Despite new records highs in the U.S. markets observed during the beginning weeks of calendar year 2020, investors remain skittish regarding the resiliency of the ten year old bull market. With slowing global growth, the threat of headline risks or adverse central bank actions clouding the horizon, it is difficult to predict what direction the markets are headed.
“Economic expansions don’t just experience a natural death…they get murdered. The culprits typically involve government policies: warfare, terrorism, trade protectionism, erosion of the rule of law, monetary policy mischief or invasive regulations.” – Former Federal Reserve Chair Ben Bernanke
Yet, the fundamentals of the U.S. economy remain strong. The economic expansion has run and jobs have increased for more than 110 straight months. Additionally, African-Americans and Hispanic unemployment rates are near historic lows, and wages are rising for lower paid employees.
Yet, there are risks to the continued health and expansion of the U.S. economy. There was a slowdown in manufacturing, GDP growth and business investment, which are warning lights but not a definitive signal that the economy was entering a recession. Despite these headwinds, the economy continues to grow.
Long-term, there exist one serious threat to the U.S. economy and the nation’s prosperity. The threat comes in the form of proposed massive increases in government’s share of, and control of, the U.S. economy.
The ballooning federal debt and the looming increase in federal taxes on all Americans to pay the federal debt obligation removes assets and capital from the more efficient private market to the least efficient and wasteful public sector.
Recession, the “R” Word
Many economists are wondering how much longer the expansion can continue and whether the economy is on the precipice of a recession. In fact, a number of financial pundits and financial news entertainment networks repeatedly say that the economy is due for a pull back. Or, they appear to be actively predicting or ‘rooting’ for recession. For example, CNBC Fast Money went as far to present on-air a ‘Countdown to Recession Clock‘ in August 2019.
Keep in mind that although the current U.S. economic expansions is the longest in the nation’s history, most financial pundits say that ‘expansions do not die of old age, the Federal Reserve kills them’ by their actions of raising interest rates and quantitative tightening.
Rising tide has not lifted all boats
“No American is ever made better off by pulling a fellow American down, and every American is made better off whenever any one of us is made better off. A rising tide raises all boats.” President John F. Kennedy
Many conservatives in America believe that ‘a rising tide will lift all boats’. America has experienced more than ten years of economic expansion and growth…its longest period in recorded history. This expansions has lifted the financial boats of many Americans, especially the wealthy and upper middle class.
According to CNBC, after years of rising, inequality is declining under President Trump. Despite the rhetoric, this expansion has lifted the economic boats of many Americans residing in the lower income brackets in America. It has slightly reduced inequality by proving job opportunities to the perennial unemployed or underemployed. Additionally, for the first time in decades, wages have risen for working class Americans. Nevertheless, there has been a relatively high percentage of Americans who have been stranded in the mud and have been left behind.
Consequently, a rising tide of the more than decade long expansion has done more through providing employment opportunities to reduce the income and wealth gap in our countries than decades of federal programs and policies. However, it has not lifted the boats stranded financially on land or stuck on shoals as a result of poor financial habits and behaviors.
Why economic inequality matters
According to the nonpartisan Pew Research Center, the rise in economic inequality in the U.S. has been tied to several factors. These include technological change, globalization, the decline of unions and the eroding value of the minimum wage. Whatever the causes, the uninterrupted increase in inequality since 1980 has caused concern among members of the public and U.S. Presidential candidates.
One reason for the concern is that people in the lower rungs of the economic ladder experience diminished economic opportunity in the face of rising inequality. Others have highlighted inequality’s negative impact on the political clout of the economically disadvantaged, on geographic segregation by income, and on economic growth itself.
Most Americans think there is too much economic inequality in the country, and about half believe addressing inequality requires significant changes to the Capitalist economic system. And according to Pew, 61% of Americans say there is too much economic inequality in the country today. Roughly a quarter (23%) say the country has about the right amount of inequality and 13% say there is too little inequality.
Tackling Inequality
Bottomline is that the longest economic expansion in U.S. history has not benefited all Americans. The top 5% have benefitted greatly while the bottom 50% have been left behind and have not benefitted equitably from the growing economic pie in the U.S.
In 2020 America, we must find someway for all Americans, not just the wealthy and political elite, to share in the nation’s prosperity brought about by Capitalism. Our goal should be to advance economic opportunities for working class Americans. Goal should be to lift those at the bottom up, not bring those at the top down.
References:
- https://www.pewsocialtrends.org/2020/01/09/trends-in-income-and-wealth-inequality/
- www.cnbc.com/video/2020/01/24/new-data-shows-wealth-inequality-declining-for-the-first-time-in-years.html
The Power of Habit, written by New York Times business reporter Charles Duhigg, explains why habits exist and how they can be changed. According to Duhigg, if people can understand how behaviors became habits, they can restructure those patterns in more constructive ways.
Bill Miller, CFA, is the founder of Miller Value Partners, and currently serves as the Chairman and Chief Investment Officer. His fourth quarter 2019 Market Letter released 13 January 2020, to clients is loaded with useful insights for investors and followers of the financial markets. The letter has been discussed thoroughly by financial pundits and the financial entertainment media.
