In business, the 80/20 rule states that 80% of your business will come from 20% of your customers. In an economy where more than 2/3rds of the growth rate is driven by consumption, an even bigger imbalance of the “have” and “have not’s” presents a major headwind.
I have often written about the disconnect between Wall Street and Main Street. As shown in the chart below, while asset prices were inflated by continued interventions of monetary policy from the Federal Reserve, it only benefited the small portion of the population with assets invested in the market. Cheap debt, excess liquidity and a buyback spree, led to soaring Wall Street and corporate profits, surging executive compensation and rising incomes for those in the top 10%. Unfortunately, the other 90% known as “Main Street” did not receive many benefits.
This divide is clearly seen in various data and survey statistics such as the recent survey from National Institute On Retirement Security which showed the typical working-age household has only $2500 in retirement account assets. Importantly, “baby boomers” who are nearing retirement had an average of just $14,500 saved for their “golden years.”
Further evidence of the failure of ongoing Central Bank interventions to spark a broad economic recovery that lifted “all boats” is shown in the chart below. 4-0ut-of-5 working-age households have retirement savings of less than one times their annual income. This does not bode well for the sustainability of living standards in the “golden years.”
Here is the problem that is unfolding for investors going forward. While the mainstream financial press continues to extol the virtues of investing in the financial markets for the “long-term”, the assumptions are based on historical data that is not likely to repeat itself in the future.
Jeff Saut, Liz Ann Sonders, and others have continued to prognosticate the financial markets have entered into the next great “secular” bull market. As I have discussed previously, this is not likely to the be case based upon valuations, debt and demographic headwinds that are currently facing the economy.
Let’s set aside valuations and look strictly at the main driver of economic growth – the consumer.