Registered Investment Adviser Caleb Lawrence
Quiet trade and little news sent the major averages into the final hour about even. One of the primary economic conundrums in the post bust and now recovery periods is the failure of wage growth to gain meaningful traction. While recent Census data shows that 2016 median household income adjusted for inflation finally surpassed its previous high set in 1999 the reality is that income growth is by and large absent and that it has been for quite some time now. This lack of income growth has also crimped consumer consumption something that drives some 70% of economic activity, and has played a leading role in the ever-increasing amounts of consumer debt as your average American attempted to maintain their standard of living. A close look at the income data shows that of the gains accrued the vast majority went to the top 10% and in fact the top 1%. Everybody else has gone backwards to varying degrees. Another hallmark of the financial crisis period has been the prodigious repurchase of company shares some 7 Trillion Dollars since 2003. Partly due to regulatory change, that removed the practice from the share price manipulation statutes. But also in response to restrictions on corporate executive compensation. The result was reduced employee compensation, that negatively impacted consumption and the economy. At the same time, it helped to propel the USA to record income and wealth inequality as CEO and executive pay shot up from 30 times that of the average employee in 1978 to 300-500 times in 2016. Another benefit was to support the share price, maintain the illusion of reasonable valuations as the earnings were spread amongst an increasingly smaller pool of shares outstanding while boosting the dividend rate at the same time. Great for primary shareholders like the CEO etc. but bad for everyone else as the economy stagnated along with innovation as the company was effectively asset stripped, often with the use of debt to enrich the executives. Like the use of zero interest rates and quantitative easing or QE these games can only be pushed so far before something has to give, I believe we have reached that point as evidenced by the new record high debt levels achieved, that like 2007-2009 are about to meet the harsh reality of not enough income as once gain it becomes a solvency issue because debt does indeed matter.