previously, when it comes to the primary 16-54 age group that should be working, it is hard to suggest that almost 95% of working age American’s are gainfully employed.
image: http://streettalklive.com/images/1dailyxchange/2015/Employment-16-54-020915.PNG

Even more critical is the fact that for roughly 80% of American’s that are working, wage growth has been non-existent. Tyler Durden at ZeroHedge wrote:

“The important math: production and non-supervisory employees, those not in leadership positions, represent 80% of the employed labor force. This is important when looking at the next chart which show the annual increases in hourly earnings just for production and nonsupervisory employees.
It is as this point that we ask that all economists avert their eyes, because it gets ugly:
image: http://streettalklive.com/images/1dailyxchange/2015/Wages-Nonsupervisory-AnnChg-032515.PNG

As the BLS reports, not only is the annual wage growth of 80% of the work force not growing, but it is in fact collapsing to the lowest levels since the Lehman crisis!

But if the wages of the non-working supervisory 80% of the labor population are tumbling while all wages are flat that must mean that the wages of America’s supervisors, aka “bosses” are…
Bingo.
The chart below shows what the implied annual change in supervisor hourly earnings has been since the start of the second Great Depression. Note the recent differences with the chart immediately above.
image: http://streettalklive.com/images/1dailyxchange/2015/Wages-Supervisory-AnnChg-032515.PNG

And there, ladies and gentlemen, is your soaring wage growth: all of it going straight into the pockets of those lucky 20% of America’s workers who are there to give orders, to wear business suits, and to sound important.

Yes – wages are growing, for those who least need wage growth, the ‘people in charge.'”

Despite many claims that the “economy” has recovered from the financial crisis, as evidenced by a surging stock market, a closer look at the majority of Americans suggests otherwise. The implications are important as the burdens on social welfare continue to swell, and the ability to pay for those entitlements becomes more questionable.

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