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Guest Post: The Fed, Housing and Stocks: The Chimera of Middle Class Assets
Submitted by Charles Hugh Smith from Of Two Minds
The Fed, Housing and Stocks: The Chimera of Middle Class Assets
On the surface, the Fed's $2 trillion-dollar campaign to prop up housing and equities may look beneficial to (what's left of) the middle class. But that is more perception than reality.
The primary driver of Fed policy is of course rescuing and enriching the too-big-to-fail banks. But the politically viable cover is "saving" what's left of Middle Class assets: housing and stocks. This chart from David Rosenberg's recent column on the Wily E. Coyote economy on Zero Hedge tells an important story: by propping up housing and stocks, the Fed is providing political cover for the status quo by seemingly acting to preserve what's left of the Baby Boom's middle class assets, which are still concentrated in housing and stocks.
Of the 26% of assets in "other," i.e. pensions and life insurance, much of those underlying assets are in bonds and equities--so the middle class wealth is probably roughly 20% in bonds, 33% in equities (stocks, emerging-market mutual funds, etc.) and 26.5% in real estate (those Boomers who still own some equity).
But beneath the surface of these "middle class" assets lurks highly concentrated wealth. As we can see here, the vast majority of "middle class" wealth is concentrated in the top 15% of the "middle class"--the tranch beneath the top 5% which owns the bulk of the nation's financial and real estate assets.
Source: Wealth, Income, and Power.
As we can see in this chart from iTulip.com, the increases in income have also been concentrated in the top 5% and the 15% just beneath that together make up the top 20%:
As I reported in Housing and the Collapse of Upward Mobility (April 16, 2010), the vast majority of housing equity resides in the one-third of homes owned free and clear (no mortgage). Here are the updated numbers from the Fed Flow of Funds:
$6.4 trillion in homeowner's equity
$16.5 trillion in household real estate assets
32% of all homes owned free and clear = $5.3 trillion of assets in non-mortgaged property
$16.5 trillion - $5.3 trillion = $11.2 trillion in mortgaged real estate assets
Mortgage debt: $10.12 trillion
$11.2 trillion - $10.12 trillion = $1.08 trillion in mortgaged-homes equity
$1.08 trillion in equity is spread among 50 million homes with mortgages. That $1 trillion of home equity is a mere 1.85% of the nation's total net worth.
The bottom 80% own a 7% share of the nation's financial wealth. That is 7% of $45 trillion, or $3 trillion, including all stocks, bonds and securities in IRAs, 401K retirement funds, savings and other accounts.
That's $3 trillion held by 108 million households, compared to $32.4 trillion held by the top 5% of households (72% of $45 trillion), roughly 7 million households.
In other words, the vast majority of assets held by the Baby Boom generation are in the top 5% of households, and most of the remaining assets are owned by the 15% tranch just beneath the top 5%. The bottom 80% don't have much home equity or directly owned bonds or stocks.
So the Fed propping up housing and the stock market only benefits the top 20%, and most of the benefit flows to the top 5%--not exactly what most Americans think of as "middle class."
Most voters probably look at the top chart and see themselves as stakeholders in the status quo.
But if they examine the second and third charts, they may find their stake in the status quo--and thus in the Fed's unprecedented propping-up of bubble valuations-- is considerably less than the mirage of "middle class wealth" constantly generated by the Mainstream Media, the political class and of course the Fed itself.
"Saving middle class assets" turns out to benefit only the top slice of households, while the dwindling middle class is left with food and energy inflation and the ginned-up perception of "rising wealth" gained by staring at the ever-rising Dow Jones Industrials: Dow 11,908, here we come.
I've addressed these topics many times before, as well as in my book-length Survival+ analysis:
The Con of the Decade (July 8, 2010)
Trade of the Decade: The Power Elite's Grand Strategy (October 25, 2010)
Are the Fed's Honchos Simpletons, Or Are They Just Taking Orders? (November 1, 2010)
Hyperinflation Is a Political Process (October 21, 2010)
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This doesn't tell the whole story of net worth and wealth distribution because at some level you're better off having that government job with a lifetime annuity than you are owning a fairly sizable amount of RE, equities and "other" wealth.
