Economic Overoptimism

Ignore stocks and housing, America's reality remains very grim indeed...

STOCKS are at their record highs, driven by a soaring stock market rally. The housing market is well off its lows, with sales and home prices edging higher, writes George Leong for Investment Contrarians.

The end result is that the overall wealth and optimism in America is higher.

According to the "CNBC All-America Economic Survey," 33% of Americans felt the price of their homes will ratchet higher, up nine points since the previous survey in November 2012 and the high point since December 2007. The survey in March also suggested 48% of Americans believed it was a good time to invest, given the stock market rally; this number isup from 31% in Novemberand it's the highest since December 2009. (Source: Liesman, S.,"CNBC, American Dream Is Back; CNBC All-America Economic Survey, "CNBC, March 26, 2013.) So all is good, right?

As I previously commented, the stock market rally has made more people rich. A total of 300,000 newly minted millionaires were created from the current multiyear stock market rally, according to Spectrem Group. (Source: Frank, R., "CNBC, US (and Booming Market) Adds 300,000 New Millionaires," CNBC, March 14, 2013.)

But hold on. The reality is that there continues to be a mass of Americans collecting food stamps, around 48 million, according to USDebtClock.org, and they don't care about the stock market rally.

While the media's headlines are commenting on how America is becoming richer, it's a myth, of course—unless you don't care about the other 95% of Americans who are just getting by and the bottom rung of this group who are considered America's poor, making minimum wage.

In my view, the growing disparity between the rich and the working class is a major dilemma that will need to be addressed, or the situation will worsen longer-term and hurt America. The stock market rally makes no difference to the less fortunate.

Economist Anthony Randazzo of the Reason Foundation made an interesting comment, saying that the easy monetary policy "...is fundamentally aregressive distribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy. It is a primary driver of income inequality." (Source: Frank, R.,"Wealth Inequality Getting the Fed's Attention," CNBC, March 26, 2013.) This statement is true, and I've agreed with this sentiment on numerous occasions in the past.

The problem is what to do and how to solve the income gap issue.

Of course, taxing the wealthy and taking away tax loop holes has always been the first option of lawmakers, but even with the recent tax increases for those making over $400,000, there are still many ways of hiding money from the Internal Revenue Service (IRS).

Now, you may ask what the point is; my view is that America is becoming poorer, not richer. Only a select group is benefiting from the stock market rally. The vast majority don't really care about the stock market rally, as they are more concerned with how to simply get by.

All I'm saying is don't be fooled by the news headlines talking about the stock market rally and how well America is doing, as a financial crisis is still possible.

Down the road, there will be significant and rising demand for food stamps and programming for those retirees who couldn't save enough during their working years, especially following the Great Recession that left middle- and lower-class Americans scrambling to recover, not benefiting from the stock market rally.

I would be very careful chasing housing stocks or real estate as much of the price increase has been driven by big-time investors and institutional money.

The easy money has also resulted in massive debt levels from consumers spending rather than saving. When interest rates rise, there could be another credit crunch, so be careful.

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