The Rally In Lumber & Inequality Part 2
For those lucky enough to retain access to credit, low mortgage rates have allowed them to participate fully in the housing market. This could be in the form of purchasing a newly constructed house, renovating an existing one, purchasing an existing home from its owner, or some combination of these activities. The net result of which is the ongoing strength of the US housing market, its resilience during the pandemic, and a robust demand for lumber.
But, high lumber prices and the strong housing market mask major economic weakness. And this weakness stems from those who are not lucky enough to have access to credit. For these folks who cannot secure a stable source of income, low rates are no help because they cannot even get a bank to loan them money.
These folks are locked out of participating in the bull market in US housing (as well as other booming markets). Needless to say, they are left behind while the lucky few sees their net worth grow as their jobs remain safe from the effects of pandemic related lockdowns. It really is a case of the rich getting richer in a winner-takes-all economic environment, with precious little left behind for the unlucky ones.
Making matters worse for these folks is policymakers’ inability to do anything to get them back on a sustainable long term trajectory of stable employment and thus income. A good example is Biden’s household stimulus checks, which provide invaluable short term relief, but do not restore these folks’ access to credit.
Without returning to this trajectory, they will remain stuck in the negative feedback loop of unemployment and lack of access to credit, which severely curtails their ability to access opportunities to participate in future economic growth.
This in turn raises a spectrum of outcomes that lie between two extremes. The first being a full economic recovery bringing a large proportion of these workers back into stable employment; and the second massive political unrest from an underclass of disenfranchised workers unable to find their way back into the labor market.
The first extreme is the rosy, happy ending. This is an outcome where we will probably see US new housing construction soar back to, if not higher than, its pre-2008 levels. Needless to say, other financial assets and markets will reflect this ebullience. Considering where risk assets like stocks are trading at this point in time, the bull market brought about by this outcome will be one to remember.
On the other hand, the second extreme is the one everybody wants to avoid. It’s the outcome where economic conditions take a turn for the worse in the future, making life even more difficult for already marginalized workers. This has dangerous political and social ramifications, including the creation of an underclass whose rising resentment at unequal access to jobs, capital, and wealth has the potential to boil over.
Unfortunately, the description above should sound very familiar, simply because it is already happening in the US. The apex of this has of course been the January 2021 march on Capitol Hill that went horribly awry, where very angry and disgruntled voters were protesting in support of a populist politician seen as fighting for their cause.
As such, the bifurcation of US politics is to some extent a reflection of the bifurcation in the American labor market, which is being reflected in today’s high housing and lumber prices. This really should be heeded as a warning that the country is closer to the unhappy ending than the happy one.
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