I am on yet another plane and reading an analysis of the growing wealth and income divide. The data in this week’s Outside the Box is fascinating – but sobering. I can kind of go along with some of the author’s ideas, but the Progressive cheerleader thing is a little disconcerting. That being said, the data squares with other work I have seen. The wealth and income divide is not 1%-99% but more like 25-75. There is a link to a book at the end for those who want a really deep dive.
This essay is by Ray Boshara, who is senior adviser and director of the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis. The center conducts research on family balance sheets and how they matter for strengthening families and the economy.
The whole them versus us theme, which is infecting the current political conversation, needs to be a little bit better grounded in the actual data. I probably should visit this theme in a letter soon.
In the meantime, I really enjoyed getting to spend the time with Art Cashin the other evening. Jeff Saut of Raymond James fame showed up, as did a few other friends. One hedge fund trader friend (Murat Koprulu) steered the conversation away from some amazing and really funny stories to a more sobering conversation. He has started asking some of the floor traders how concerned they are about the shrinking of liquidity in the bond and equity markets. Art began to talk to us about how the demise of the floor traders, known as specialists, has really begun to shrink liquidity. Murat was specifically asking about what would happen in another crisis-type event. In the “old days” a specialist more or less had to make a market in a stock if he wanted to keep his job. It was in his best interest to find a market price. The NYSE floor is a shell of what it was when I first went there 15 years ago. They’ve taken to cramming more and more people into one area of the floor so that it looks like there’s activity on TV.
What is gone is the specialist trading desk that used to make markets in hundreds of individual issues. High-frequency trading has given us the illusion of liquidity and volume but is actually destroying liquidity. The problem is that the HFT firms can disappear in a microsecond, which is why we see more and more flash crashes in various issues. In the bond market, the regulatory burden imposed upon banks and their bond portfolios by Dodd-Frank, which has caused the banks to no longer maintain large inventories of bonds, is giving rise to a potential lack of liquidity that is even more daunting than in the stock market.
I am reading more and more expressions of concern by very sober analysts (not the usual doom and gloom types) who are very worried that the next crisis will be much larger than it should be because of a lack of liquidity. This is not the type of liquidity that the Fed can cure with an injection of a few trillion dollars. This is buyers disappearing. The conversation with Art, Murat, and friends brought an otherwise fun few hours to a rather sobering end.
And on that note, you have a great week. I will be landing in a few hours, and I see Tex-Mex in my near future. I am starting yet again on a diet that will get me down to my goal prior to our conference in late May. I am too determined to shed that last 15 pounds. The latest Rocky movie is being shown on the plane. Sylvester Stallone is only a few years older than I am, and he is in marvelous shape. Clearly, I need a bit more gym time.
John Mauldin is editor of Mauldin Economics' Outside The Box.