Transcription
For the first time in over 30 years, we are seeing these two lines diverge away from each other. It's telling us that something in the financial system is beginning to break.
The blue line represents consumer confidence in the stock market. And it's currently sitting at one of the highest levels of the last 30 years, even higher than the readings we had in 2000 that is notoriously known for having been an extremely euphoric period in the stock market. The white line is a survey from the University of Michigan and it tells us how people are feeling about their own economic outlook. And this one is currently sitting at similar levels to where it was at the heart of the great financial crisis. So on one hand, people feel confident about the performance of the stock market, but on the other hand, they've never been more depressed about their own economic outlook.
As you can see from this chart, this is the first time that we've seen such a divergence between these two surveys. This is a symptom of a problem that has extremely deep roots. And as we're going to see, it requires an economic reset before it can be resolved.
This is a chart showing us real personal income growth in the US, which is the amount of money people earn after adjusting for inflation. From the 1960s until 2008, real personal income followed a fairly steady trend of about 2.8% growth per year. This long-term trend gave people a sense of what to expect from their future earnings and so the ability to make financial decisions based on these expectations. This is a concept called permanent income that was developed by Milton Freriedman in 1957.
As you can see, since 2008, personal income growth has fallen short of the long-term trajectory. Take someone in 1999, for example. Based on the historical trend, they could have had certain expectations regarding what their income would look like 20 years later. The reality is for the last decade, the financial expectations that people may have had pre-financial crisis have never been met. Now, what makes this worse is that this gap has recently begun to widen. When we look at the growth trend in personal income from 2010 to 2020, we see that personal income has fallen behind this trend once again since the pandemic. Again, someone in 2015 was expecting a certain level of income by 2025 and is now seeing those expectations come up short.
On the flip side, the US stock market has exceeded people's expectations. We can see this by comparing the percentage change of real personal income against the inflation-adjusted return of the S&P 500. Since 2010, real personal income has risen by only about 50% while the S&P 500 has soared by nearly 300% even after adjusting for inflation. So on one side, people have grown used to being disappointed by their real personal income growth. But on the flip side, stock market returns have blown past most people's expectations.
Now, most understand that this gap can't go on forever. The financial economy and asset prices can only diverge away from the real economy for so long. And this is where the concept of the great reset comes in. Some argue that this reset could come through a violent repricing of assets. Others believe it could happen more quietly as income growth somehow catches up to assets. So, let's look at how and when this reset is going to happen.
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To understand the Great Reset, we need to look at the average personal savings rate in the United States. Since the 1980s, it has been trending lower, falling from around 13% to just 4% today. Now, look at what happens when we add corporate profit margins on top. While the savings of the average American has been declining, corporate profit margins have been steadily climbing. This divergence is extremely important to understand.
Corporate profits ultimately get distributed to shareholders. And unlike wage earners, shareholders don't spend most of the income that they receive. Instead, much of it gets reinvested back into financial assets like stocks, gold, Bitcoin, private equity, or real estate. And we can see the results of this all around us. Home prices are at record highs. Gold has been hitting new all-time highs. Bitcoin is also trading at all-time highs and being adopted as a new financial asset. And all of this has been fueled by a backdrop of record corporate profitability.
Inherently, there's nothing wrong with this process. It's a natural extension of how the financial system works. The real problem begins when this dynamic filters through to housing. Throughout most of the last 60 years, the average price of a home has been roughly four times the yearly household income in the United States. Since the late 1990s, however, that ratio has moved to roughly seven, essentially making housing about two times less affordable.
Now, keep in mind, shelter is the largest component of the consumer price index. So, this has a disproportionately large impact on people's budgets. If a larger and larger share of someone's income goes through to shelter, that naturally leaves less room for saving. And so pretty much nothing left to invest in assets like stocks, gold, Bitcoin that have been compounding wealth for those who can't afford them. So in practical terms, it means that many households remain stuck exactly where they are throughout their life. Their expenses rise, but their ability to build wealth through asset ownership doesn't keep pace.
And we can see the impact of this on how people feel about their future. Back in 2000, roughly 75% of Americans said they had a good chance of improving their standard of living. By 2010, that had dropped to 50%. And today, that number has fallen to 25%. That's a staggering shift in just a period of 25 years. And this has all translated into the highest level of wealth inequality in the US since the 1920s.
This chart shows us the share of wealth owned by the top 0.1% of the US population. This is the quote unquote reset that many people are looking for. That somehow we see wealth inequalities come back to where they were in the 1960s. Something similar to what happened during this period right here where the wealth inequalities of the early 1900s were completely reversed and led to one of the most prosperous periods in US history with a thriving middle class.
If we put the S&P 500 index on top of this chart, we actually see that the peak in wealth inequality in 1929 coincided perfectly with the top of the stock market. Back then, rising asset prices, particularly stocks and housing, were also contributing to high levels of wealth inequality. The market crash that followed between 1929 and 1940, coincided with the beginning of a reversal in this wealth inequality trend, as you can see from this line moving lower.
This shift didn't just randomly happen on its own. A catalyst was needed, a trigger that forced what many would call the big economic reset. To understand what that trigger was, we can replace the S&P 500 with the top marginal US corporate income tax rate. In the 1910s, the top marginal tax rate on corporations was 0%. Policymakers then proceeded to push it to nearly 40% over the next few decades.
Now, although there are many theories around what actually caused the Great Depression and the crash of the 1930s, it's likely that this rise in corporate taxes was one of the key forces that triggered it. This was economically painful. It squeezed corporate profits. It dragged asset prices lower, and it caused unemployment to rise, but it did help flip the wealth inequality trend that had been climbing in the decades before. And these high levels of corporate taxes did coincide with an extensive period of low wealth inequality in the US.
In the 1980s, however, we saw the corporate tax rate come down. At the time, US corporations were under real strain. Profit margins were squeezed and the economy was struggling in the early 80s as a result of high inflation and weak growth. Policymakers responded by cutting taxes in order to relieve pressure on businesses and get the economy booming again. And it worked. The economy accelerated through the late 1980s and 1990s with strong growth and large appreciations in asset prices. Between 1982 and 1999, the S&P 500 index delivered nearly a 20% annual return. Behind the scenes, however, these policies did set the stage for wealth inequalities to reverse and begin moving steadily higher over the following decades.
Today, as the corporate tax rate has fallen to the lowest level since the 1930s, wealth inequalities have risen to the highest levels since the 1930s. Now, wealth inequality in the US has multiple factors influencing it. There is not just one clear explanation for why it has happened, but this chart does likely explain part of the story. Lower corporate taxes have allowed profit margins to stay very resilient even while the US consumer has been under pressure.
We happen to think that this great reset will come when this line finally reverses and starts moving higher. This will probably cause a lot of pain and cause asset prices to drop violently like they did in the 1930s. So, what does this all mean for the US stock market today? Well, the stock market discounts future events. So, it's possible that the stock market could peak before corporate taxes actually begin to rise. This is what happened in 1929. The peak in the market occurred a year or two before corporate taxes were raised starting in 1931.
For now, however, we remain long on assets that stand to benefit from today's macroeconomic backdrop. That includes stocks, that includes gold, and that includes crypto. These are assets that are experiencing extreme inflows as money is flooding into financial markets. But there will come a moment when this trend flips in the opposite direction, and that's when things could get ugly. our strategy will flip to a much more defensive posture.
Now, again, make sure not to miss the discount that we're doing on our surface to celebrate our 5-year anniversary. We have been taking our clients step by step through this macroeconomic environment, sharing our setups and market strategy every step of the way. I look forward to seeing you on the service. Thank you for watching.