I have focused a lot on the stock and bond markets since Trump’s election, in part because you write what you know and at this time last year I was getting my master’s in finance. But also, markets are forward-looking in nature and if you want a real sense of how Trump’s actions are being perceived by the world, you’re not going to find a more honest broker than financial markets who spend all day putting their money where their mouth is. To demonstrate just one example of many from markets currently uneasy about Trump, returns on the yield curve inverted the first week of his trade war, perhaps the clearest and most obvious warning that he is pursuing recessionary policies.
I have also focused heavily on the CAPE Ratio, also known as the Shiller P.E. ratio, as earnings are markets’ version of “ball don’t lie” and the price of the stock is the main focus of a company in our greedy capitalist world. Price to earnings ratios are helpful barometers of just how over- or undervalued current stocks and markets are relative to past ones. The Shiller P.E. Ratio smooths earnings over ten years to get an average that spans beyond one business cycle, providing an ultimate zoomed-out “ball don’t lie” metric for the market.
An elevated ratio does not mean it must come all the way back down. The 2000 spike is qualitatively different from the 1930s, for good reason. Despite being the most over-valued market in history, the dot com bubble was real. It was a forward-looking market getting out ahead of a paradigm shifting technology where earnings inevitably caught up to deflating hysteria and brought it back to a new baseline elevated from the past. The 1930s bubble was driven by greed and fraud which is why it retraced all the way in a crisis that Elon Musk seems determine to speedrun.
AI is very important to our economy, even if it just is a bunch of hallucinating chatbots that Microsoft is now realizing don’t have as much demand as they invested for, and are canceling some data center leases as a result. The narrative is the point. The money has been spent and promised. The market is determined to repeat the 2000 pattern of a mega-bubble, and based on this ratio, you can prove these expectations are somewhat baked into the second or third most expensive market in history depending on which day you look at this chart. That means the market is fragile to a change in the prime narrative it has priced in, which, well…
This month’s recent stock market pullback is a result of Deepseek, the Chinese ChatGPT clone which proved that Nvidia and other chip makers’ “moats” they had helped construct around goliaths like Microsoft weren’t all so moat-y after all. As of this writing, Nvidia is down a little over twelve percent from its highs, and is being rejected by the previous range it sat in from November to January when the market was telling itself that Trump was going to be good for the market.
But given the divergence between Treasury Bonds and the Fed Funds Rate since September, it’s clear the smartest money in the world is calling bullshit and putting everyone else on edge. Smart money typically equals wealthy folks (a distinction Chris Rock so eloquently made clear when he said “Shaq is rich, the white man who signs his check is wealthy”), which brings us to an article today in the Wall Street Journal about new Moody’s Analytics data titled, “The U.S. Economy Depends More Than Ever on Rich People.”
The top 10% of earners—households making about $250,000 a year or more—are splurging on everything from vacations to designer handbags, buoyed by big gains in stocks, real estate and other assets. Those consumers now account for 49.7% of all spending, a record in data going back to 1989, according to an analysis by Moody’s Analytics. Three decades ago, they accounted for about 36%.
If it feels like the economy is divided between people being hit by inflation every day and people who aren’t, that’s because it is.
Then inflation struck, and prices rose sharply. Most Americans turned to their extra savings to keep up with their rising bills. But the top 10% of earners kept most of what they had saved up.
Affluent people also found themselves with assets, such as stocks, that suddenly were worth far more. The net worth of the top 20% of earners has risen by more than $35 trillion, or 45%, since the end of 2019, according to Federal Reserve data. Net worth grew at a similar rate for everyone else, but it translated to a lot less money: an increase of $14 trillion for the bottom 80%.
WSJ interviewed Vivek Trivedi, who saved up during the pandemic to buy investment properties. His financial situation was buoyed by his sub-three percent mortgage he refinanced during the ZIRP-fever dream that’s driven all of Silicon Valley’s elite insane, and this era provided a once-in-a-generation opportunity for people to learn the life-changing secrets of cheap debt. Trivedi literally invested in a different world, and he is not affected like those who could not and now can face the only world in front of them where the rent is too damn high.
Even though this general spending dynamic in Moodys’ data is what you would expect to see in a normal Pareto distribution, this kind of inequality is very distorted, and historically is an economic harbinger of doom. The dynamic we are experiencing right now is part of what aided the crash of 1929, as there is a very basic and very delicate situation where the wealthy elite have an even more outsized impact on the health of the entire economy.
The Spark
People with more money tend to use it differently than those with less money. In America’s roughly 70 percent consumer-driven economy, disposable income, the money you have after paying your bills, is the key to the whole ballgame. That goes right into consumer spending and getting everyone as much of it is how stable economies are built where dollars maximize their economic efficiency by flying from bank account to bank account.
While the rich and wealthy elite have more than enough to both spend and save, on the whole, they save more than they spend. This basic law of humankind makes all economic policy that provides additional cash to the wealthy fundamentally inefficient since the gains mostly just sit in money market funds, bonds and other interest-bearing cash-like instruments and don’t go into that big 70 percent consumer engine.
The bottom ninety percent does not have very much disposable income relative to a world where eggs now cost a dollar each, while the top ten percent is over-flowing with disposable income due to elevated asset prices and is making up for that shortfall and then some, but as WSJ notes, a “stock market selloff or decline in home values that rattles the confidence of the top ten percent and causes them to cut back would have a significant effect on the economy.”
Climate change is already irrevocably changing home ownership and making home insurance a thing in the past in most of Florida, big parts of Los Angeles and North Carolina, and other surprising and growing patches of America like Oklahoma. If you can’t get your home insured, you can’t get a mortgage, which means the only people who can buy uninsured homes are cash buyers. As 2008 demonstrated, when holes in America’s housing market are revealed, they have the potential to spiral out of control pretty quickly, especially when prices find themselves at a point entirely detached from reality.
Let’s say that Elon and his band of Nazi zoomers do finally break something in their quest to turn America’s largest employer into Twitter. The stock market has been sending warning signals for a while and bond yields are having a very hard time figuring out life right now, and this all creates a sense of unease in a world where inflation isn’t going away. Practically every chart of every index or stock you look at right now has a double top-style structure, a classic top signal and sign of market exhaustion. There are other worrisome signs too, like the end of year selling and then the rally/pullback to start this year which has brought a kind of volume to the boring old Dow Jones only equaled during the depths of the pandemic crash. If you look close enough in the charts, you can see the chaos in the bond markets rippling through the stock markets.
The dynamic at the heart of our economy, seen from stocks to housing to consumer spending, is that it is being hollowed out by inflation and greedflation, then propped up by elite spending, which is fueled primarily by elevated asset prices. It doesn’t take a finance degree to see where this might become a problem.
The market’s sentiment is changing from the up only days of Sleepy Joe (save for the great risk-free rate repricing event of 2022), and if something were to occur that fundamentally alters the market’s expectations in the near-term from bullish to bearish, there is a lot of room for the market to fall. The S&P 500 could retrace 40 percent, and it would be at the 2022 lows–also known as the widely celebrated November 2020 all-time high. Given how vital the elevated stock and housing markets’ wealth effect is to the economy, a protracted selloff in either market could easily be the spark to create the crisis(es) that Trump and Elon are seeding all around us every day.
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