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America Crosses The Tipping Point: The Middle Class Is Now A Minority

Americans have long lived in a nation made up primarily of middle-class families, neither rich nor poor, but comfortable enough,�notes NPR's Marilyn Geewax, but this year - for the first time in US history, that changed.�A new analysis of government data shows�that�as of 2015, middle-income households have become the minority, extending a multi-decade decline that confirms the hollowing out of society as�49% of all Americans now live in a home that receives money from the government each month.�Sadly, the trends that are destroying the middle class in America just continue to accelerate.

Back in 1971, about 2 out of 3 Americans lived in middle-income households.�Since then, the middle has been steadily shrinking.

Today, just a shade under half of all households (about 49.9 percent) have middle incomes.�Slightly more than half of Americans (about 50.1 percent) either live in a lower-class household (roughly 29 percent) or an upper-class household (about 21 percent).

As NPR explains,�thanks to factory closings and other economic factors,�the country now has 120.8 million adults living in middle-income households, the study found. That�compares with the 121.3 million who are living in either upper- or lower-income households.

"The hollowing of the middle has proceeded steadily for the past four decades,"�Pew concluded.

And middle-income Americans not only have shrunk as a share of the population but have�fallen further behind financially, with their median income down 4 percent compared with the year 2000, Pew said.

Since 1970, the U.S. economy has been growing, and we all have been getting wealthier. But�people who have the biggest incomes have been pulling away from the pack in a trend that shows no sign of slowing... asmiddle-income jobs are still 900,000 short of pre-recession employment levels...

And if you’re a millennial, you’d be forgiven for being disillusioned with the American dream.�As we recently noted, compared to young Americans in 1986, you’re three times as likely to think the American dream is dead and buried. As�WaPo notes, "young workers today are significantly more pessimistic about the possibility of success in America than their counterparts were in 1986, according to a new Fusion 2016 Issues poll -�a shift that appears to reflect lingering damage from the Great Recession and more than a decade of wage stagnation for typical workers.”

While there are numerous reasons for the collapse of the American Middle Class (most appear driven by political 'fairness' or monetary policy�intended�consequences), though we suspect�politicians learned long ago that it's easier to just import non-Americanized voters to vote for you,�than,�as FutureMoneyTrends notes, to get naturalized citizens who still cherish the idea of America to vote for things like national healthcare systems, higher taxes on business owners, and the catering to every little tribal group that declares themselves a minority.��

It is only a matter of time before the middle class is wiped out and America begins to resemble the poverty, violence and tyranny so often associated with the countries from which many illegal migrants originate.

It appears that time is drawing near as�Charles Hugh-Smith recently noted,�the mainstream is finally waking up to the future of the American Dream: downward mobility for all but the top 10% of households.

Downward mobility and social defeat lead to�social depression.�Here are the conditions that characterize social depression:

1. High expectations of endless rising prosperity have been instilled in generations of citizens as a birthright.

2. Part-time and unemployed people are marginalized, not just financially but socially.

3. Widening income/wealth disparity as those in the top 10% pull away from the shrinking middle class.

4. A systemic decline in social/economic mobility as it becomes increasingly difficult to move from dependence on the state (welfare) or one's parents to financial independence.

5. A widening disconnect between higher education and employment: a college/university degree no longer guarantees a stable, good-paying job.

6. A failure in the Status Quo institutions and mainstream media to recognize social recession as a reality.

7. A systemic failure of imagination within state and private-sector institutions on how to address social recession issues.

8. The abandonment of middle class aspirations by the generations ensnared by the social recession: young people no longer aspire to (or cannot afford) consumerist status symbols such as luxury autos or homeownership.

9. A generational abandonment of marriage, families and independent households as these are no longer affordable to those with part-time or unstable employment, i.e. what I have termed (following Jeremy Rifkin) the end of work.

10. A loss of hope in the young generations as a result of the above conditions.

If you don't think these apply, please check back in a year.�We'll have a firmer grasp of social depression in December 2016.

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Oil is plunging again, this time in the wake of OPEC’s inability to limit its members’ production. The US dollar, meanwhile, is up on the divergence between Fed tightening and ECB/BoJ/BoC easing.