In terms of who's getting the best relative deal the real story is more like: The Top and The Bottom vs. The Middle. But yeah, the middle class, particularly the private sector middle class, is getting screwed.
Is this any surprise to anyone with near "average" IQ?
We the Sheeple have, by voting for the (D) & (R) Kleptocrats election after election, volunteered to be the eggs in the omelet.
In a lotto culture, everyone "thinks" they will be a "winner", even though 99.99999% will never even come close to breaking even...
I would wager that professions like Doctors, Lawyers etc - upper middle class - are the ones who have the RE, Equities and other "wealth."
I wish the author would cross reference to professions so we didn't have to speculate.
It surprises me what some people define as upper class and some define as middle class.
The real owner class "the upper class" doesn't work, and certainly doesn't labor like physicians.
I have a lot of sympathy for physicians these days, especially for those who have been practicing for at least ten years or so.
No one wants to face the simple facts.
To retire with a six figure income you have to save 2-3 million (after tax) and invest very carefully. Otherwise you will lose far more than your alleged taxable income.
Or..., you could teach third grade in New Joisy or be a lowest on the totem pole fireman in Cali. This shit has to end.
Sounds like more "workers" need to fight for pension plans and we need to fully fund social security.
;)
Better yet, get rid of Social Security and pensions and everyone fund their own retirement. No reason to create dependency on government or corporations.
The entire concept of "middle class" is bullsh*t. Why? Because there is no absolute way to define it. It depends on the eye of the beholder.
What makes sense is calling it as it is: working class and rentier class.
Instead of the marxist class-warfare cliches, why not write a simpler and more powerful piece opposing the Fed, the fascist welfare state, SS, progressive taxation, Davis Beacon, and all other aspects of the system that exists to loot some to give to others?
Lumped in with "the rich" are those who created a product that lots of people wanted to buy because it is worth more to them than the money they spent on it as well as the parasites like Goldman Sachs.
+ sum(qe1:qex)
There is in fact a class war going on in America today. But it is not the rich vs. poor or the haves vs have nots, etc, etc.
The REAL CLASS WAR in America is between the productive and the unproductive. There are lots of wealthy people who also produce. But the producers continue to get squeezed by both the unproductive elite and the unproductive poor -- those with no intent of working when they can suck the .gov teat.
Right On! Down with unions too! Bless you my conservative brethren!
Calling this report of the breakdown of distribution of assets "class-warfare cliches" demonstrates you're just not looking at this rationally.
It's not "class-warfare" to point out that a tiny percentage of the population of the USA owns virtually everything. That's not a cliche--it's a fact.
It would be "class-warfare" to suggest that this wealth should be seized and redistributed, or the owners need to be hung from lampposts. That theme is nowhere to be seen in the article.
It's a huge problem with some Americans that pointing out the obvious (in this case, enormous wealth inequality that is destroying the country) is a bad thing.
Normally rational, intelligent people suddenly become brainwashed sheeple when it comes to the topic of class. The level of propaganda is deep.
The coming planned implosion of the markets will wipe out the remaining 7%, once the total economic reverberations are felt. Coming sooner than you think. It's called unsustainability at all levels, bitchez.
I believe they have planned for the inevitible outcome- a total collapse but they did not plan it. I believe religion MUST be wiped out NOW before it is too late! The RCC has billions in worth...
Save the banks! bitchez!!
Save Lockhead-Martin...
http://seenoevilspeaknoevilhearnoevil.blogspot.com/2011/01/lockheed-martin-how-giant-weapons-maker.html
A dollar is worth far more to the poor than a dollar is worth to the rich. So for a person of modest means it really does make a big difference if his assets are worth $25,000 or $50,000--even though this is an infintisimal fraction of national wealth.
Good point.
Life support for pensions and other funds. Triage.
