The Real Source of Wealth Inequality…

The only way that people really improve their wealth is by buying a house, condo, whatever it may be, owning shares of stock,’ says Mark Cuban.

He was on Yahoo! Finance addressing the issue of inequality of wealth, which many people consider a problem.

But the analysis was bad; the advice was some of the worst we’ve ever heard.

Buying stocks or houses may have been a good plan for 1982. Maybe for 1992. And maybe even 2002. But for 2019? Is the pattern of the last 30 years likely to continue?

Soft economy

But first, let’s check the news. Stocks managed a decent showing for a third day in a row after a story circulated late on Thursday that the Mexican tariffs might be delayed.

The world economy, however, still seems to be weakening. Bloomberg:

German industrial production plunged the most in almost four years in April and the nation’s central bank gave a gloomy assessment of the outlook, highlighting an ongoing slump in Europe’s largest economy.

German factories are at the heart of Europe’s slowdown, as trade tensions, weaker car sales and cooling global demand weigh on exports. The 1.9% drop in output was the biggest since August 2015 and follows a survey this week showing that manufacturing probably still contracted in May.

And in the US, this again from Bloomberg:

Here’s one consequence of the slowing US housing market: Home flippers are heading for the exits.

Homes that were resold within 12 months after being purchased made up 7.2% of all transactions in the first quarter, the biggest share since the start of 2010, Attom Data Solutions reported Thursday.

Meanwhile, the average return on investment, not including renovations and other expenses, dropped to 39%, an almost eight-year low.

Speculators are on the housing market’s front lines, where softening price growth, waning demand and longer times to sell can turn quickly into shrinking profits, or even losses. Purchases of previously owned homes fell 4.4% in April, the 14th straight year-over-year decline, according to the National Association of Realtors.

“Investors may be getting out while the getting is good,” Todd Teta, chief product officer at Attom Data Solutions, said in the report. “If investors are seeing profit margins drop, they may be acting now and selling before price increases drop even more.”

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Next mistake

As the economy softens, the feds prepare to make their next mistake.

Recall that monetary policy is really just a series of mistakes.

First, they keep rates too low for too long — thus creating a dangerous bubble.

Second, they need to raise rates to engineer a ‘soft landing.’ 

Third, and finally, when the stocks crash, they cut rates in a panic, leading to another bubble.

Over time, the distortions increase (which we can measure as debt… up $20 trillion in the last 10 years), thus creating the need for bigger and bigger mistakes to overcome Mr Market’s longing for a correction.

We are now, apparently, at the tippy-top of a giant bubble that the feds created after the panic of 2008–2009. This time, they added some $12 trillion in monetary and fiscal stimulus, not to mention negative real lending rates during almost the entire time.

This produced the weakest recovery ever — with trailing 10-year GDP growth rates only about 1.5% — barely half the rate of the late 1990s. And it sent all the key, traditional relationships into bizarre and unhealthy territory.

Traditional relationship

Yesterday, we looked at the relationship between household wealth (based on asset prices) and GDP. For half a century, the ratio was about 3.8-to-1. Now, it’s 5.35-to-1 — a record.

There is also a traditional relationship between the stock market and GDP, which Warren Buffett uses to tell when stocks are overpriced.

Here again, this is not an arbitrary number. There’s a natural relationship between the economic output (GDP) and the enterprises that produce it (in this case we use the Wilshire 5,000).

Again, for half a century following the end of WWII, the ratio — Wilshire stocks/nominal quarterly GDP — ran around 50%. Today, it’s 133%.

Another traditional relationship worth looking at is time (labour) compared to stock prices (capital). And here, too, we see the same pattern.

Between 1945 and 1995, it took an average working man between 20 and 40 hours to earn enough to buy the S&P 500.

Wages went up. Stocks went up. GDP went up. But the relationship held fairly steady.

Then, after 1995, time got cheap while stocks got dear. In the following five years, the price of the S&P stocks rose steeply. By the end of the 20th century, it took the average worker 100 hours to pay for them.

And now, the ratio sits near an all-time high of 120.

That is why we have ‘inequality’ in the US. The feds pushed up prices for rich folks’ assets… but not for the common man’s time. Most people — who have nothing but time to offer — are relatively worse off.

But as Berkshire’s Charlie Munger points out, this is a problem that will take care of itself.

The feds can manipulate and control…but only to a point. They may or may not be able to stifle the coming correction. But they can’t command the tides.

And now Mr Cuban urges the working man to step up and buy stocks at four times (in terms of labour hours) what they cost in the early 1990s.

And from whom would they buy them?

From the elite shareholders who know it’s time to get out…


Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.

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