This widening gap is a perfect storm for the many, many entities that have borrowed dollars to speculate in foreign currencies or drill for oil. Some examples:

Emerging Market Debt Sales Are Down 98 Percent

(Bloomberg) – The commodity-price slump and the slowdown in China’s economy are crippling developing nations’ ability to borrow abroad, even as international debt sales from advanced nations remain at a five-year high.

Issuance by emerging-market borrowers slumped to a net $1.5 billion in the third quarter, a drop of 98 percent from the second quarter, according to the Bank for International Settlements. That was the biggest downtrend since the 2008 financial crisis and reduced global sales of securities by almost 80 percent, the BIS said in a report.

Emerging-market assets tumbled in the third quarter, led by the biggest plunge in commodity prices since 2008 and China’s surprise devaluation of the yuan. The average yield on developing-nation corporate bonds posted the biggest increase in four years, stocks lost a combined $4.2 trillion and a gauge of currencies slid 8.3 percent against the dollar. Sanctions on Russian entities and political turmoil in Brazil and Turkey also affected sales by companies in those countries.

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Fears rise that junk bond investors are over their skis

(CNBC) – After years of safely reaching for yield through risky assets like stocks and speculative-grade bonds, Wall Street is heading into 2016 rethinking the strategy.

That trend of low defaults has begun to turn the other way, with the trailing 12-month rate rising to 2.8 percent in November, the highest level in three years, according to ratings agency S&P, which expects defaults to climb to 3.3 percent by Sept. 30, 2016.

Moreover, fellow ratings agency Moody’s reported its liquidity stress index in November hit its highest rate since February 2010. Still more troubling is that some of the damage has begun to spill outside the oil, gas and mining sectors, where most of the defaults had been contained.

Fully one-third of oil and gas and mining and metals companies in Moody’s coverage universe are on review for downgrade or have negative outlooks.

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Brazil’s Unprecedented Torrent of Downgrades Is Set to Get Worse

(Bloomberg) – Amid Brazil’s economic and political tumult, the nation’s businesses have seen a record number of downgrades this year — and the total is about to get worse.

Fitch Ratings estimates it may slash the ratings of as many as 10 companies for every one it upgrades in 2016. Fitch said that grim scenario is most likely if it chops Brazil’s grade, an ever-growing possibility as the country’s woes deepen.

A top lawmaker initiated impeachment proceedings against President Dilma Rousseff last week, a move that may further undermine the nation’s finances and exacerbate the worst recession in a quarter century. That spells trouble for companies already finding it hard to obtain financing in the wake of an unprecedented corruption scandal at Brazil’s state oil company.

“You will see companies burning cash,” Fitch’s Carvalho said. “The cross-border market is closed for Brazilian companies, and the local market is selective.”

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Saudi Arabia’s big welfare spending faces the oil abyss

(CNBC) – If Saudi Arabia maintains oil production at current levels amid the oil price crash, then it’s going to have to cut its budget — or it will likely be bankrupt by the end of the decade. The big issue is Saudi Arabia’s big spending ways, especially increased government spending on social welfare programs.

According to the IMF, government expenditures in Saudi Arabia are expected to reach 50.4 percent of GDP in 2015, up from 40.8 percent in 2014. That increase can be attributed to two things: falling oil prices (it’s bringing in less revenue) and an inflated budget (it’s spending more money).

It’s no secret that a large portion of Saudi Arabia’s roughly 30 million people rely on the government for economic support. In February, the newly crowned King Salman doled out a reported $32 billion to the Saudi people in bonuses and subsidies to celebrate his ascension to the throne.

“We are a welfare society, so the population depends a lot on government subsidies, directly and indirectly,” Abdullah Al-Alami, a Saudi writer and economist, recently told The New York Times. “But one day we are going to run out of oil, and I don’t believe it is wise to be pampered and subsidized.”

To summarize, the world is entering a classic credit crunch, in which lending dries up for marginal borrowers first before tightening for core entities like multinational corporations and developed world governments. And it’s just beginning.

Most of today’s crises evolved with oil considerably higher and the dollar somewhat lower, so current conditions are actually a lot worse than those that, for instance, caused emerging market debt issuance to evaporate and shoved Brazil into existential crisis.

And since oil overproduction will likely to continue while the differences in central bank policies are etched in stone for the next few months at least, it’s possible that the performance gap between oil and the dollar will widen going forward. This will turbo-charge today’s crises and add a few more, as oil producing US states hit financial walls and big chunks of the developing world follow Brazil down the drain.

