Whenever an economic recession hits, not only personal income drops but the dreaded wealth gap of 2021 looms larger than in any other time in modern history.
As the US Stock Market is dangerously overvalued by 200% these days and just hit itâs record highs last year, the 200s Dotcom Bubble and 2008 Housing Crisis is minuscule compared to the current recession. The aftermath of economic recessions leads to a variety of factors that most of us never consider correlated.
The biggest effect out of an economic recession is number one, loss of a job, and reduced personal income. This means housing prices lag which for the wealthy, can they easily take advantage of with all-time low-interest rates on a mortgage estimated these days at around 2.15% and get a bigger sliver of the pie growing their WFH lifestyles.
As home prices rise, so does personal income. Hence, the more money you make, the more you can afford a downpayment on a home. Duh. But the majority of people affected in COVID cannot take part in these great rates because they are more at risk for losing their job since 71% of Americans are considered blue-collar workers, those who perform manual labor which results in them being more at risk to COVID, bigger chance losing their jobs, no medical, insurance or pension benefits and are just trying to live paycheck to paycheck, not in their second beach home after getting cabin fever in their Manhattan apartment.
Itâs sad to see that during economic recessions, the wealth gap only grows, never shrinks. Yes, people fall down the ladder and earn less, but then there are those, cough, cough Bezos that has amassed $20 billion more during a recession thus far.
Different Divide
In 2020 housing prices are at an all-time high, and the S&P 500 was up by 44% ytd in 2020, something the working class doesnât care nor pay attention to since they are just focused on providing bread for the table.
Obviously, this isnât great news considering that most Americans are struggling financially during this pandemic while the rest of us just have to be cooked up in the house working from home dealing with Zoom fatigue. Donâtâ get me wrong, Zoom is no joke, it requires real mental stamina as well and can be very mentally draining, but finding the silver linings is always your best bet, especially since you could easily be in a worse situation like most Americans.
-The stock market is at an all-time high
-Housing prices are also in constant demand, running out of supply and the largest component of personal wealth, an extreme divide
-Yet, lower-income earners survive on less per day than what a typical middle to upper-income earner makes per hour and less likely to own a home or invest which means they donât benefit from the unprecedented gains of these asset prices.
-Any fiscal stimulus received by people like me who have been lucky enough to be (financially) unaffected by this recession only contribute to stock market gains, something the lower-income class never focus on besides paying for groceries and preventing eviction with their stimulus money
As weâve encountered last year with the fanatic rise of retail investor âgamblingâ apps, Robinhood, and the absurd interest teens have in personal finance, the typical throwaway investing strategy we constantly hear that never actually helps is just âbuy stocksâ and youâll be G.
I call this teen interest in money absurd since Iâve been convincing my colleagues for months to read Robert Kiwoski or brush up on Warrenâs strategies and they continue to make money for China on TikTok instead.
Anyway, buying stocks is the worst strategy you can make. At least buy an index!
Those who use Robinhood donât have any or very limited financial education, those who buy indexes, plan strategically and monitor risk accordingly.
At this point, Iâve ditched the personal finance books, yellow Dummie books and stopped with the YouTube, Coursera courses because it isnât personalized nor realistic/most of the times accurate becuase the future is always uncertain. You should never be in it to win it but as weâve seen with the skyrocketing unrealistic valuations for stocks such as Airbnb on their first trading day as a public company after their IPO, Tesla and Bitcoin reaching 40k tripling in less than a month. As a result, skepticism must be in the forefront due to this palooza.
2020 Hit The Hardest in History
Many economists presume that past historical recessions have been far worse financially, not death or any other factor wise than 2020. Yet that is untrue.
According to the U.S. GDP, Gross Domestic Product that tracks the exchange of goods between countries, it is almost identical and steeping lower than ever in history.
This year we saw a 3.5% decline in real GDP which is pretty grim. But compared to the peak to trough decline in GDP during the financial crimes, it was at 3.97% which isnât a whole lot of a difference considering this is a virus not a bankâs fault. This was during the darkest days of the financial crisis and the current U.S. economy is roughly in the same position it was during the worst days of 08â09.
