Billionaire entrepreneur Mark Cuban is banking on cash. He currently owns just four dividend stocks, Amazon, Netflix, and two undisclosed shorts. His logic?
"I think we borrowed from the future to pump up the current market...I don't know when the market will start to recognize that, and that's my biggest concern."
Cuban is spot on. With US debt levels at an all-time high -- from student to consumer to federal and municipal -- it is only a matter of time before the stimulus boosts wear off, consumers pull back spending and markets react, a long-awaited reversal that will shake investor confidence and cause the market to spiral.
Shouldn't we expect a correction following a ten-year bull run? Absolutely. The problem is, the correction is late -- too late. The American people, for better or worse, have been riding this economic high up-up-up -- taking on more debt in light of steady work (or in some cases, simply work in general), with the expectation, no doubt, that they will be working for the foreseeable future.
It is hard to predict what, exactly, will tip the economy in the other direction. Rising tariffs are a good bet. The wearing off of corporate tax cut savings might be another. Lagging wage growth (or in some cases stagnant or negative) is a near guarantee to trigger a consumer spending pullback; if people can’t afford to live, they certainly can’t afford to buy your product.
Last week -- on August 21st -- the S&P 500 hit an all-time high and tied the record for the longest bull market. But what exactly does that tell us?
While stocks may be high, investor numbers are low – a whopping 84 percent of all stocks owned by Americans belong to the wealthiest 10 percent of households, as reported by the New York Times. That includes stakes in pension plans, 401(k)’s and individual retirement accounts, as well as trust funds, mutual funds and college savings programs like 529 plans.
“For the vast majority of Americans, fluctuations in the stock market have relatively little effect on their wealth, or well-being, for that matter,” said Edward N. Wolff, an economist at New York University who recently published new research on the topic.
Ian Bremmer, Founder and President of Eurasia group, writes and tweets frequently on this topic, citing the broader breakdown as follows:
Who owns stocks in the US
Top 1%: 40.3% of US stock (up from 34% in 2001)
Top 5%: 71.4%
Top 10%: 83.7%
Top 20%: 93%
Bottom 20%: 0.2%
The Top 20% owns 93% of the stocks – and we use that as an indicator of overall financial health?
Yes, we can infer that if indexed companies have stocks that are performing well, the company is therefore likely doing well and keeping people employed, which is better for the economy overall. But this is not a linear equation – the company could be doing well because it cut jobs, or sent them overseas, or any combination of activity resulting in less employment.
"I'm not saying that we can't hit record highs...I'm concerned about the debt. Will GDP grow fast enough to overcome the increases in the debt and particularly than the interest rates that expand the debt. I'm not ready to say that's a net positive to the economy....I've got my two stocks and I think there's a whole lot of uncertainty that attaches itself to pretty much everything in the market."
Economic health indictors such as low unemployment, a booming stock market and GDP growth provide a good estimate as to how the economy is faring. But these measures work in aggregates and lack context. Much like the subprime mortgage crisis, the true status of our economic markets becomes clear only when digging within.