Our Nation’s “Straining” Social Fabric

Stocks are rallying on soft data … the anger/frustration from millennials … what’s the government’s role in offering “free stuff?” … are you ready for cuts to entitlements?

As I write Friday morning, the rally we’ve been expecting is here and picking up steam.

Fueling it is this morning’s soft October jobs report, showing a payroll increase of 150,000 which was less than the consensus forecast of 170,000.

Meanwhile, the unemployment rate rose to 3.9%. And average hourly earnings, an important measure for inflation, increased 0.2% for the month, less than the 0.3% forecast.

Wall Street is cheering the soft data, believing the Fed’s takeaway will be “further rate hikes aren’t necessary.”

As we’ve profiled in the Digest recently, there are many reasons to expect a sustained rally today, and it looks like that’s what we’ve got. Let’s enjoy it and trade it higher.

But as we do so, let’s also look farther out on the horizon, preparing ourselves for what’s on the way.

On that note, let’s shift gears…

***Is it your responsibility to pick up the tuition tab for someone graduating college today?

Are you willing to receive less in Social Security payments so that your child can receive some Social Security tomorrow?

What social programs deserve funding when the government can’t pay for all it has promised to its citizenry?

Get ready for a twisting, turning Digest.

We’re going to change directions several times. But when it’s done, we hope it will have painted a portrait of how interrelated our economy/government/investment markets are, while highlighting the risks that need to be on your radar.

Let’s begin with the gridlocked housing market.

Existing homeowners, sitting on dirt-cheap mortgage rates from a few years ago, have zero interest in selling because the mortgage rate on any new home would be closer to 8%.

As a result, the handful of homes that are selling have exorbitant price tags. This is courtesy of bidding wars from deep-pocketed buyers who have been willing to spend vastly above market prices to buy a home.

In addition, we’re near record-low existing home transaction volumes.

Below, we look at existing home sales dating back to 1999. We’ve crashed to a level not seen since the housing crisis.

Source: YCharts.com

Yesterday, Bloomberg published an article titled “The US Housing Market Has Become an Impossible Mess,” asking the question “will anything budge?”

Regular Digest readers know that we’ve answered that question “not anytime soon,” short of a widespread recession.

On our current trajectory, nothing changes. Rabid buyers will pounce on the slow leak of existing homes trickling out for sale. This will keep prices at existing levels, or even higher.

If the Fed cuts rates next year, it could make the problem worse because the Fed won’t cut rates by much. Perhaps we’ll get 75 or 100 basis points of cuts. Let’s guess that pushes down the 30-year fixed rate mortgage from 8% to 6.5% or 7%.

Some additional homeowners will be prompted to list their properties, but it won’t be enough to flood the market with new homes. But you know what will the flood the market? Homebuyers salivating at the prospect of slightly greater affordability.

So, this massive influx of would-be homebuyers will cause prices to remain high – or rise even higher.

And even if a brutal recession hit, logic suggests such an economic downturn would prevent millions of Americans from buying homes.

Bloomberg shares our perspective. From yesterday:

A stubbornly strong economy threatens to keep mortgages expensive for years.

Modestly cheaper loans would only unlock pent-up demand, sending prices even higher.

The kind of economic collapse that might bring rates down faster would also make buying harder. And homebuilders are grappling with limited supplies of labor, land and materials.

***The “straining” social fabric from this gridlocked housing market

The Bloomberg article quotes Glenn Kelman, chief executive officer at brokerage Redfin Corp., who made a comment about how bad the housing market is.

But it was Kelman’s second comment, almost an afterthought, that caught our eye and sends our Digest in a new direction:

[This housing unaffordability] is going to strain the social fabric of America that the younger generation isn’t able to buy a home anytime soon.

In a nation as large as the United States, there are all sorts of divisions – race, religion, political leaning, you name it. But there’s one division we’ve profiled many times in the Digest that has been widening in recent years – the wealth gap.

Younger Americans, unable to buy homes today, are falling behind on what, historically, has been the #1-pathway to wealth – home equity.

Roughly one year ago, Business Insider ran an article titled “Sorry, millennials, you’re never getting a good home.” From that article:

Despite their desire to settle down in homes of their own, millennials face a bleak outlook for one big reason: There simply aren’t nearly enough homes for the 72.1 million members of their generation…

After detailing the housing shortage, the article veers off in a related, yet tangential direction:

…The slow start to their careers has left millennials in a more precarious financial position than that of baby boomers or Gen X before them.

Compared with these generations, millennials have more debt, a lower net worth, and a worse chance of making more than their parents.

