Low-income Americans are breaking … more affluent Americans are doing fine … the government’s role in widening the wealth gap … more taxes coming … Eric Fry’s latest idea

A progression of dominos is tipping over today…and the final one casts a dark shadow over your income and savings.

We’ll begin with the figure “$6,218.”

This is the average credit card debt carried by your typical U.S. consumer. It’s up a whopping 8.5% from last year.

According to a report released earlier this week by the Federal Reserve Bank of New York, a growing number of U.S. households are coming under major financial pressure, resulting in rising credit card delinquencies.

From CNBC:

Over the last year, roughly 8.9% of credit card balances transitioned into delinquency, the New York Fed reported.

According to TransUnion’s research, “serious delinquencies,” or those 90 days or more past due, reached the highest level since 2010.

As you’d suspect, inflation isn’t hurting everyone equally

Yesterday, Walmart released earnings, showing better than expected results. However, a deeper analysis reveals who’s most responsible for those profits.

From Yahoo! Finance:

Online sales in the United States surged 22%, surpassing the 17% growth it posted during the typically robust holiday season. Growth was driven by…households earning more than $100,000 per year.

“It was nice to see that sales increased because of volumes and not just prices. The dispiriting aspect is that wealthier consumers are continuing to do the heavy lifting,” said Brian Jacobsen, chief economist at Annex Wealth Management…

While Americans have generally managed to navigate through higher prices, prolonged inflation has sparked worries that lower-income consumers might be more pressured and potentially slow down an anticipated recovery in spending.

This conclusion echoes the CNBC article we highlighted on Monday titled “McDonald’s and other big brands warn that low-income consumers are starting to crack”:

Some of America’s best-known corporations are saying their consumers are being pinched by inflation as prices continue rising…

“It is clear that broad-based consumer pressures persist around the world,” McDonald’s CEO Chris Kempczinski said on the fast-food chain’s earnings call early Tuesday.

But as we just noted, these “consumer pressures” aren’t being felt equally. We’re seeing a widening of the divergence between the top 20% of American earners and the bottom 80%.

As inflation has eaten away at the spending power of the lower 80%, Americans with assets have largely seen their net worths rise alongside higher prices

Inflation makes all sorts of items and goods more expensive. But for those Americans who own these items and goods – think assets such as real estate, stocks, commodities, collectibles, etc. – their wealth has mostly floated atop the rising tide of inflation.

Take residential real estate and stocks…

Here we are at or near all-time highs in both asset classes, thanks in large part to the trillions of dollars printed by the government that flooded our economy in the wake of the pandemic, eventually finding their way into the stock and housing markets.

And who owns stocks and homes? Well, mostly the top 20% of earners, as you can see below:

(The various shades of blue represent real estate, stocks, retirement accounts, private businesses, and other assets.)

To be clear, the after-inflation value of these assets might not have increased all that much. But from an optics perspective, these Americans undoubtedly appear wealthier while lower-income Americans are increasingly pinched.

This isn’t a symptom of greed and/or class warfare – it’s a natural manifestation of inflation, which the government had a huge role in creating

We’re reminded of a quote from French businessman and economist, Frederic Bastiat in the 19th century:

When false money, under whatever form it may take, is put into circulation, depreciation will ensue, and manifest itself by the universal rise of everything that is capable of being sold.

But this rise in prices is not instantaneous and equal for all things. Sharp men, brokers, men of business, will not suffer by it; for it is their trade to watch the fluctuation of prices, to observe the cause. And even to speculate upon it.

But little tradesmen, countrymen and workmen, will bear the whole weight of it.

If you want a reminder about this “false money…put into circulation,” last year, The Kobeissi Letter reported that since 2020, the U.S. has printed nearly 80% of all the U.S. dollars in circulation.

From The Kobeissi Letter:

To put that in perspective, at the start of 2020 we had ~$4 trillion in circulation.

Now, there is nearly $19 TRILLION in circulation, a 375% jump in 3 years.

We are paying the price for trillions of Dollars that were printed seemingly overnight.

In the year since The Kobeissi Letter published this, our M2 Money Supply has risen ever higher – from nearly $19 trillion to more than $21 trillion.

Now, here’s where things take a frustrating turn for me…

Rather than take responsibility for its role in exacerbating this problem and enact better policy, our government redirects toward “greedy” corporations and the rich

Let’s be clear – it was the government’s own policy of fire-hosing the economy with money that played an enormous role in the recent widening of the wealth gap. So many of those trillions of dollars eventually flowed to Americans with assets.

But instead of owning up to that, the resulting wealth divergence has now become a political talking point.

“The rich have gotten even richer. They must pay their fair share.”

Now, I’d like to avoid a potential misunderstanding: I’m not against the rich or the affluent paying more in taxes (or various corporations). But I am very much against a deliberate misrepresentation of the truth about taxation.

Here are the numbers from The Wall Street Journal:

The top-earning 1%, which makes 18% of all income, paid 25% of all federal taxes and 40% of all income taxes.

The bottom-earning 60% earned 23% of income but paid only 13% of federal taxes.

