Twenty-thirteen is the year the Haves and the Have Nots came to prominence, dressed up as a new TV series which opened on the Oprah Winfrey Network (OWN). The title of the show alludes, of course, to the notion that there is a distinction between those with high incomes and/or a high net worth, and, well, the rest of us.
The Haves are also known as “the 1 percent,” and the Have Nots, in the wonderful math of rhetoric, “the 47 percent.” The unnamed mass in the middle, well, nobody talks about them. There may be a good reason: The American middle class appears to be following the path of the dodo. America is in the midst of a disturbing trend, a growing gulf between the haves and the have nots.
It’s not just rhetoric. There is a statistic measuring the gap, called the Gini coefficient. The Fed actually tracks it, so you know it’s not a trivial thing. Like all statistics, it’s not perfect; but, viewed over several decades. it gives you a good idea of whether the gap is widening or narrowing. Check it out for yourself (click to enlarge):
The chart reflects what we all suspect: Spreading the wealth among all income groups was part of America’s “golden age” after the Second World War, reflected in a dropping Gini number. However, since the seventies, the rise in the Gini coefficient shows the growing gap between the haves and the have nots.
Why bring this up? As we start 2014, this dynamic carries a big threat to you if you ever considered yourself part of the middle class.
The economic cycle
Everyone knows the economy moves in cycles, where good times are followed by recessions, which in turn are followed again by more good times. Over time we’ve become accustomed to certain signs that characterize the various phases of the economic cycle. One of the more unmistakable characteristics of the “good times” has been the prevalence of ridiculous prices for things with no practical use — stuff like art, collector cars, fashions, second homes, etc. The Roaring Twenties, which preceded the Great Depression, is a particularly famous instance of what former Fed governor Alan Greenspan termed “irrational exuberance.”
Whenever you see irrational exuberance, you know the next recession is around the corner. After a recession, there’s usually a period of slow recovery as jobs come back, people recover and get back to “normal” (however that looks from person to person). Although all income levels never shared equally in the wealth in the past, they usually experienced the good and bad times together. We’ve never had something like the Roaring Twenties while an inordinate portion of the nation were still looking for jobs.
Smart people understand the ebb and flow of the economy and take their cues from the signs of the shifting seasons. When a recession arrives, they’re prepared and ride it out, scooping up the bargains only found in times of recession, building their net worth over the long haul, regardless of the economy.
Ever since the bottom of the last recession in 2009, the economy has been running on two diverging tracks. The stock market has recovered smartly and hit several new record highs in 2013. A visitor from Mars would call that a nice and healthy recovery — it’s been four years since the last bottom, so the economy must be in high growth mode.
The unemployment situation shows everything but a robust recovery. Look how long employment is taking to recover this time around, compared to previous recessions (click to enlarge):
The middle class is still in the early recovery phase of the economy… but the 1 percent are hitting their stride with their irrational exuberance. Want evidence? Just over a month ago, someone paid $142 million for a piece of art, a new record. During 2013, multiple new records were set at collector car auctions. And we’re seeing that old sign of too much money: the reappearance of multiple $100 million houses. All while unemployment just can’t get below 7 percent (and we all know that number is understated).
The Fed is faced with a dilemma: Should it respond to the bubble markets in rich-person trinkets, which point to inflation and the need for tightening up? Or should it keep pumping in even more money in hopes of creating more jobs and prosperity for the middle class?
In probably his last address, Ben Bernanke said they’ll keep pumping.
Therefore, in 2014, you can expect to see more income growth for the middle class, even if it’s not as exuberant as for the 1 percent. You can expect your 401(k) plan’s value to keep climbing as it did last year.
But beware. Winter never comes suddenly. You get a coldish snap in the fall, and then it goes away, replaced by more seasonal weather. Then, a few weeks later, you get another cold snap, this time a bit longer and a bit colder. Then seasonal weather returns. As time passes, the cold snaps come quicker, last longer and get colder. The shift to winter is always gradual.
You’ve just witnessed the first cold snap for the next recession. The actual recession may be two to three years away, but there’s no question that, having passed the halfway mark, we’re closer to the next recession than the previous one.
What should you do?
- Make hay while the sun shines. Grab every opportunity to get extra income. These opportunities will dry up again, just like they did in the previous recession.
- Delay all “upgrade” type of purchases. Don’t be fooled by your current income — you don’t know if or when it might go down.
- Do not take on new debt under any circumstances.
- Pay off whatever debt you have.
Chances are 2014 will be a good year by all measures. Take full advantage, but don’t be lulled into thinking these good times will last forever. They never do. Forewarned is forearmed.
Happy New Year!