A Middle Class Massacre

One by one, the pillars of American wealth begin to wobble and give way...

(Source: Getty Images)

Bill Bonner, reckoning today from Baltimore, Maryland...

Wow…Wall Street popped up yesterday after the latest inflation number came in at 7.7%...only 50 little basis points below the last inflation reading.  

But watch out. Mr. Market is a trickster. During a long bull market – say, from 1982 to 2021 – his occasional sell-offs shook out investors. Later, they had to buy back in at higher prices. Those that did best were those that just stuck with the program, ignoring the sell-offs.  

And now that the buy-and-hold lesson has been learned, the primary trend seems to be going in the other direction. Mr. Market lures investors into the falling market with occasional rallies. They ‘buy the f*ing dip’ and then Mr. Market takes prices down again. Then, they lose even more money.    

But our focus today is not on the ups and downs of the stock market. Yes, the current downturn hits 401ks, pension funds, and family portfolios. But it is just a part of something bigger – a Middle Class Massacre.

CNBC:     

Dow pops 1,200 points, S&P 500 jumps 5% in biggest rally in two years after light inflation report

Stocks mounted their biggest rally since 2020 after October’s reading of consumer prices raised investor hopes that inflation has peaked.

Falling inflation readings will give the Fed reason to ‘pause’ on its drive to normalcy – or, so investors believe. Perhaps they’re right; if inflation keeps falling, as it might, the Fed will let down its guard…and ease off.

Then again, it may not. But investors are a pollyannish lot, at least for now. And with no recent memory of a prolonged bear market, it will take a number of disappointments to squeeze the ‘buy-the-f*ing-dip’ reflex out of them.

In the meantime…

Doomed Dow

Stocks and bonds still aren’t cheap. Nor are the Chinese still turning millions of peasants into cheap factory labor. Nor is the oil and gas industry adding new, cheap sources of energy. And by the way, real interest rates are still at record lows, with a long way to go before they come close to ‘normal.’    

We elaborate: With a Fed Funds rate of 4% and a CPI of 7.7%, the Fed is still lending money at more than 3 percentage points BELOW inflation. As far as we know, consumer price hikes have never been brought under control by lending out money at negative real rates. So, we have to believe that either inflation will persist…or the Fed will have to continue to raise rates, “until something breaks.”

Either way, the rally in the stock market is doomed. At best it will be scrawny and short-lived…like the runt of a litter. But something else also dooms Dow earnings…the Dow itself…and America’s middle class.   

Three things determine the financial health for middle class families – their houses, their jobs, and the value of their money. On all three scores, they are getting killed.  

After-inflation wages began going down in April of last year. They’ve been negative ever since. That’s why savings are down too – with a household savings rate of 3.1%, less than half what it was a year ago.

So far, the official statistics show jobs still available. But Elon Musk just fired half of the Twitter staff. Many other companies are following his lead. Fortune Magazine:

The jobs that built America’s middle class are disappearing, intensifying its downfall

…a lurking recession is now threatening the livelihoods of white-collar workers: Those higher-salaried management roles—the jobs once heralded in American society as the key to obtaining the middle class American Dream—may be axed in waves.

As these jobs vanish in favor of blue-collar workers at more manageable costs, that pipeline to the middle class could be chopped at the knees, reports The Financial Times. 

But at least middle class households still have a roof over their heads, right? And at least they have accumulated wealth as house prices rose, right? And at least they can take out some of that ‘equity,’ if they need to, right?

Oh dear reader – thanks for the softball pitch. The answer is no! BusinessInsider:

US home sales will keep falling…

Redfin said it expects home sales to keep falling through 2023, as it laid off 13% of its workforce… Rising mortgage rates and high inflation are key pressures pulling down the number of home sales.  

Many families took advantage of the lower interest rates to refinance their houses…often ‘taking out equity’ for new kitchens or baths. But now they have to refinance once more – at much higher rates…while house prices are falling. Mortgage payments have more than doubled since July 2020.

Submerging Markets

Let’s see – incomes going down…jobs disappearing…house prices falling…   Fortune Magazine draws a conclusion:

The middle class is in a tight spot, squeezed between the disappearing wealth Americans squirreled away during the pandemic and projected layoffs at the hands of a looming recession.

But wait. It’s just ‘transitory,’ right? Not exactly; Bloomberg: 

Once-in-a-Generation Wealth Boom Ends for America’s Middle Class 

…in March of this year, the average real wealth of the American middle class—including home equity and other physical assets as well as retirement and other savings—peaked at $393,300, the highest it’s ever been, according to data assembled by economists at the University of California, Berkeley.

The March pinnacle for middle-class wealth capped a five-year period of accumulation—spanning two presidencies and made possible by historically low interest rates—that has been the most remarkable in the past half-century.     

But that era is fading, if not over.     

The average wealth of adults in what the Berkeley economists call the “middle 40%”—the population whose wealth falls in the 50th to 90th percentile—had by the close of business Oct. 25 fallen about 7%, or by more than $27,000 to $366,100, since that March peak, they estimate. That’s already the biggest hit seen since the 2007-09 global financial crisis.

Transitory? If this is a serious bear market, stocks may not recover for 15 to 20 years. If Powell pivots (as we think he will) the economy will go into a period of inflation, recession and chaos that could last for 20-50 years. And house prices? Who knows?  

It took generations of hard work to build America’s middle class wealth. It will only take a few years of delusion and incompetence to tear it down.

Regards,

Bill Bonner