That population included the bottom-earning 40%, which had a combined average income-tax rate of negative 6.4%.

America’s top tax rates often exceed international norms. Our top income-tax bracket of 43.7%—including typical state taxes—exceeds that of the standard OECD nation (40.4%). 

Sure, our wealthy could pay more in taxes. But the idea that they aren’t paying their “fair share” is naïve at best and intentionally divisive from our political leaders at worst.

I write this as someone who is not in the top income bracket, but who has eyes and a willingness to see the truth.

But let’s give our politicians freedom to turn the tax dial to maximum levels on the rich…

Would that solve our government’s debt/spending problem and the inflation-fueled wealth gap?

Beginning with alleviating our government’s debt burden, here’s Brian Riedl, senior fellow at the Manhattan Institute, published in the WSJ:

As budget deficits surge toward the stratosphere, Congress will soon have to get serious about savings proposals. Yet reforming Social Security and Medicare—the leading drivers of long-term deficits—remains a political nonstarter.

Neither party is willing to raise middle-class taxes. And cutting defense and social spending would save at most $200 billion annually from deficits that are projected to approach $3 trillion by 2034.

That leaves one option: Tax the rich. It won’t be nearly enough…

It’s farcical…to suggest that the tax-the-rich pot of gold is large enough to rein in our deficits and finance new spending programs.

Seizing every dollar of income earned over $500,000 wouldn’t balance the budget. Liquidating every dollar of billionaire wealth would fund the federal government for only nine months.

Riedl dives into greater detail on the mess our government has created, eventually dovetailing into our final domino – you and me (underline added):

As deficits soar toward 10% of GDP, taxing the rich can certainly be on the table as part of a deficit-reduction package. Yet most savings will have to come from Social Security and healthcare spending, which are driving long-term deficits upward.

Any major tax component will also have to include the middle class.

The tax-the-rich solution is a fantasy.

What about alleviating the growing wealth gap between the classes?

I believe most people would be in favor of reasonable, effective steps to help those on the low end of the economic spectrum. The challenge is what happens when rubber meets road.

Let’s look at an example…

Home equity is a huge contributor to the overall net worths of millions of Americans. Between 2020 and last summer, the price of the average U.S. home exploded 44%.

So, on paper, we now have an even greater wealth disparity (in large part due to our government’s own policy). What’s the solution?

Does the government tax homeowners on these unrealized gains and then redistribute those proceeds to non-homeowners? How many Americans have the liquidity to pay a tax bill on a 44% climb in the value of their home equity?

While that might sound crazy, recently in the Digest, we profiled President Biden’s plan to tax unrealized capital gains on ultra-wealthy Americans. Given our government’s toxic financial position, why are we to believe such a policy wouldn’t eventually widen to impact more regular Americans?

Meanwhile, what’s mentioned less frequently is that our system is already far more redistributionist than our political leaders let on.

From Bloomberg:

I have news for you: The United States is becoming more redistributionist. Whether you like it or not.

The broader historical trends show that the US tax-and-transfer system is getting more progressive, including in recent years. And the US government is increasingly redistributing wealth to the bottom half of the income distribution.

This portrait belies the common view that the US doesn’t have a “real” welfare state, at least as compared to, say, the Nordic countries…

The Bloomberg article dives into all sorts of details which we don’t have time to flesh out today. But here’s their bottom line:

Cliches about the US are easy to come by. While conservatives like to suggest that income redistribution is by its very nature anti-American, progressives say that America is uniquely cruel in its rejection of the welfare state.

Neither narrative is quite correct. As America gets more wealthy, the data show, it is redistributing more of its wealth.

At the end of the day, there’s no easy answer here. But as we connect the breadcrumbs between rising credit card debt, inflation, wealth disparity, and our government’s endless need for more money, one thing becomes increasingly clear…

Get ready to give more to Uncle Sam.

Circling back to the investment implications, the importance of generating wealth from the markets today while conditions are decidedly bullish is magnified.

And that’s our goal here in the Digest. We’re thrilled to be able to bring you the research and investment ideas from some of the smartest, most successful analysts in the business.

On that note, before we sign off, put next Tuesday at 7 PM Eastern on your calendar

We’ll bring you more details in upcoming Digests, but here’s the preview of the latest trade idea from our macro expert Eric Fry…

There’s something interesting happening in the Rust Belt today. In short, it’s a revitalization through high-tech industries that are relocating to the area.

Eric has been tracking this “Rust Belt revival” and the investment implications:

As investors, capitalizing on this trend is not particularly easy… or obvious.

However, I’ve identified one sector that sits at the nexus of AI and the Rust Belt Renaissance… and the one company within that sector that I believe will be the next trillion-dollar AI company.

We’ll go over all the details on that sector during my special strategy session, The Next $1 Trillion AI Stock, scheduled for Tuesday, May 21, at 7 p.m. Eastern time. And we’ll explore how we can make 40 years of Nvidia-type gains on that stock in just months.

We’ll bring you more details on this on Monday, but to go ahead and reserve your seat for this event, click here.

Have a good evening,

Jeff Remsburg