I’m okay, but things are terrible. There’s a general sense that economic conditions right now are absolutely awful and that the outlook is terrible – a sense that is completely and totally refuted by reality. Why is it that the general public feels this way, and how is this impacting the way they invest?
The Economic Numbers:
Inflation, Interest Rates, the Markets, and Employment
So here’s a few numbers for perspective. In the last video we talked about how the inflation rate in October was 3%. Interest rate hikes are probably over. Markets have avoided a painful correction. In fact, in November, they had a lovely month. Bond markets are stabilized. Unemployment is 3.9%. Economists call that full employment. Anyone who is able to work and wants a job can get one in this economy.
Real wages, that’s wages after inflation, are up 3% since the end of 2019. And more important, the bottom quintile, the bottom 20% of the population, have seen annual nominal raises of almost 6%. This is clearly the beginning of a golden age for the working class, which is great news. Everybody’s worried about inequality. It’s a problem that’s being corrected by three things, demand, demography, and digitization. All the western countries are running very hot economies, partly because of aggressive spending, both by governments and corporations. The demographics are such that there aren’t enough workers to go around. And politically, immigration is touchy, which is unfortunate because we’re all fighting for the same quality workers.
Technology and Education
And digitization, everybody since the Luddites back in the 1800s have been afraid of technology. And what we’re finding, even AI is helping improve the productivity of the less skilled workers. It’s quite fascinating. We didn’t really see this coming. But technology is improving the productivity of the less productive workers, which is making them more valuable. As you might imagine in a scenario like this, the premium of a four-year degree is not what it used to be. Well, it doesn’t take a rocket scientist to note they’ve gotten very expensive and the pay differential is not as exciting as it used to be. Let me tell you how bad it is. The pay premium for a four-year degree is the lowest it’s been in 50 years.
The Bad Vibes Around a Good Economy
So the overriding question is, why is everybody so glum? Why is the opinion so much worse than reality? In fact, the consumer sentiment index is below 64, the neutral is considered 100. It’s marginally better than what it was at the height of the Great Recession. That makes no sense whatsoever. And so a lot of research now is into why are people feeling this way? Because what’s the point of a good economy if everybody thinks it’s terrible? Well, it appears that, with political polarization as extreme as it is today, it doesn’t matter who’s in office. The other half thinks that everything’s being destroyed. And so that’s one part. It appears people are losing touch with the middle reality. They’re not realizing that, hey, the answers to most of the problems are somewhere in the middle. The weaponization of social media, if it bleeds, it leads. If it raises your pulse, it’s interesting. It means that good news doesn’t get the play it deserves.
What we have today is a distorted reality field. And it’s a dangerous one because people are going to make political decisions, and I’m not talking about who they vote for president, but even sub-issues based on perception, not reality. And yet, at the individual household level, spending is strong. Ergo, I’m okay, but things are terrible. Everybody’s individual situation leaves them feeling like things are good, but the world is going to hell in a hand basket, at least economically. And the perception is clearly wrong. There has been and always will be challenges, and most of them will be unforeseen. And most of the things we worry about are not the things we should be worrying about. But probably the best advice I’ve got is if you’re on social media, just take it off the phone. Quit using the internet for your news. Remember that economics is only loosely related to politics. Find the middle and enjoy your life.
We wish you the best of investing success.
Paul is the founder and CEO of Avion Wealth, LLC. He leads a team of wealth managers in building and executing financial plans for high net worth individuals and families. Contact Avion Wealth to speak with a financial advisor.