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In 8 Years, Developed Market Stocks Have Gained Nothing

Global equity markets, as measured by the MSCI Developed World index, are above the lows hit in early October but�remain on a downtrend�that began after markets peaked at the end of May this year.

As SocGen's Andrew Lapthorne notes, the current level is now only just above where the index stood at the beginning of 2013 and�less than 1% above the 2007 peak. In other words, as he warns,�"the equity market has run out of momentum,"�and the 'bill' for the debt overhang is coming due.

The recovery since 2007 has been very one-sided with only Denmark, Switzerland and the US indices exceeding their October 2007 US dollar price levels.

The UK is down 34% in US dollar terms and the MSCI Eurozone is 40% down. The reasons for this weak performance is fairly clear, unlike Japan neither the UK or Eurozone have experienced an earnings recovery in either US dollar terms or in local currency terms.�Profits in both regions are still 45-55% down from the 2007 high according to MSCI reported profits.

The Eurozone of course has many problems,�but at least Eurozone companies have not been boosting leverage as a consequence of disappointing profits, as is the case in the US and apparently the UK as well!�As we have remarked upon on numerous occasions, the US equity market has been boosting leverage with record levels of debt-financed share buybacks, resulting in a significant increase in leverage among US corporates.

However with all the focus on the US, many investors may have missed the major corporate debt problem now emerging in the UK stock market.�Devoid of the headline-grabbing buybacks, many may not have noticed that both nominal net debt and net debt to EBITDA have never been higher in the UK.

The bulk of that increase has come from a huge rise in Mining sector debt at a time when profits have collapsed, but leverage ratios in other sectors are also elevated.�The US is not the only market now facing a corporate debt overhang.

Source: SocGen

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Brett Rentmeester Outlines:

APPROACHES TO SOLVING YIELD CHASING

& HIGH VALUATION RISKS

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FRA Co-Founder Gordon T. Long interviews Brett Rentmeester on Austrian economics and the importance of having an entrepreneurial mindset in investment. �Brent Rentmeester is the president of Windrock Wealth Management and has been in the wealth asset management for over 18years. Mr Rentmeester believes the uniqueness of Windrock is its focus on the macroeconomic picture, Austrian economics and what it all means for investment implications as well as an entrepreneurial mindset on how to find investment opportunities.

The Austrian school to him is the “acknowledgement of the influence that central banks have on the business cycle and interest rate and therefore the opportunities left for investment”.

He mentions that the traditional stock, bond portfolio is under a lot of challenge going forward because there is no real and safe income anywhere today. As a result people are becoming speculators and risk takers even when they don’t want to.

Brett believes having an entrepreneur mindset when investing, is the key to addressing the dilemma of income and the future of investment. Secure private lending is lending money to borrowers that is backed by real tangible assets or an income stream. According to him, what makes this a unique category is that it addresses the pockets of lending that is being neglected by the big banks as a result of� the financial banking distress that took place in 2008.

On examples of secure private lending, Brett highlights 3 different categories with his examples. He explains that in auctioned rental properties, the government organizations Fannie Mae and Freddie Mac by law are restricted from buying mortgages on such properties until after 2 years, this results in a niche market for private lenders. “In energy markets more states are moving towards a deregulated market”. What this means is that a consumer can buy energy from a variety of energy companies. Now this system is facilitated by third party brokers who go door to door offering this energy from various energy companies. Now because the brokers want the commissions up front and the energy companies can’t provide it, we see people coming in to pay the brokers a discounted fee upfront and then agree to collect the 3year contract provided by the energy companies.

Trade financing

“Global trade happens between different parties but often times it’s financed by big banks, trade receivables. So one party needs to buy goods and a supplier supplies them but someone’s got to finance that transaction and it’s often the third party bank”.

Due to new regulations, banks are required to reserve more capital in such situations, as a result an opportunity is created for private money to finance the transaction between the customer and supplier.

“Rather than taking on more risk you don’t have to today, you just have to be more creative”

– Gordon. T. Long.

Brett echoes this sentiment saying:

“So much of the industry and investors think in a very narrow box of stocks, bonds and maybe hedge funds but there’s a lot of things outside of that, that if you open your mind to the opportunities, are quite interesting to research”.

Abstract written by Chukwuma Uwaga –�[email protected]

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