Diagnosing Whose Economy Is Healthy

 | Jul 24, 2013 | 11:00 AM EDT
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The economy continues to offer mixed results, not supporting a bull case but neither signaling an imminent demise.

Part of the reason for the stagnation is that we now effectively have two economies. One is for the upper echelon, whose wealth is being restored by quantitative easing driving higher asset prices, and whose high paying jobs appear more secure. Then, there is the lower echelon, whose income is stagnant to declining, who have no wealth and therefore no wealth effect and whose employment prospects are bleak

There is fodder here for a discussion of "fairness", but that is not the purpose of this site: Our objective is to make money. A bifurcated economy, however, is a problem from an investment perspective. That's because that vast swath of struggling middle-income-to-lower-income Americans should provide the demand that can create growing sales and profits for our investments.

Putting more wealth in the hands of the upper echelon is fine as far as it goes, but this time around the trickle down strategy to jumpstart economic growth is not working as it did in the 1980s.

Are there really two economies? Consider some data points:

  • National Association of Realtors data shows that home sales at the lowest price points -- those inhabited by the lower income bands -- are falling, not rising.
  •  First time home-buyers are shrinking as a percent of sales: 29% this June, compared to 32% last year.
  • All-cash home sales are up versus last year, indicating sales are going to investment funds and other non-individuals.
  • McDonalds (MCD) the ultimate down-scale eatery reported poor results.
  • Wal-Mart (WMT) the ultimate down-scale shopping destination -- and epicenter of US consumption -- saw a 1.4% decline in comps.
  • Real median income continues to decline, meaning more earners are in the lower half are pulling down the median.
  • Job growth is isolated mainly to part time, lower wage jobs. Job openings for highly skilled (and thus paid) jobs are actually on the rise.
  • In an economy with greater income inequality, producers have only two options. They can hope that somehow the lower half of the income distribution somehow is paid more by someone in order to increase their purchasing power. Or, they can shift production into higher priced goods that appeal to the higher income band.

Hope is not a strategy, so I am interested in the "Gatsby" stocks that cater to the well to do, as these folks actually have some purchasing power -- and are more likely to use it, now that there are no returns to saving.

Besides "Gatsby" high-end product companies, exporters can do OK since they are less subject to domestic demand. These names tend to be more industrial and technology, so those segments may represent fruitful hunting for ideas that can transcend a stagnant U.S. economy.

Until we see real income gains for the lower echelon of earnings, I believe the economy will remain stagnant, with a "whole lotta nothin'" going on. Good returns will require narrow stock picking around sectors serving the high end of American earners.

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