Those factors, particularly the rise in student debt, have prevented millennials from getting a home. 

More than 20% of the decline in young-adult homeownership between 2005 and 2014 can be attributed to mounting student-loan debt, the Federal Reserve found in a 2019 report.

Now, speaking directly to “stretching the social fabric,” millennials aren’t just angry about this, they’re angry at other American demographic groups. The New York Times ran a piece on this in August.

From the Times, quoting users on “X,” formerly Twitter:

“Gen X sucks.”

“Gen X had it so good with their high income jobs with excel skills and 30yr fixed interest mortgages. This is why they make the worst leaders, ZERO empathy for the people that came after them.”

We can all agree Gen X is the worst though right?

For spatial reasons, we won’t dive into the other intra-demographic frustrations, but they exist.

***Returning to millennials and their financial challenges, let’s zero in on this idea of student debt

As you’ve likely read in headlines recently, the Biden Administration has been doing everything it can to forgive student debt. Here’s NBC from earlier this week:

The Biden administration is proposing a new plan to forgive student debt, months after the Supreme Court struck down President Joe Biden’s sweeping pandemic-era debt relief plan in June…

“President Biden and I are committed to helping borrowers who’ve been failed by our country’s broken and unaffordable student loan system,” Education Secretary Miguel Cardona said in a statement, adding that the aid would build upon $127 billion in loan forgiveness the administration has approved for about 3.6 million borrowers.

Now, at face value, this plan to forgive student debt is noble. Such a debt cancellation would help alleviate the wealth gap, while potentially assuaging some of our population’s social division.

But debt doesn’t just disappear when cancelled by the government. Rather, it’s absorbed by taxpayers like you and me.

And this dovetails into a broader discussion we’ve been having in the Digest recently about our government’s increasingly precarious financial position, who’s receiving what entitlement programs, who’s footing the bill, and how it all ties back to your portfolio and purchasing power.

***Yesterday, billionaire hedge fund manager Stanley Druckenmiller called out the government’s egregious spending and entitlement programs

In an interview with CNBC’s “Squawk Box,” Druckenmiller said the government should cut social security entitlements to offset the announced $106B in support for Ukraine and the State of Israel.

But he wasn’t just targeting social security. Druckenmiller urged the government to cut all sorts of entitlements – the polar opposite of what Biden is doing as takes on $127 billion of student loan debt.

From Druckenmiller:

I want to go after entitlements. That’s where the money is. And, at some point, it’s going to happen no matter what…

Childcare is not emergency spending. It’s a priority that maybe should be on the table or not, but we are spending like drunken sailors.

Circling back to Social Security, he said:

This generation has got to take a cut.

Right now, current seniors are going to get 100 cents on the dollar. Future seniors [are] looking at five or 10 cents on the dollar.

Is it not unreasonable for us to go to 85 or 90 cents on the dollar?

***Unreasonable or not, do you think this is going to happen?

We’re reminded of a quote from Lord Alexander Fraser T. Woodhouselee back in the 18th century:

[A democracy] can only exist until the people discover they can vote themselves largess out of the public treasury.

From that moment on, the majority always votes for the candidate promising the most benefits from the public treasury, with the result that democracy always collapses over a loose fiscal policy–to be followed by a dictatorship.

Along these lines, in 2021, the Congressional Budget Office estimated that the lowest-income 60% of Americans were net beneficiaries, receiving more in social insurance benefits and transfer payments than they paid in taxes.

Meanwhile, think about the protests and demands we’ve seen from Americans in just the last few years…

Demands for free health care… demands for free tuition… demands for free childcare…

Stepping back, do you think the average American is willing to receive less in benefits and entitlements today so that future generations can have some tomorrow?

And which politicians will campaign on tough-but-critical fiscal restraint, rather than “vote for me and I’ll make sure you get XYZ”?

Do you think the government will cut back its spending in any material way whatsoever until it has no other option due to the insolvency of various programs?

***These questions matter because their answers are at the heart of the purchasing power of your wealth

Yesterday in the Digest, we did a deep dive into the increasingly disastrous financial position of the government.

It tackled government spending, soaring federal interest costs, how high rates impact the 10-year Treasury yield, accelerating bond issuance, the effect on the investment markets and your wealth, and how to respond in your portfolio. Click here to re-read it.

The bottom line is that our government’s only play from here is more taxation, more debt spending, and greater debasement of the currency.

Make sure your portfolio and wealth and prepared for it.

In the meantime, we have a climbing stock market that appears to have plenty of firepower. Let’s take advantage.

Have a good evening,

Jeff Remsburg

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