The Corner of Main and Wall

There was an interesting article in the Wall Street Journal this week about the intense competition among banks to manage the assets of the wealthier clients. Many of them are now offering what they call lifestyle advisory services which include everything from planning a vacation to find the right dorm room for you children. There is a lot of money involved as the fees from managing the assets of the wealthiest American can be a substantial source of income. Interestingly these added services are being offered as the services for the non-mega rich and fees for mundane banking services needed by the rest of the populace are rising. MoneyRates.com recently reported that the fees for things like overdrafts, ATM usage and account maintenance rose again in the first half of 2013. The high end wealth market has been getting bigger as asset prices have recovered in the past five years. There are now more than 10 million millionaires in the United States and more than 1 million households have assets of $5 million or more. That's a nice pool of money for the banks to fight over with average fees of about 1% charged for wealth management services. While it is nice to see the millionaires club growing it also points out the growing distance between Wall Street and Main Street, A substantial of this wealth increase has been created by the revaluing of financial assets as a result of monetary policies. The wealth gap created by the re-inflating of financial assets has become soothing of a political football this year and will probably continue to be so as we approach mid-year elections. Political considerations aside this is going to become an issue for stock prices as rational economics would seem to demand that eventually we see real growth in business activity to justify higher stock prices and thee has been little sign of that in recent years. While S&P 500 earnings have more than doubled since the market bottom in 2009 revenue growth has been substantially less than that. Most of the profit growth seems to have been achieved though cost cutting measures, including workforce reductions, and financial engineering tools like stock buybacks. The reason for the tepid revenue growth becomes somewhat obvious when you take a close look at Main Street. Even as we hear discussion about an improving job market the U6 rate of un and under employed individuals is still hovering at about 15% of a shrunken workforce. There is no official inflation in the economy but down on Main street the price of beef, hogs, coffee and gasoline have seen sharp rises in recent weeks. No wonder the recent Bloomberg Consumer Comfort Index shows that consumers have a negative view of the economy right now. Even as the market had one of its best years ever the index fell from -33 at this time last year to -29 as most people just did not see the results of low interest policies that those with substantial assets in the stock name markets enjoyed last year. Seth Klarman referred to the disconnect between stock prices and economic activity in his recent letter to shareholders calling it a Truman Show Economy. He wrote “Every Truman under Bernanke's dome knows the environment is phony. But the zeitgeist is so damn pleasant, the days so resplendent, the mood so euphoric, the returns so irresistible, that no one wants it to end, and no one wants to exit the dome until they're sure everyone else won't stay on forever” This should be a real concern of most investors. The disconnect between economic activity and stock prices can be resolved in three ways. First the economy can begin to grow at a rate fast enough to justify stock prices. Second of course is the possibility that the stock market declines to a level that is in line with real economic activity. The third possibility is that stock prices go nowhere until the economy eventually catches. Two of those possible outcomes are not happy events for investors in the stock market. Many investors are not concerned about the disconnect and take the strong performance of the market as a cause for celebration Klarman addressed this issue in his letter as well writing' “No one can know what the future holds, but any year in which the S&P 500 jumps 32% and the NASDAQ Composite 40% while corporate earnings barely increase should be cause for concern, not further exuberance. It might not look like it now, but markets don't exist simply to enrich people.” If Main Street isn't happy with the economic and jobs situation they will be cautious with their money. That's a real problem when your economy is driven by consumer activity and if it doesn't improve there is a very real chance it will eventually be reflected in stock prices.