You could think of this as a liquidity problem: Maybe people just don’t have enough ready cash in their checking or savings accounts to meet an unexpected expense. In that case, you might reckon you’d find greater stability by looking at net worth—the sum of people’s assets, including their retirement accounts and their home equity. That is precisely what Edward Wolff, an economist at New York University and the author of a forthcoming book on the history of wealth in America, did. Here’s what he found: There isn’t much net worth to draw on. Median net worth has declined steeply in the past generation—down 85.3 percent from 1983 to 2013 for the bottom income quintile, down 63.5 percent for the second-lowest quintile, and down 25.8 percent for the third, or middle, quintile. According to research funded by the Russell Sage Foundation, the inflation-adjusted net worth of the typical household, one at the median point of wealth distribution, was $87,992 in 2003. By 2013, it had declined to $54,500, a 38 percent drop. And though the bursting of the housing bubble in 2008 certainly contributed to the drop, the decline for the lower quintiles began long before the recession—as early as the mid-1980s, Wolff says.

Wolff also examined the number of months that a family headed by someone of “prime working age,” between 24 and 55 years old, could continue to self-fund its current consumption, presuming the liquidation of all financial assets except home equity, if the family were to lose its income—a different way of looking at the emergency question. He found that in 2013, prime-working-age families in the bottom two income quintiles had no net worth at all and thus nothing to spend. A family in the middle quintile, with an average income of roughly $50,000, could continue its spending for … six days. Even in the second-highest quintile, a family could maintain its normal consumption for only 5.3 months. Granted, those numbers do not include home equity. But, as Wolff says, “it’s much harder now to get a second mortgage or a home-equity loan or to refinance.” So remove that home equity, which in any case plummeted during the Great Recession, and a lot of people are basically wiped out. “Families have been using their savings to finance their consumption,” Wolff notes. In his assessment, the typical American family is in “desperate straits.”

 

Eoin Treacy's view

Statistics such as these give us some insight into the motivation behind the monetary policy employed by the Federal Reserve and why they have been so reticent to raise rates. The impact, for a broad swathe of the population, of losing a job, even a part time one, would be financial ruin.

With the economy at close to full employment, wages beginning to rise and the net benefit of somewhat lower energy prices the average person should be in a better position today than a few years ago. However that assumes people have not indulged in lifestyle creep where the little luxuries that were previously foregone are now deemed acceptable. This article for CNN Money details how people started eating out more when they had a little more money in their pockets. In a culture increasingly geared towards instant gratification and entitlement this is a situation unlikely to get better on its own.   

The Fed has a major decision this year. Having dialled back their original aim of raising rates four times, they are now talking about two. However, we are now already close to half way through the year so when are those two rate hikes going to materialise?

12-month Treasury bills are currently yielding just less than 0.5%. That suggests the Fed is expected to raise rates once in the next year. That’s a substantial paring of expectations for tightening and helps to explain the relative strength of the stock market since much of the decline had been centred on fears the Fed was going to take the punchbowl away.

This is a particularly pivotal time because the above yield chart is now testing the region of the its trend mean and progression of higher reaction lows while the main Wall Street indices are testing the upper side of their respective ranges.

A sustained move below the MA for yields would suggest even a 25 basis point hike in the next 12 months is being viewed as unlikely. On the other hand a bounce from this level would begin to price in a hike sometime over the summer or fall which would likely act as a headwind for equity markets. A clear downward dynamic would confirm resistance for the S&P at these levels.