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Do The Wealthy Always Win?

Zero Rates And QE Continually Widen The Wealth Gap

(Not intended to be investment advice)

I spent some time reading and thinking about this post the other day. But what really struck me was the top comment — it was an incredibly introspective and poignant response that honestly deserves to be its own post and not a comment in somebody else’s:

I’m not an economist but have, however, been around long enough to realize that after every crisis in America, there is an economic downturn sometime after and that the “regular” people, such as myself are the ones who suffer. I have begun to feel like these crises are designed to make wealthy people more wealthy at the expense of those of us “on Main Street”.

For example, when average people apply to get a mortgage or re-finance, the lending institution does its level best to get people to borrow more money than they actually need. They say things like “pay off your credit card debt” or “you will need new furniture for your new house” or your real estate agent will lead you to increasingly more expensive homes because you might actually qualify to borrow more money. Many people get convinced into buying a home that winds up being a real burden to pay for, especially if hard times hit. In the late 90’s when I bought my home, I spotted these tactics and stuck to my budget. I’m so glad I did. I’m still living in that same home today. — Pdljmpr

Distrust For The Elite

Since the 2008 crisis where the same bankers that steered the financial system to the brink of collapse (by doling out subprime mortgages to folks that couldn’t afford them) were given million dollar golden parachutes, there’s been an extreme distrust of the financial elite.

Similar to what Pdljmpr says above, there’s this belief (a valid one in my opinion) that the rich and powerful play by a different set of rules. A few examples over the last few years:

  • Angelo Mozilo, the founder of Countrywide (one of the biggest issuers of predatory subprime loans), was fined $67.5 million for his role in pushing predatory loans onto financially illiterate consumers, basically bankrupting them in the process. But Mr. Mozilo earned almost $500 million in comp between 2001 and 2006 — so no big deal for him.
  • In 2013, SAC Capital pleads guilty to insider trading, ultimately paying $1.8 billion in fines. Yet its kingpin, Steve Cohen, got off scot-free and is once again managing people’s money (and making millions). One of his underlings did go to jail though — sucks to be the fall guy.
  • Last February, several senators sold stock right before the COVID crash based on non-public information from a closed Senate meeting about the coronavirus. An investigation was started but quickly dropped just a few short months later with most of the involved senators completely off the hook.
  • Recently (as you might have heard), hedge fund Melvin Capital blew up billions of dollars shorting GameStop — they reportedly lost more than 50% in January alone. But then hedge funds Citadel and Point72 (Steve Cohen’s current fund) came in and gifted Melvin a $2.75 billion extra life.

Reading about these things makes us angry. There’s a blatant double standard going on here (no one bails me out when I blow up a trade). Watch the following video. If I did this, I would be in jail. But because of her then-position and political connections, Caren Turner felt it was fully in her right to berate and intimate these two police officers.

Feeling Left Behind

The last two economic shocks, 2008 and COVID, definitely impacted the rich and poor differently. Pdljmpr is more or less right to feel the way he/she feels:

I have begun to feel like these crises are designed to make wealthy people more wealthy at the expense of those of us “on Main Street”.

Crises favor those with capital. If you’re already wealthy, then a crisis while annoying to your portfolio balance is an opportunity to buy more stocks and real estate at attractive prices. There’s also the tailwind of stimulative Fed (Federal Reserve) monetary policy that’s designed to push up the prices of risky assets. So your stocks, real estate, fine art, and wine collection all get a huge boost.

I would argue that without the Fed locking rates to zero and bringing out the QE money printer, the U.S. economy might not have made it out of the 2008 Financial Crisis in one piece. Things were truly dire back then.

But because we scraped by in 2008 thanks to the magical combination of zero rates and QE, they’ve now become the “easy button” for fighting crises. In the past decade, every time markets have looked even the least bit wobbly, the Fed (or the ECB) begin firing the QE cannons. This constant waterfall of liquidity has thus far prevented shocks and recessions from becoming worse — but they’ve also pushed the prices of almost all risky assets to truly frothy heights.

Unfortunately, only those that own financial assets benefited from this meteoric rise. As of 2016, the top 10% of Americans (by wealth) owned 84% of stock market wealth (source: Wikipedia) while many in the bottom 50% owned no stocks at all.

Thus, economic shocks disproportionately hurt the poor and middle class. With little in savings (which also means no money to buy stocks), when they lose their jobs, the not-so-rich can very quickly go from just scraping by to facing eviction. Meanwhile, the rich keep getting richer by surfing the QE wave.

It’s no surprise that people are angry. GameStop was a fun story while it lasted, but it also showed Main Street’s very real and very strong resentment towards the financial elite. It’s bad enough that the rich and powerful have always been able to get away with more than the rest of us. But because of the way the Fed has chosen to combat economic shocks, the elite keep coming out of every crises significantly richer than they went in. Optically, it truly looks like they’re getting bailed out over and over again.

Perpetually easy monetary policy and QE favor risky assets. And literally those are all the Fed’s got these days — unfortunately that means the wealth gap will only grow bigger from here on out. It also means that in order to keep up, we need to own at least some equities (but don’t go all-in). Yes they’re worryingly expensive, but if the rules of the game are designed to favors stocks, then we’ve got to invest accordingly.

Data Science @Solovis, Doing my Best to Explain Data Science and Finance in Plain English. Follow my publication at: https://medium.com/alpha-beta-blog

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