Income Inequality - Who is to blame?

Income Inequality - Who is to blame?

August 26, 2021
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The S&P 500 has now hit an all-time high 50 times during FY 2021. The most all-time highs ever in a single year was 77 in 1995 and as of right now, we are on pace for 78 new highs in FY 2021.

One positive note from the above chart shows that even with all these new all-time highs, the rest of the year for the S&P 500 has been historically favorable (1987 is the one outlier). Although the sound of markets at all-time highs sounds great, there may be a bigger problem brewing under the hood.

It’s not just the stock markets that are hitting all-time highs. We are now seeing the housing market, job openings, wages, and inflation (highest since 1991) all at unprecedented levels. Yet, our Federal Reserve still feels compelled to buy $120 billion worth of bond purchases each month.

Where is the disconnect?

A recent study, “The Savings Glut of the Rich”, that was published in Bloomberg shows that while the Fed condemns the growing wealth gap, they may be in fact responsible for what we have seen as of late.

Most of the wealthy are the ones with significant amounts of capital in the stock market. Meanwhile, the average blue-collar worker does not the same exposure to the equity markets and may only have their funds in a “high-yield” savings account that is generating them 0.5% interest.

As of March 2021, the top 1% of Americans owned approximately 53% of the total stocks and mutual funds in the markets and the top 10% owned 89% of all corporate and mutual fund shares outstanding. This disproportionate ownership of equities/mutual funds have allowed the rich to laugh away the “transitory” inflation while they spend hundreds of thousands, and sometimes even millions, to buy fake rocks.

The study showed that the wealthy are parking their cash in the exact assets that the Fed continues to pump. Put another way, “Basically, the U.S. and lower-income families are becoming more indebted, rich people have more money tied up in debt funds, and less money goes toward fostering innovation and prosperity.”

Investors are now focused on the Fed’s annual meeting, which is being held virtually this year on Friday in Jackson Hole. This meeting is analyzed by analysts and traders all around the world to try and gauge when and if the Fed will begin cutting back on their $120 billion of monthly bond purchases.  

The arguments have been made that with markets and the housing markets booming, why do we still need so much Fed intervention? The Fed seems too aligned with the administration rather than acting like a true independent agency.

Chairman Powell and his colleagues could argue that the rise in Covid cases give them a reason to continue to guide the economy through uncertainty. But with the markets where they are and inflation continuing to increase, more and more Fed officials are open to begin tapering these purchases.

Only time will tell, but my guess is we won’t get much news out of Chairman Powell this Friday.

One last chart that shows how significant the Fed’s bond purchases and the stimulus packages have been by increasing the M2 Money Supply (includes cash, checking deposits, and easily convertible near money):

Approximately 33% of the U.S. M2 Money Supply has been created in the past 20-months….


  • Kyle

Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual.