Friday, January 14, 2011

The Fed, Housing and Stocks: The Chimera of Middle Class Assets

On the surface, the Fed's $2 trillion-dollar campaign to prop up housing and equities may look beneficial to (what's left of) the middle class. But that is more perception than reality.

The primary driver of Fed policy is of course rescuing and enriching the too-big-to-fail banks. But the politically viable cover is "saving" what's left of Middle Class assets: housing and stocks. This chart from David Rosenberg's recent column on the Wily E. Coyote economy on Zero Hedge tells an important story: by propping up housing and stocks, the Fed is providing political cover for the status quo by seemingly acting to preserve what's left of the Baby Boom's middle class assets, which are still concentrated in housing and stocks.

Of the 26% of assets in "other," i.e. pensions and life insurance, much of those underlying assets are in bonds and equities--so the middle class wealth is probably roughly 20% in bonds, 33% in equities (stocks, emerging-market mutual funds, etc.) and 26.5% in real estate (those Boomers who still own some equity).

But beneath the surface of these "middle class" assets lurks highly concentrated wealth. As we can see here, the vast majority of "middle class" wealth is concentrated in the top 15% of the "middle class"--the tranch beneath the top 5% which owns the bulk of the nation's financial and real estate assets.

Source: Wealth, Income, and Power.

As we can see in this chart from, the increases in income have also been concentrated in the top 5% and the 15% just beneath that together make up the top 20%:

As I reported in Housing and the Collapse of Upward Mobility (April 16, 2010), the vast majority of housing equity resides in the one-third of homes owned free and clear (no mortgage). Here are the updated numbers from the Fed Flow of Funds:

$6.4 trillion in homeowner's equity

$16.5 trillion in household real estate assets

32% of all homes owned free and clear = $5.3 trillion of assets in non-mortgaged property

$16.5 trillion - $5.3 trillion = $11.2 trillion in mortgaged real estate assets

Mortgage debt: $10.12 trillion

$11.2 trillion - $10.12 trillion = $1.08 trillion in mortgaged-homes equity

$1.08 trillion in equity is spread among 50 million homes with mortgages. That $1 trillion of home equity is a mere 1.85% of the nation's total net worth.

The bottom 80% own a 7% share of the nation's financial wealth. That is 7% of $45 trillion, or $3 trillion, including all stocks, bonds and securities in IRAs, 401K retirement funds, savings and other accounts.

That's $3 trillion held by 108 million households, compared to $32.4 trillion held by the top 5% of households (72% of $45 trillion), roughly 7 million households.

In other words, the vast majority of assets held by the Baby Boom generation are in the top 5% of households, and most of the remaining assets are owned by the 15% tranch just beneath the top 5%. The bottom 80% don't have much home equity or directly owned bonds or stocks.

So the Fed propping up housing and the stock market only benefits the top 20%, and most of the benefit flows to the top 5%--not exactly what most Americans think of as "middle class."

Most voters probably look at the top chart and see themselves as stakeholders in the status quo.

But if they examine the second and third charts, they may find their stake in the status quo--and thus in the Fed's unprecedented propping-up of bubble valuations-- is considerably less than the mirage of "middle class wealth" constantly generated by the Mainstream Media, the political class and of course the Fed itself.

"Saving middle class assets" turns out to benefit only the top slice of households,while the dwindling middle class is left with food and energy inflation and the ginned-up perception of "rising wealth" gained by staring at the ever-rising Dow Jones Industrials:Dow 11,908, here we come.

I've addressed these topics many times before, as well as in my book-length Survival+analysis:

The Con of the Decade (July 8, 2010)

Trade of the Decade: The Power Elite's Grand Strategy (October 25, 2010)

Are the Fed's Honchos Simpletons, Or Are They Just Taking Orders? (November 1, 2010)

Hyperinflation Is a Political Process (October 21, 2010)

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