This Gap Will Spark a Once in a Lifetime Economic Reset.

[00:00:00] Speaker 1: For the first time in nearly four decades, we're seeing these two lines moving in completely different directions. This line shows us the percentage of consumers who expect the stock market to be higher over the next 12 months. And today, it's sitting at the highest level ever recorded, even above what we saw during the peak of the dot-com bubble. Now, this line, on the other hand, measures consumer confidence, or simply how people feel about their own financial situation and the broader economy. And that has fallen to the lowest reading in history. So, the very same consumers who have never felt this optimistic about the stock market have also never been this pessimistic about their own financial situation. This is a symptom of a much deeper problem in our financial system. And the truth is, it requires a major economic reset for it to actually get solved. Real personal income in the U.S. has grown by roughly 50% over the past 15 years, which works out to roughly a 2.5% growth per year. So, this is the average amount of growth that Americans have seen on their wages after adjusting for inflation. Now, more recently, even this modest growth rate has started to actually disappear. Real personal income in the United States is declining once again. Now, if we compare that to what's been happening on financial assets, we can see that the S&P 500 adjusted for inflation has actually more than tripled in value over the same period of time. Now, a lot of people have gotten used to this, but this is a gap that matters. Because asset ownership is not evenly distributed across the economy. Roughly 90% of U.S. stock market value is owned by 10% of households. Meanwhile, households that are living paycheck to paycheck that rely mostly on wages, well, their income has grown significantly slower and have not at all benefited from the compounding of wealth that has occurred for people who own the stock market. Now, most people are familiar with this story, but there's absolutely nothing that is normal about this. Because when we zoom out, we can quickly see that throughout most of modern history, the stock market and personal income have generally grown at roughly the same pace. This was true for nearly five decades between the 1970s all the way through roughly 2018, which is exactly what you would expect in a healthy economy. What we're seeing right now is a historic shift. And most people understand that this gap that you see here cannot continue forever. The financial economy and the real economy can only diverge away from one another for so long. And that's where this idea of a great reset comes in. Because many people argue that this gap can only be resolved with a violent repricing of financial assets. We can get a very good sense for what the roadmap for this potential reset actually looks like by actually understanding what's driving this today. Corporate profits as a percentage of GDP have now reached almost 12%. This is up from roughly 5% in the 1980s. This is despite a pandemic lockdown, an inflation shock from the Russian invasion of Ukraine, a trade war, and many other economic shocks. Despite all of that, corporate America has never been this profitable. But now look at what happens on the other side of this equation. Over the same period of time, wages as a share of GDP have fallen to their lowest level since 1948. In other words, as corporate profits captured a larger and larger share of the economy, workers captured a smaller and smaller one. Now, although the divergence that we talked about earlier has only been present really for the last 10 years, this divergence that we see here has been in place 20 years. You can think of this as the engine causing the divergence. The only question is how long can this engine keep on running? Now, in theory, it shouldn't. After all, corporate profits ultimately depend on consumers who can afford to spend. And consumers, for the most part, depend on wages and income. So if wages are falling to their lowest share of the economy in nearly eight years, you would expect that to eventually weigh on corporate profits as well. This is the idea behind Warren Buffett's famous quote from decades ago. He suggested that corporate profits are unlikely to remain much above six percent of GDP for the long run because eventually the economy should rebalance. So there is something unnatural here. There's something else at play that's making this last a lot longer than what it should. There are structural conditions that are currently in place that make this possible. And one of those conditions can be seen on this chart. It shows us the spread between what corporate America pays in taxes and what the average American pays. For the past four decades, this line has been rising. Now, what this means is that the U.S. tax policy has quietly shifted from favoring consumers to favoring corporations. Right now, the average American is paying the highest effective tax rate since the 1980s. In fact, the lowest income bracket went from paying 0% tax in the 1980s to paying 10% today. Meanwhile, the corporate tax rate sits at 21%, which is the lowest level since the 1980s. And so you can start to get a picture for how corporations have been able to produce record profitability at the very same time when consumers are struggling with their own finances. One has been taxed less and one has been taxed more. Now, there are many other variables that come into play when it comes to how assets are priced and whether wages are growing. But the point is that we have been in an environment that has systematically favored capital while increasing taxes on labor. And needless to say that this is not something that is synonym with a healthy economy. And the big problem is that this has gone so far that in order to reverse it, it could cause some real damage. We can zoom out to see that the last time that we saw a reversal in this tax environment was actually in the 1970s. This line that you see here came down violently over the course of 20 years. So completely shifting the favorability of the tax system away from corporations and more towards the consumer. Now, this came directly at the expense of corporate profitability and profits came under pressure and asset prices struggled with them. Between 1965 and 1980, the S&P 500 lost roughly 50% of its value in inflation adjusted terms. This was very financially painful, but it did compress economic inequality and it set the stage for a flourishing US consumer in the 1980s and 1990s. This was the last true period where you had a very strong consumer-oriented economy. Now you can see today, we've had the tax regime support significantly higher equity prices. If we were to see a reversal of this tax regime, it would likely be extremely economic painful as a result of the pain that falling asset prices would cause. And policymakers know this very well. This is why no administration is willing to pull the trigger required for the reset to take place. This essentially means that the engine that we discussed earlier continues to run. And this is a very important implication for investors. In an environment where capital continues to receive more favorable tax treatments than labor income, financial assets remain one of the most attractive ways to build long-term wealth. In other words, if this policy backdrop persists, which it is, building your wealth may depend a lot less on earning a higher salary in a debt economy and much more on owning productive assets. This is how you profit from a broken system, rather than being one of the people it quietly leaves behind. You also need to be aware that this will not always be the case. When the cycle eventually turns and policy begins to shift back towards the consumer at the expense of corporate profits, those same assets will quickly become a source of risk. So the goal is not simply to own assets, it's to own them while the system rewards them and to know when that's changing. That's exactly what we do at Bravo's Research. We help you position yourself correctly for the current environment, making sure you are building your wealth in the most optimal manner that exists. You can book a call with us using the link below and we'll look at whether you are positioned correctly to profit from this environment. We'll show you our own strategy, how we're positioned and how we can improve your own approach. These calls are completely free. The only catch is that we only have a limited number of spots at a time. We recommend you only book a call if you have at least a $30,000 portfolio, as that's the real starting point where building your wealth using financial markets becomes the most valuable. So if you'd like to speak with us, simply click on the link below to book your call. I look forward to speaking with you. Thank you for watching.