The Rich Get Richer, Once Again and Always
Right now with the stock market at an all-time high, interest rates at an all-time low GD,P and record unemployment, this calls for some contemplation. Yes, the unemployment rate is improving and the jobâs report that came out today, Jan 8th for late readers, did show a light at the end of the tunnel that progress is slow and steady, rebounding in mid 2022 most likely. Yeah, that wasnât a typo.
Before we dive into why this income disparity gap is only getting larger, letâs first debunk the assumptions we have about unemployment.
Self Employed/freelancer is not unemployed. Any STEADY income you make is employed. In this day in age, you can be your own boss, and in a volatile job market, no better idea!
Underemployment: You still have a job but during these volatile times, you are earning 70% less than last year which feels like you are unemployed.
Comparing the Recessions
U.S. home prices rose approximately by 8% this year and that is solely reserved for those who can afford it. In the financial crisis of 08, governments didnâtâ respond with enough fiscal stimulus(stimulus checks, PPP, tax break) and instead just a monetary stimulus (monetary support not through governmental lead initiatives)
Today, governments around the world have provided fiscal stimulus packages, finally, a second one here in the states passed in December for the needy. This stimulus has allowed the majority of blue-collar, paycheck to paycheck working Americans to replace their income for the coming months with this extra cash.
Low-income earners are always hit the hardest because they cannot profit off of a crisis. They always do worse becuase itâs the hardest time to rise your ranks.
Workers in the bottom 20% made up half of the job losses during the recession and donâtâ have a say in the demand for houses as they are more concerned about paying down their debt, rent and feeding themselves.
They use their stimulus checks to stay afloat while the top percent, middle to upper class go straight to investing it.
Since I make less than $80k per year as a student, I was the only one eligible in my family for stimulus and I directly put it into my ROTH IRA to save and further make me more money via investing, not spending a penny to support myself. It was a generous gift that needs to be better allocated. Why should the rich get stimulus? It wasnât even my birthday.
Worldwide Perspective
Compared to Europe where the economy is set to fall around 10% in the UK and Italy and only by 4.3% in the US due to higher GDP, population, and innovation in the states, the US as a whole isnât as affected globally, but economically, there are still major effects.
The US Compared to Other Countries
Japan hasnât even fully recovered from the Lost Decade. This was caused due to too much overconfidence, hype, and helicopter parenting intervention from governments and central banks that made stocks fly in price, be overvalued and all tank.
See any similarities?
That is happening now.
If you invested 1k in BitCoin a decade ago, you would have $230m today and Musk just surpassed Bezos as the wealthiest person in the world due to Teslaâs surge.
What we can firmly say is that the US Stock Market has completely detached itself from economic reality projecting a possible boom then close bustâŚ
So what does this all mean for you because tbh, we donât need any more politics or bad stories at the start of this year:
-Keep staying bullish as long as possible but make appropriate assumptions and estimates about flying high stocks
-Sleep on every decision, especially financially
-Donât watch too much news, itâs just hype and the most devasting stories
-Stocks are overvalued and will come down eventually, donât become too excited, itâs not a game, itâs you money after all on the line
-Money printing benefits the rich more than the poor which aids to this wealth gap and perpetuates this problem
History Repeats Itself
It sure does and no matter how much we try to plan, predict, earn our MBAs and spend thousands of WallStreetOnline Course prep (never sponsored FYI) to help us navigate the future, the only thing that is in our control is our mindset and actions.
Everything else is external and we cannot rely on the banks to give out faulty rated loans for families that canât afford them leading to foreclosures during 08 and a bat doing something funky in Wuhan in 2019 to make the world turn upside down. All we can consider is rationality, diversification, moderation, and data to back up claims and help us live a financial free secure life.
Is there a solution to preventing lower class earners from not getting their fair share out of the crisis faster and able to avoid the most uncertainty?
Although America is supposedly a community, it is divided, not just in politics, but for everyone for themselves. Each states have their own mandates, laws, limits on everything from who can get the vaccine first to what income should be taxed more. If you havenât noticed, people arenât as giving as you might assume.
America is business after all. But what I will leave those who need an extra cushion to stay sane and secure for the unforeseeable future is to simply create it. Hope for the best, plan for the worst. Cash is king, the stock market is for everyone and financial literacy is the best investment you can give yourself.
Stop being impatient, making excuses and start being rational and less stupid. You arenât stupid, America and the internet as made you stupid.
Start making your life fairer. It is all in your hands so seize it before the govât or 1% does.