Thanks to the Federal Reserve’s dedication to increasing your net worth, 2013 will go down as one of the most prosperous years on file. Stock prices have increased more than 20 percent and U.S. home prices have increased nearly 15 percent. These gains hit national headlines, but the gains for back-page asset classes are equally impressive.
In November, Christie’s set a record with $692 million in sales on a Tuesday night, including a record $142.4 million for “Three Studies of Lucian Freud.” Also, in November a case of 1978 Romanee-Conti Burgundy sold for a record $474,000. U.S. car auctions this year will top a record $1 billion. The 60-carat “Pink Star” diamond sold for a record $83 million. Bob Dylan’s 1964 Fender Stratocaster sold for a record $965,000. A used pair of Michael Jordan’s basketball high tops sold for a record $104,765. I could go all day. According to the Federal Reserve, U.S. household net worth hit a record of $77 trillion in the third quarter. By this measure, the Fed’s easy money policies have definitely hit their target. Money printing has inflated asset prices without inflating prices for goods and services. With the unemployment rate falling, wealth rising and de-leveraging trends slowing, is it time for the Fed to taper bond purchases?
The Have and Have Not U.S. Consumer
U.S. household net worth has more than reclaimed the damage from the great recession. Unfortunately, with the bulk of the gains accruing to more affluent asset owners, not all Americans participated equally. Only half of U.S. households own stocks. In fact, the top 10 percent of income earners own 80 percent of market wealth. The affluent have also seen the vast majority of income gains as the top 10 percent of earners receive over 50 percent of available income. Since the great recession, 95 percent of income gains have accrued to the top 1 percent while income gains for the remainder 99 percent have been flat.
The narrow participation in wealth and income gains does explain the relative disconnect between the surge in asset prices and the somewhat lackluster consumer spending story. While holiday retail sales have been surprisingly brisk, the consumer spending contribution to third quarter GDP was the lowest in four years. Perversely, the 3.6 percent growth in third quarter GDP came from a buildup of business inventories, a function of lackluster consumer demand. For those not participating in the asset inflation story, falling real incomes must be offset by job gains and increased indebtedness for a more durable rise in consumer spending.
Temper the Taper
The recent market pullback assumes the Fed will react to headline economic data and reduce its simulative bond purchases this week. A deeper look at the data reveals that the average American continues to struggle economically, hindering consumer spending and restraining inflationary pressures on goods and services. For this reason, the Fed should maintain its present bond-buying program. If it does, we should receive a Santa Claus rally to close out a record 2013.
David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.