Don't Be a Casualty of America's "Potemkin Village Economy"

It was 1787, and Empress Catherine II was embarking on an inspection tour of The Crimea, a region annexed from the Ottoman Empire four years before following a Russian victory over that Turkish foe and its Crimean vassal. A new war was about to start between Russia and the Turks and Catherine wanted to impress her allies.

The key player in this “inspection” was a man named Grigory Potemkin, a field marshal and minister and now the governor of newly annexed lands.

Potemkin wasn’t just a highly placed tour guide: The Crimea had been devastated by the war and many feared that its Muslim Tatar population could become what we now refer to as a “fifth column” — kind of a clandestine resistance that could create confusion and sow disinformation via espionage and terrorist-style attacks.

Potemkin was ordered to quell any insurrection, rebuild the region and bring in Russians to settle that region — the tallest of tall orders.

There was one other “wildcard” here, too: Potemkin and Catherine the Great had been lovers. They remained close, even now, and Potemkin wanted to impress Catherine with his “accomplishments” during her Crimean tour.

Potemkin created beautiful villages — a string of them on the banks of the Dnieper River. And all were inhabited by energetic, well-dressed and happy people — who waved at Catherine as she passed. According to one report, Potemkin even provided an impressive warship.

It was all a façade.

Despite Potemkin’s desire to dazzle his former paramour, the order was tall and money tight.

So he improvised.

The settlements were fakes, pasteboard fronts that were disassembled after the barge carrying Catherine and the other diplomats passed by and reassembled at her next inspection point. Those “happy” inhabitants were costumed peasants who were also shuttled from stop to stop; healthy livestock added to the illusion.

And that warship? It, too, was flimsily built, barely floated, and took on water and sank not long after it served its purpose.

And the term “Potemkin Village” was born.

Historians now say this grand-sounding tale was exaggerated — if not total fiction.

It doesn’t matter.

Not for us.

It’s a great story. And it makes a crucial point at a critical juncture: That a bright-and-shiny façade can blind us to the starker reality that sits behind it.

We see that here in America.

Welcome to the Potemkin Village Economy.

Two posts I saw over the past week show us this perfectly.

Take a look. Let’s talk about what they mean.

Then we’ll get into what you can do …

Two “Potemkin” Posts?

The first post, on LinkedIn by Charles-Henry Monchau, flaunts some of the American economy’s bright-and-shiny facade.

For instance:

• Stocks Are at Record Highs: 62% of Americans own stocks in some form — through retirement accounts, mutual funds, or direct investments.

• Alternatives like Gold and Bitcoin Are Near Records, Too: Gold is up nearly 28% this year and nearly 37% over the past 12 months; for Bitcoin it’s 17% and 96%. Both have seen broader buying by mainstream investors.

• Home Prices Are at Record Highs: The median existing home price is $429,400 ($527,000 in the Northeast, where I live) — the highest on record.

• U.S. Net Worth: Median household net worth hit a record $192,900 — thanks to gains in stocks and real estate — says the U.S. Federal Reserve’s Survey of Consumer Finances (SCF).

Sounds great, doesn’t it?

But is it true?

Are Americans financially strong? Or is this a pasteboard façade — one that’ll turn into a lumpy mess of running paint and soggy cardboard after the first real storm hits?

The Yahoo! Finance survey of Americans’ finances — along with some nuances of Monchau’s LinkedIn item — gives me pause.

Let’s start with the new Yahoo Finance/Marist Poll Survey, which found that:

• Nearly half (45%) of adults say the area they live in is not very affordable — or isn’t affordable at all.

• And the same amount — 45% — say their current income roughly matches their expenses, while three in 10 say their monthly expenses exceed their paychecks.

• And disaster lurks — either just around the corner or in retirement — since a bit more than half of Americans are dissatisfied with what they’ve saved. Worse still, nearly a third of Americans are very dissatisfied or completely dissatisfied with their savings right now.

• One in three Americans say their financial situation has deteriorated in the past year — with setbacks most common among older folks and lower-income households.

With the scorching run we’ve seen in stocks over the last year, that last item is downright alarming.

It’s even worse when you look at this chart — and what it tells us.

At a time when stocks, home values and U.S. household net worth are each at all-time highs, 73% of those surveyed say their financial situation has stayed the same or gotten worse.

That’s horrifying.

Add this: Household credit-card debt surged $27 billion to a collective $1.21 trillion in the second quarter — pretty much in line with last year’s all-time high.

So Americans have continued to borrow and spend — in the face of growing uncertainty.

And it begs the question: What happens when stocks sell off and the economy skids into recession – both of which will eventually happen?

Let’s consider some “what-comes-next” possibilities.

After all, the stock market — and the economy — are “what-comes-next” organisms.

A Scary Look “Under the Hood”

In the near term, interest rates (the Fed), inflation, economic news and stock prices (as a function of earnings, interest rates and wealth) are the most-obvious things to watch.

The Fed and rate decisions will be a key storyline for the rest of this year.

I always say this to you folks, and I’ll repeat it again here: In discussions like this, I intentionally oversimplify. To give you folks key concepts to consider. And to give you starting points for deeper research.

That said, any rate cuts we see will likely be a “good-news/bad-news” storyline — creating more cheap money to keep stock prices surging, but also revving up the inflationary pressures, which already seem to be building.

Could we end up with stagflation for the first time since the 1970s? I lived through that stretch — and watched my family, my friends’ families and my neighbors deal with that: It wasn’t pleasant. (Actually, it sucked.)

Morgan Stanley recently warned that stagflation was something to watch for.

There are early warning signals of a slowing economy. Companies are slowing hiring, or cutting workers outright. (Facing the Keytruda “patent cliff” and wanting to cut costs, Merck & Co. MRK 0.00%↑ says it is cutting 6,000 jobs, or 8% of its workforce.

