The Economy Is Tanking But The Stock Market Is Rising – This May Widen The Rich-Poor Gap And Cause Wars

Investors who were bearish about the stock market were probably paying attention on the tattered economy left by the wake of COVID-19.

The Singapore Government spent a record $60 billion dollars to support the economy and her workers.

The U.S. has hit 33.3 million unemployment claims during COVID-19 or about an unemployment rate of 20%.

China is gradually getting back to business but even so, they are not even near their previous operating capacity.

International Monetary Fund (IMF) forecasted the advanced economies’s GDP would contract by about 6.1% in 2020.

Despite all these, the stock markets around the world have recovered.

This have left many investors scratching their heads and some still believe the worst in the markets has yet to come.

In contrast, there are others who believe that the unlimited QE is a force to be reckoned with, and that the stock market is a leading indicator for better things to come for the economy.

We believe what we want to believe.

I am not going to add on to the forecasts but I wanted to highlight a major consequence if the stock market and the economy continue to go in opposite directions.

The higher income earners or more well-to-do families are the ones who have excess money to put into the stock market. The lower-income ones who are living paycheck-to-paycheck wouldn’t even think of investing in the first place. So a rising stock market would benefit the richer ones and not the poor.

COVID-19 has resulted in temporary (and some permanent) shuttering of businesses. While many white-collar office executives would have no issues working from home, the blue-collar workers might have little to no income at all.

A programmer is able to code at home but a construction worker can’t build remotely. A banker is able to advise clients on Zoom but a masseur can’t massage virtually. A teacher is able to share the knowledge through online tools while a waiter can’t serve dishes when there’s nobody in the restaurant.

Hence COVID-19 has hit the lower-income group harder and many may not even have enough savings to fall back on.

Business Insiders compared the differences in spending between the high and low income earners in the U.S. We can see from the chart below that one of the most stark differences was in the area of insurance and pensions. The top 20% earners insure and invest almost 30 times more than the bottom 20%. The rich gets richer as the saying goes.

The Edge Singapore did a check with the local brokerage firms and most have reported a surge in account openings during this period. Phillip Securities had 3 times more applications in the first quarter compared to a year ago. OCBC also reported that the number of clients who traded in the last quarter was close to 90 per cent of the entire 2019. Some brokerages have also noticed that majority of these investors were above the age of 30 and tend to have more stable careers and income.

Therefore the people who are investing and getting the benefits out of a rising stock market belong to the higher income group.

The extreme low interest rates set by central banks to boost the economy would again benefit the richer and higher-income earners. This is because they can get loans to own assets while the poor wouldn’t even qualify without any collaterals. In turn, these assets rise in prices and so do the net worth of their owners.

Hence, I am of the view that COVID-19 is more likely to widen the gap between the rich and the poor, especially when the stock market continue to rise and lower income workers remain out of jobs.

I must admit that I am in a privileged position because I get to invest in the stock market.

On the other hand I also believe it is important for all of us to keep an eye out for the not so privileged amongst us.

I’m not trying to sound like a Robin Hood and ask everyone to donate their wealth away. It is not about being altruistic. There’s a selfish reason to help the less fortunate to lead decent lives. If they are not even able to achieve that, it is a matter of time before we see protests and revolutions.

As warned by economist Thomas Piketty and hedge fund manager Ray Dalio, social unrests and wars have higher chances of occurrence when the inequality becomes too unbearable.

Income inequality in the U.S. has climbed back to the same level during the Great Depression and pre-WWII period.

Ray Dalio had similar observations whereby the wealth of the top 0.1% in the U.S. is close to the remaining 90%!

When 1) within countries there are economic conflicts between the rich/capitalist/political right and the poor/proletariat/political left that lead to conflicts that result in populist, autocratic, nationalistic, and militaristic leaders coming to power, while at the same time, 2) between countries there are conflicts arising among comparably strong economic and military powers, the relationships between economics and politics become especially intertwined—and the probabilities of disruptive conflicts (e.g., wars) become much higher than normal.

~ Ray Dalio, Big Debt Crises

It is also good to take reference from the Ultimatum Game. This is a famous social experiment whereby a player is given a sum of money to share with a second player. The first player will make an offer to the second player and none will receive the money if the latter disagree with the amount shared.

Results have showed that the second player would rather reject a small amount when he felt it was an unfair split. He would want the offeror to suffer by not having the money.

This is the nature of how our brains were wired and we can’t change that. Even the monkeys couldn’t stand unfairness.

When the poor has nothing to lose anymore, that’s where they will resort to violence to seize wealth from the rich. History has showed us plenty of bloodshed revolutions.

As James Carse suggests, this is an infinite game and we need to keep playing. We need to make some changes especially when the game looks like it is going to end. Otherwise we might have made this a finite game and our future generations wouldn’t be able to play it anymore.

Don’t keep taking and be smug about your rising wealth. Give sometimes. It is for your own sake as much as it is an altruistic gesture.

Don’t push the poor too far.