With this edition we detail the ongoing insanity of U.S. wealth inequality and how Canada is following the trend. Also, a CIBC economist finds the dark side of an economic soft landing and two new white papers show that the rise of sports gambling is affecting stock market liquidity.
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The ludicrous extremes, and causes, of U.S. wealth inequality
Wealth concentration is not a new trend but few commentators have offered an explanation as to why it’s happening, beyond waving at it with inane terms like “late-stage capitalism.” Macquarie Capital global strategist Viktor Shvets, however, broke this trend in a research report this week by providing three reasons the rich are getting richer, along with potential remedies.
The most recent Federal Reserve report on U.S. household finances reveals wealth concentration as ludicrously extreme and getting worse. The top 0.1 per cent of the population, about 130,000 people, have increased their wealth by US$8-trillion to $21-trillion since 2019. That’s $157-million per household.
The bottom 50 per cent of Americans, about 66 million households, own about 2.0 per cent of wealth, down from 3.5 per cent in 1989.
Wealth disparities are also apparent by age cohort. Millennials own roughly nine per cent of U.S. wealth at an age when Boomers owned 20 per cent. Americans under 40 years old own seven per cent of assets now versus 12 per cent in the late 1980s. This makes intergenerational animosity explicable.
Mr. Shvets blames the commingled rise of two ‘ations’ - digitization and financialization – for driving wealth concentration. The rise of technology has created a cabal of centi-billionaires while asset securitization, hedge funds and share buybacks are three examples of how economic emphasis has changed from producing goods to leveraging finances for profits.
Households attached to technology and finance through equities accumulated substantial wealth and left the rest of the economy behind. The poorest half of the U.S. population count equities as four per cent of assets while for the top 0.1 per cent it is 50 per cent.
The strategist lists globalization and the subsequent developed world de-industrialization as another reason for financial inequality. Manufacturing moved to China, Vietnam and, for the auto industry Mexico, leaving developed market workers with much lower paying employment.
The third reason for inequality is a loophole-ridden U.S. tax system that largely ignores capital in favour of income.
Mr. Shvets recommendations are largely conventional – capital gains, wealth and estate taxes to begin with. He also favours a tax on robots and increased programs to make health care and lower debt commitments available to the bottom 50 per cent.
Wealth concentration in Canada is less of a problem but it is getting worse. Earlier this year, Statscan reported that the wealthiest 20 per cent of Canadians own 67.4 per cent of assets while the bottom 40 per cent own 2.8 per cent.
I’ll concede that this is not the most actionable column for investors I’ve written lately but I’m fascinated by the magnitude of U.S. financial polarization. I also believe this era will be known by these trends in future history books.
Avery Shenfeld of CIBC.Donald Weber/The Globe and Mail
Soft landing comes with a cost
Inflation pressures are easing in North America but CIBC economist Avery Shenfeld sees reasons the relief might be short-lived.
Mr. Shenfeld’s most recent research report was ostensibly about commodity prices treading water. While global equities and corporate bonds reflect an optimistic outlook for economic growth, energy and metals prices are neither in a steep uptrend or on a sustained decline.
The economist cites falling inflation pressure as the reason for the meandering path of commodity prices. Current indications imply that inflation has been tamed without the accompanying economic damage experienced in the 1980s after Paul Volcker inflicted huge rate increases to trigger an inflation inflection point. That’s the good news.
Mr. Shenfeld is the first person I’ve seen who identified the downside of the soft landing. “The bad news for economic growth ahead is that having not opened up an ocean of economic slack, we don’t have that much room for an economic boom without bringing inflation back into the picture.”
The lack of economic upheaval cased by rate hikes means we are still operating near full output in many industries, setting the stage for shortages, higher prices and central bank rate hikes if growth accelerates. North American economies may continue to bump up against inflation pressure and have to endure higher borrowing costs as a matter of course in the coming years.
Diversions
Sports gambling reduces market liquidity
I listen to a lot of sports podcasts, many of them concerning the NFL and my beloved (and future 2025 Super Bowl champion) Detroit Lions. It is impossible in my experience to do this and avoid advertisements for sports gambling, including the motormouth listing of state-specific regulations and addiction hotlines at the end.
It turns out that the near-ubiquity of sports gambling might have effects on the stock market, as Preet Banerjee wrote in a Globe Investor column this week.
Mr. Banerjee cited two U.S. working papers estimating that for every dollar bet on sporting events, there is a decline of two dollars in stock market investment. The studies also found significant declines in credit scores and a 25 to 30 per cent increase in bankruptcies in jurisdictions allowing sports gambling.
The essentials
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What’s up next
CIBC is the last of the major banks to report on Thursday. Domestic GDP for the second quarter will be released on Friday – 1.8 per cent annualized growth is currently forecasted by economists. The U.S. will report GDP for that same quarter on Thursday and anything a lot above or below the consensus of 2.8 per cent annualized growth will move markets.
The University of Michigan Consumer Sentiment survey for August is out Friday. I only mention it to add that I generally ignore this indicator as it is neither positively or negatively consistently correlated with the S&P 500. U.S. PCE inflation data, the Fed’s favourite measure of price pressure, is also out Friday.
Editor’s note: A previous version of this article incorrectly stated that the top 0.1 per cent of the U.S. population increased their wealth by US$1-trillion to $13-trillion since 2019. That group increased their wealth by US$8-trillion to US$21-trillion. This version has been updated.
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