Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Commentary

Several Really Scary Economic Trends in the United States

There’s a lot about today’s US economy that scares me but a few trends stand out as truly frightening.

Disturbingly some of these developments indicate that we might soon face a drop off in economic activity rivaling that of the Great Depression. Here are numbers about the economic trends that worry me the most:

The Retirement Crisis

The numbers indicate that tens of millions of Americans will experience a drastic drop in income in the years ahead. This will occur because Americans are not saving for retirement.

Around 56% of Americans have less than $10,000 saved for retirement and around one third of Americans have nothing saved for retirement, Time reported. That means they’ll end up relying on Social Security and the average Social Security payment is $1,350 a month.

This means the majority of the 76 million Baby Boomers who are about to retire will be earning $16,200 a year. That’s a little over the federal poverty level of $12,600 for individuals, and just under the $16,240 poverty level for a family of two.

The effects of this on communities will be catastrophic because millions of Americans will have less money to spend. That means less business at stores, fewer jobs, lower amounts of sales and property taxes collected, etc. Spending by baby boomers drove America’s economic engine for the last few decades, well that spending is about to dramatically contract and devastate a lot of communities.

We must also note that a lot of Seniors take home less from Social Security because of the bizarre way the program pays out. A major problem is that the benefits are based on what a person paid in, not their currents needs, which is why millions are living on a few hundred dollars a month. Some sort of Social Security fix is needed and fast.

The Pension Crisis

Closely related to the retirement crisis is the pension crisis. Millions of Americans who thought they had earned a good pension through decades of public service are might get nothing. Meaning they too will join the tens of millions with nothing but Social Security.

The amount of unfunded state and local government pension in the US was $1.75 trillion in October 2016 according to Moody’s. Governments in one state alone: Illinois owe between $111 billion and $193 billion in unfunded pensions. The City of Chicago has accumulated $32.92 billion in unfunded pensions.

The pension crisis might be highly destructive because governments will end up diverting tax money from things like schools, police, street maintenance, libraries and the fire department to cover pensions. Chicago is already spending $1.7 billion a year to cover unfunded pensions.

The Retail Apocalypse

Over 3,000 retail stores across the United States might close over the next year. Back on March 30, 2017, I counted 2,306, but since then another major chain Payless ShoeSource has filed for bankruptcy.

Payless announced immediate plans to close 400 stores across the U.S. and Canada, The Washington Post reported. The situation is made worse by the retail real estate market which is oversaturated according to Urban Outfitters CEO Robert Hayne.

That means lower rents for retail space, lower property values and lower amounts of property tax taken in by governments across the United States. This should worry us because property tax finances a wide variety of government services including schools.

It also means reduced sales tax; the primary funding source for many governments, and fewer jobs. Something many people forget is that retail supports a lot of very good middle class jobs including truck drivers, managers and clerical and administrative personnel.

A related problem is that many families rely on a member with a retail position such as cashier to generate just enough extra income to keep the household in the middle class. For many families mom’s job behind the register is the only thing covering the mortgage payment or providing health insurance.

Loss of Manufacturing Jobs

The United States lost 5.6 million manufacturing jobs between 2000 and 2010, according to The Financial Times. Disturbingly President Trump’s trade policies are unlikely to reverse this process because 85% of the job loss was caused by automation and new technology not trade, the Center for Business and Economic Research at Ball University found.

This should worry us because manufacturing jobs often pay more and are more likely to come with benefits such as health insurance. A more destructive consequence of this change is that manufacturing provides jobs for the uneducated and men who are dropping out of the labor force in large numbers. That’s a long term threat to social stability that’s not being addressed.

Societies that have large numbers of unemployed young men often find themselves facing unrest and high crime rates. America is now in such a situation and it is getting worse.

Political upheaval and civil unrest are likely once it becomes apparent that President Trump will not be able to deliver upon his promises to restore manufacturing jobs. That might lead to rioting and worse in some parts of the country.

Used Car Prices

The average American household today makes two major investments these days an automobile and a house. Here’s something frightening the value of one of those investments might collapse over the next few years.

Used vehicle prices are projected to fall by 50% over the next five years by analysts at Morgan Stanley. That would be on top of the 4% by which preowned vehicle prices fell in 2016 according to the NADA Used Car Guide.

That means a used car which is worth $5,000 today might be worth $2,500 or less in 2021. A major problem here will be that lower prices for late model cars which are traded in will drive down the prices of older vehicles. Many people will go to sell their vehicles and end up collecting just a couple of hundred dollars from the junkman.

This means that all those Americans who are shelling out $200 to $500 a month in car payments are essentially throwing their money away. It also means that millions of running cars in good condition will end up at the scrapyards in a few years, because nobody else will want them.

Worry about Used Car Prices Not the Stock Market

There is one economic factor that does not worry me much and that’s the stock market. There is little possibility of a major bear market in stocks, despite these economic trends. My take is that stock prices will remain stable for the foreseeable future because there is no real alternative to them as an investment right now.

Another reason why I’m not worried about stocks is that most Americans are not exposed to them. Only around 52% of Americans have money invested in the stock market according to Gallup. Those who want to worry about an asset that’s depreciating should worry about cars because almost every household in the U.S. owns one and used car prices are collapsing as noted above.

The bottom line is that there are some very worrying economic trends out there. Everybody needs to be concerned because some there are some indications of big trouble in the US economy.

For a truly disturbing picture of where these trends might lead checkout Chris Arnade’s extremely frightening Medium articles “USA: A Third World Country in the makingand “A Town Forgotten.  They provide an excellent view of the hollowing out of America and the economic devastation in parts of the country.