Bwahaaa! Finding a DB pension scheme that isn't currently underwater when realistic assumptions are used (instead of using optomistic interest rate assumptions and out of date mortality assumptions) could be tricky... Triage would kill the patient!
Yes. My new retirement plan is to have as many kids as possible, hoping that one will be successful and provide for me until I die.
Housing stocks going ballistic today.
And BAC is on a tear.
Hard to be bearish on stocks when the absolute worst two sectors are flying.
And here we are knocking on SPX 1300 with no signs of slowing. So far we're starting out earnings season very strong to add to improving economic data. Until something drastic happens in either of those arenas, 2011 is shaping up to be an amazing year.
Yep, it's gonna be an amazing year for municipal funds!
Buy the dip Mr. Autobot...
HAHAHAHAHAHAHAHAHAHAHAH God you are fucking funny.
Like the old saying goes, "There's a SUCKER born every minute!"
Well 7 IS a lucky number...
Dear Mr. "Tyler Durden"
Before the global infrastructure collapse into chaos, and there is no access to the internet, let me be the first you to thank you for everything you did to expose the fraud and disgusting criminals for what they are. I sincerely thank you. Godspeed.
the third year of a presidency is historically a favorable one for the markets – data indicates that on average, the S&P 500 gained 14.12%, and average gains were 17.7% under a Democrat party leader. The last time the market was down in a 3rd year was in 1939. That's 19 straight 3rd years in a row of being up. A stat the bears/shorts shouldn't ignore.
As if these are normal markets during normal times? You do the math. We're over due to break that stat. T-3m
Not with 3-4% GDP and an economy that is getting stronger practically by the day.
With all due respect, the economy is not getting stronger.
The only reason we have 3-4% GDP is because the Fed is flooding the market with liquidity. The fact that the GDP is ONLY 3-4% shows just how bad things are.
What happens when the Fed starts to tighten?
What happens when the Fed Gov cuts spending?
Dr Bernanke will no doubt have to tighten eventually to help stop the recovering economy from overheating. Why create another bubble. I trust he'll know when that time is. The consumer is begining to spend again and with the continued wealth effect it will only get stronger thus offsetting any pullback in Government spending. JMVHO.
Sorry - can't see a "break in that stat". Everything is pointing toward keeping that trend intact. Once we work through this earnings season, which has already shown some impressive numbers (think AAPL next week), the green light to 1400 will be firmly glowing.
Please examine every economic release over the past couple of weeks. You'd be hard pressed to find anything that is not pointing toward much stronger economic growth. Couple that with strong earnings and we will not "break the stat".
and gold is tanking!
so everything must be great, right guys?
Don't you think we are overdue some kind of pullback, even just 3-4%? It seems almost unhealthy for the market to go up in this linear fashion.
If the market were screaming higher every day, I would agree that a 3-4% pull back would be healthy. But the market is slowly moving higher daily in half percentage or quarter percentage moves. That's actually the sign of a market that will continue marching higher.
If we were adding 2% daily, then you would have your signal that it's time to pull back a bit. However, we're not seeing that - just slow steady moves upward.
A fair point . There have been no explosions upward . No blow off tops . I would assume however that 1300 on the S&P will serve as formidable resistance . It's served this role in the past , first back in 06 and then again in 08 .
I agree, nice steady sustainable move much like the economic recovery. 1300 will get broken through eventually. Gotta stop & pause occassionally along the way to 1400+ sometimes.
Hmmm, let me take this challenge:
1. Consumer debt levels still near RECORD highs - Check
2. Corporate downsizing low-hanging-fruit obtained - Check
3. Raw material inputs rising faster than pass-through - Check
4. State and Local governments raising taxes and laying off workers - Check
5. Federal Government past ramp-up phase of debt cycle - Check
6. Federal and State Social program costs past peak ramp-up - Check
7. Inflation in consumer staples increasing - Check
8. No major new technology or paradigm shift to establish a Labor demand LIFT - Check
9. Morons that equate 20x P/E multiple as too low and having room to grow unbounded - Check
Morons that equate 20x P/E multiple as too low and having room to grow unbounded - Check
http://www.youtube.com/watch?v=-58-36lSqG4
Working as intended. A system that only enriches a few doesn't have to pay as big of dividends.