Job cuts are accelerating across the biopharma industry, says BioSpace.com.

And that’s just one sector.

So far this month, 114 companies filed WARN Act notices to lay off employees – up from 95 in July but down from 160 in June – signaling a whipsawing national jobs picture.

Microsoft Corp. MSFT 0.00%↑, Intel Corp. INTC 0.00%↑ , Amazon.com Inc. AMZN 0.00%↑ and Tyson Foods TSN 0.00%↑ are some of the firms cutting payroll. And the announcements cut across retailing, healthcare, logistics and manufacturing — as well as Big Pharma.

There are long-term worries, too — as Monchau’s note points out: America’s debt stands at a record levels, something we’ve talked about with financial historian Mark Higgins, author of the book Investing in U.S. Financial History.

But even those long-term concerns can have a near-term impact.

U.S. debt stands at $37 trillion. Public debt (money owed to outside investors, which excludes cash owed to the government itself — and more relevant to inflation and rate sensitivity) is $29.6 trillion.

For every 1% change in interest rates (up or down), yearly interest payments change by $296 billion (based on $29.6 trillion in publicly held debt × 1%).

Interest payments cost us $3 billion a day.

That’s one of the big reasons the Trump Administration is militantly pushing for rate cuts. That’ll affect housing, a market that’s been wheezing a bit this year. Here, too, we’re looking at a classic “good-news/bad-news” dichotomy.

Fed cuts won’t likely impact mortgage rates — not in the near term. And high rates (still up near 7%) are one reason America’s housing market has wheezed along this year.

Even so, as we’ve seen already, record home prices have helped boost household net worth. But they simultaneously deepen the affordability crisis for new buyers. And pricey real estate spills over to squeeze renters, too.

Affordability is at its worst point in more than three decades, locking out many first-time buyers, squeezing renters and helping to exacerbate the “haves/have-nots” economy.

Which brings us back to the Yahoo! Finance survey, and our Potemkin Village Economy tale.

Be a “Have” — Not a “Have Not”

In our “good-news/bad-news” comparisons, America’s record net worth isn’t quite as gleeful as it sounds.

While the median (midpoint) net worth is at that record $192,900, the average net worth is nearly $630,000 — one of the signs of the “wealth gap” that continues to grow and exacerbate the “haves/have-nots” schism here in America.

Take a look at how wealth is increasingly skewed to the upside. The numbers also show how the bottom half of Americans are a financial disaster just waiting to happen.

We’re living in a “two-tiered economy” — one in which the financial markets are thriving, but everyday Americans are increasingly scuffling because of stagnant wages, rising debt, major affordability issues and near-zero savings.

That should scare you. And it should scare the “Inside-the-Beltway” crowd — if they’re smart enough to see it or courageous enough to admit it.

Time to Take Action

The death of the middle class – and the “Death of the Single-Digit Millionaire” – is a storyline we’ve covered extensively.

We see it. We’re telling you about it. And we’re here to help.

Here are the Top 7 takeaways: The key things you need to watch; and the actions you can take.

No. 1: Asset Inflation ≠ Personal Prosperity

• Stock markets, Bitcoin, gold, and housing are at or near all-time highs, but these gains are concentrated among wealthier individuals and institutions.

• Many Americans aren’t big owners — so they’re not benefiting from the rally.

Takeaway: You need to participate — and you can learn how to be a Wealth Builder by following along with Stock Picker’s Corner (SPC) each week.

No. 2. Living Costs Are Crushing

• Despite easing inflation, 45% of Americans say their area is “not very affordable” or “not affordable at all.”

• Rising prices for essentials — housing, insurance, energy — are outpacing wage growth for lots of folks.

Takeaway: Taking control — amassing your own assets — is the only answer.

No. 3: Housing Wealth Isn’t Liquid

• Home prices remain high.

• But high rates and insurance costs mean homeowners feel “house rich, cash poor.”

Takeaway: Liquid assets, including stocks and true “cash-flow” income investments, are a must.

No. 4: Too Much Debt Is Deadly

• Credit card balances and student loan arrears are at record highs, especially among younger and lower-income households. The household average is nearly $11,000.

• Nearly 29% of Americans say their monthly expenses exceed their income.

Takeaway: Buy with cash, delay purchases, save, and invest.

No. 5: The Generational Divide Is Growing

• Older generations (Gen X, Boomers) are more likely to report worsening finances.

• Gen Z and Millennials are slightly more optimistic — but still face affordability challenges.

Takeaway: No matter your age, invest early and invest often. Play the long game.

No. 6: Savings Are Thin

• Only 25% of Americans are satisfied with their savings; 31% are very or completely dissatisfied.

• Folks are vulnerable.

Takeaway: Emergency savings are lacking; put some money to the side so you don’t get whacked.

No. 7: Income Inequality Is Widening

• 47% of households earning under $50,000 say their finances have worsened, compared to 27% of higher earners.

• The Gini Index of income equality (where 0 is perfect and 1 is the worst) stands at 0.49, which means income inequality in the U.S. is quite high.

Takeaway: If you can’t beat ‘em, join ‘em; become a Wealth Builder and get there yourself.

Welcome to the Potemkin Village Economy, folks.

Wealth Killers eke out a living behind flimsy financial facades. Wealth Builders construct storm-resistant houses atop the strongest foundations.

If you already have that “house,” use SPC strategies to help you fortify it.

If you feel like a Potemkin Village character, turn the page and write a new story for yourself. It’s never too late to build your own house — and move into the high-asset neighborhood.

In fact, drop me a line — and tell me: How do you feel about your financial situation this year — versus a year ago?

I want to hear from you.

See you next time;