Economic Recovery?

If you are considering divesting your retirement money back into equities, you may want to think again. The above chart, from Bloomberg.com, illustrates the problem.

Comstock Partners has stated that government efforts can't “solve a problem of excess debt generation that resulted from greed and living way beyond our means...We could wind up with a lost couple of decades.”

According to the Federal Reserve Bank of San Francisco, if private borrowers reduce their debt at the same rate as Japan's did after its economic bubble burst in the 1980's, savings rates will continue to climb to about 10% in 2018. This could inhibit growth in U.S. consumer spending, which makes up 70% of our GDP, by 0.75% annually on average during the next nine years.

This uncertainty in the markets is also apparent in the VIX, the "fear" index, which is indicating that the biggest bull run the market has seen since the 1930s won't last through September. According to last week’s reading, there is a 68% likelihood the S&P 500 will fluctuate as much as 7.2% in the next 30 days. From a historical perspective, the same upward-sloping curve occurred last August before the S&P 500 fell 9.1% in September and 17% in October. Ironically, September has also historically been the worst performing month.

On a slightly partisan note, if you look at the chart of Debt vs GDP, it's clear when our country started to live beyond it's means: the 1980's. More interestingly, this is the same time that Ronald Reagan took our top marginal tax rate from 70% to 28% over a 7 year period, while at the same time increasing taxes on the middle class through increased social security and medicare taxes. After the massive tax cuts for the wealthiest Americans, is there any wonder why the ratio of debt to GDP skyrocketed?

So, if you are looking for a point where the redistribution of wealth upward began, look no further than Ronald Reagan. In 1979, the top 1% owned 20.5% of the nations wealth. By 2004 (the latest I could find data) that number had grown to 34.3%, after peaking at 38.5% in 1995. I assume that drop was due to the market crashes of the late 90's and early 00's, so I'm sure the ratio peaked again in 2007 before the credit crunch.