Pure genius - Check
that's nitpicking isn't it - Nigel Tufnell
"8. No major new technology or paradigm shift to establish a Labor demand LIFT - Check"
No major new technology -check
No lasting paradigm shift? This is the battle. Can emerging markets be created to sustain consumption?
Once you have all the accouterments of civilized society can you create a consumer competitive environment in the rest of the world where the carrot has been held out many times before only to be followed by the stick? I hope so but political greed and corruption are high hurdles because they cannot be satiated only economically outdistanced and relegated to the periphery as in the developed countries.
Well, it's worse than that, because the bottom 80% are not only poor, but they're about to lose what little they have - mainly, their homes:
http://strikelawyer.wordpress.com/2011/01/13/us-mortgage-default-rates/
25% of them, anyway. And growing.
This is not an economic crisis; this is a social and humanitarian crisis that will produce civil unrest at some point unless it is addressed. And there is little hope that it will be addressed, and no hope at all that the overlords will address it.
http://strikelawyer.wordpress.com
Yes and though it's been said before it bears repeating: the ability of local government to provide support is contracting fast, just as the need is expanding. The mesh in the safety net is stretched and torn.
The tax code is also severely slanted in favor of the wealthy. For instance a person with a million dollar mortagage with a 6% interest rate can deduct up to $60k of income while someone with a $100k mortgage can deduct up to $6k which is about the same as the standard deduction anyways. The tax system needs to be simplified and deductions need to go. Middle class incomes are shrinking so housing costs need to come down. I agree that propping up real estate prices mostly benefits the wealthy land owners and banks.
Well, EVERYTHING they have done is to benefit the banks. Partly this is the favoritism bred by familiarity; but it's also the whole idea of the central bank. It takes care of the banks, and the banks will take care of everyone else by lending to them.
It is this process which has broken. The Fed still does what it is supposed to do - benefit the banks - but the banks don't benefit anyone else, and the don't lend to them because they are not "worthy" borrowers.
The tax code is largely a side show.
The key to all this is debt. Cancel it, start over with everyone solvent, and return to monetary sanity with a gold standard. It will take a constitutional amendment. I could post it if enough people are interested.
http://strikelawyer.wordpress.com
The government extorts the money needed to pay off the banks threw the IRS and by point of gun and incarceration if you refuse to pay. Your mortgage and your April 15th check are two troughs leading right to the PigMen on Wall Street. Debt and taxes = bank's bread and butter.
Good article. Some will object to it as "marxist" rhetoric, but it speaks for itself to what the trend is and the disinfranchizement--economic and otherwise--of the common man that is the real game.
The problem with stating: "The top 5%" or "The top 1%" is that it does not complete the picture. What about the top 1000 families or the top 0.0003%?
time to take control? forced asset migration? form a political party who's objective is to even out the wealth distribution so that there is a more palatable pyramid of wealth? hmmm..is this super communism or benevolent fascism or democratic idealism?
from these figures
$3 trillion held by 108 million households, bottom 95%
$32 trillion held by 7 million households top 5%
total wealth = 45 trillion for 115 million households
Our new normal party can do whatever it likes, so lets assume that all assets are transferrable and we can re-allocate these assets Zimbabwe style, after all we have a lot in common, economically speaking!
The average wealth per household is 32e12 divided by 7e6, which I make aound 4.5e6, call it 5 million bucks, cos the S&P is up today.
Right, thats not a huge number, but let's say our new (benevolent super communist) normal party, decides that anything over $2 million in assets (including the house) is too much to put in one household. I can hear the squaling already for a lot of people...what have those below us ever done!
Right..what does this mean, take the extra $3m assets x 7 million housesholds and redistribute 3e6 x 7e6 = $21 trillion to the bottom 115 million households!
Well you could go granular and apprtion less to the middle cohorts too, on a graduated basis, but let's not pre-rate and stick with this analogy..
