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Desperation on Tap?

By Robert L. Cain


“The mass of men lead lives of quiet desperation. What is called resignation is confirmed desperation.”  Henry David Thoreau, Walden


It seems the economy is booming.  The stock market has hit a new all-time high. Consumer spending is up.  Hiring is up every month, it seems. The news media touts the wonderful upticks and implies a glowing economic future. But almost two-thirds of the population lives in quiet desperation, resigned to things getting worse.


That comes from the New York Federal Reserve Bank’s report of June 13, 2016.  They report that “the average perceived probability of missing a minimum debt payment” in the next three months increased to 14.1 percent, from 13.9 percent in February, the highest since September 2014.  But that is just part of the story.  The most potentially desperate are those with a high school diploma or less, with 20.9 percent, about one in five, in fear of missing a debt payment.  Before we dismiss that as inconsequential, the US Census Bureau reports those with a high school diploma or less make up 63.4 percent of the population.


Let’s add a couple of more statistics to this demographic.  The same NY Fed report says that in the same group, high school diploma or less, “the mean perceived probability of losing one’s job increased from 3.1 percent in June to 3.3 percent” the highest since June 2015.  Perception is everything.  It doesn’t matter if it’s true or false, if someone perceives something to be true, that affects his or her actions, in this case about whether to hunker down in spending.


One more piece of information that affects both spending and the economy from the New York Fed, “Which Households Have Negative Wealth,” reports that 15.1 percent of US households “have net wealth less than or equal to zero.”  As we might expect, they have “much lower annual incomes than households with non-negative wealth, $39,077 versus $86,309, respectively.”  In addition, the vast majority are renters, some 81 percent.


One truly disturbing statistic from the report is that the “primary asset held by households with negative wealth is the vehicle(s), 45-65 percent of their total assets.”  Edmunds.com estimates that once you drive a car off the lot, the average value drops some 11 percent.  After a year, the value has dropped a total of 25 percent. By the time three years are up, 45 percent of the value has disappeared. That’s the average.  Some models depreciate even faster. Plus, the debt on the vehicle may well exceed its value. Vehicles hold value poorly, bringing up the question as to whether a vehicle can even be considered an asset.  What happens when 14 percent of the population stops making car payments, for example?


The biggest debt compositions are credit cards and student loans, with up to 30 percent of debt going to credit cards.  For the most indebted sector, those with a negative net worth of between $47,500 and $520,000, student loan debt accounts for some 40 percent of the negative wealth.  Of course those with student loan debt most likely have more than a high school diploma.


Let’s add one more factor.  Adam Shaff writing in USA Today August 15, posted warnings from three “high-profile” investors, Carl Icahn, Jeff Gundlach of Doubletree Capital, and Bill Gross of Janus Funds.  Carl Icahn warns that the current run-up in the stock market is a “mirage.” Gundlach advises “Sell everything,” while Bill Gross advises “I don’t like stocks.  I don’t like bonds.”


Why is that? Greg Rutherford, CEO of Cavalier Investments, “ticks off a list of worries” about the stock market. There are the high corporate price-to-earnings ratios, the weak GDP, and contracting corporate earnings over “four straight quarters.”  Then there’s the oil price pressure and continuing drops in interest rates because of weak growth.


Should all this concern us?  First of all, it the wheels of the economy appear to be a little wobbly.  With about 13 percent of the population afraid they will miss loan payments and some afraid of losing their jobs, there could well be a pullback in spending, a figure that increases when level of education gets factored in.  Then there’s the domino effect. As more people fear for their financial lives, the fear spreads affecting more and more people, those farther up the income and farther down the debt chain.  Add to that the apparently overblown stock market, and we have the makings of an unwelcome retreat of the economy.


Those people who don’t have jobs now won’t find them because employers are holding off hiring to see where all this is going.  The people who are afraid of losing their jobs will.  And the people who believe they will miss a debt payment in the next three months may miss more than just one.  All it will take, warns Adam Shaff is “that benign state of affairs can change quickly” such as if something hits “completely out of the blue” such as occurred last August when China devalued its currency.

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