The top 5% transfer IMMEDIATELY 21 trillion in assets to the other 95% for a one-off windfall of $118,000 ish.... hmmm...ok just three years of the average household income?
Bleh..not enough? Well hang on..that pays off half of everyones mortgage and make them borrow it all back? Perhaps our new normal party could then make borrowing illegal above 50% of the average value of sales in 20 similar properties in the last ten years? That would make things stable..anyway..i dont think the wealth in the top 5% is that high on average. Especially if the dollar crashes as seems inevitable.
And really caring people would want to redistribute on a global basis. In which case everyone in the US needs to send 90+% of their wealth to another country.
And it can be done on a voluntary basis (no need for complaining about unequal outcomes). And the line for such starts in front of me -- but don't worry I'll catch up.
Yeah, let's pretend there's the slightest color of communism in this picture.
And, since they seem to so often go together, let's also pretend average wealth of the top 5% is not that high, really.
What a beautiful meritocracy!
what scares me the most is that the top 5% are just those that have been given the chance to succeed and the bottom 95% have been shafted and this is the scale of the shafting of the current infrastructure..communism probably works if no-one ever aspires to have more than anyone else.
$3 trillion held by 108 million households...maybe this $30,000 net wealth per household for the bottom 95% accumulated over the ages is a natural outcome of population growth and taxes over decades of poor and failed government policy.
Maybe this wealth would have been 100,000 per household and assets should be 9 trillion, and this has been robbed..as the Federal government runs ever larger deficits. But then again, national debt is $14tn.
Thats the trouble in looking at outcomes rather than bullshit..you get the truth..the democratic system being run is just as fucked as communism
Great article.
The great "unrecognized" injustice of our time needs to be hammered home, again, and again, and again, and for as long as it goes unattended.
Thanks.
Gol darned marxist commie ratfink.
Solution/Entlosung: STEP EINZ - Cut all social programs minus the biggest employment program in the world - the US armed forces, Homeland Security and asorted US secret agencies. Encamp all the poor, unemployed and food stamp recepients in AZ - or better yet, outsource them to Mexico and let them fend for themselves. STEP ZWEI - Attack Iran, North Korea and Pakistan. STEP DREI - more FAB FED paper to the Hyper Rich & their Banksters. That should take care of it all. Say HEIL to the Rich uber alles, Bitchez!
I imagine this is the plan.
Earth is a lifeboat drifting in a hostile universe and there are too many people on board; if this continues then almost no one will survive.
Time to start pushing people overboard.
If you're in the boat and you're not getting pushed out, are you going to volunteer to give someone else your spot? How about your children's spot?
TPOG
more like bernanke is the captain of the titanic...awash in a sea of money and about to hit a black hole that compresses allpaper money down to one ounce of ummm truffles?
not truffles, caviar.
With the GSEs, debt is $15 trillion. Therefore, fact, we either undertaxed or overspent. It would be wonderful to be able to say that we are debating who should pay which portion of this deficit (regardless of future commitments absurdities).
But we are'nt. The entire wagon is going over the cliff...
Agreed.
Add the GSE debt, then add the Fed debt and then add unfunded state pensions.
I feel a little optimistic today, I believe that with the (holes) facts lying in the road we can avoid them. Cumulative deficits and promises to pay benefits, are all debts. We need some bright spark to put it all down on paper and either write off all the debt and promises since its too much shit to handle, we can then "right size" the economy, pretty much like Iceland has done.
The banks have facilitated the demise of democracy via voters (Governments) living beyong their means, but they are simply not the culprits, I am afraid we (you, me and everyone who votes) are just as much to blame.
If we can resurrect the system which was based on "pay-back" of debt plus interest rather than the current "never pay back anything ever and just roll it over" then maybe we can do that.
Facts should be visible. I wonder who will add all the debt whether it is Treasuries or their agencies (GSE's or Fed or loans to States or social benefit promises) and help us face the facts and make the decision.
Iceland or Zimababwe/Japan?