The U.S. stock market is still hovering near record territory, corporate profits are running at historic levels and the largest technology companies in the world continue to command valuations that would have looked absurd only a decade ago.
Yet the economic experience of millions of Americans looks nothing like a boom.
Consumer prices were still 3.4% higher in July than a year earlier, while inflation-adjusted average hourly earnings slipped 0.2% over the same period. Housing remains brutally expensive, insurance costs continue to climb and household debt has pushed further into record territory. The contradiction is increasingly difficult to ignore: Wall Street looks rich while ordinary purchasing power remains under pressure.
That does not mean the stock market is fake. It means the stock market is measuring something very different from the financial health of the average household.
Corporate America is doing extremely well. Profits reached a record 13.2% of U.S. GDP in the second quarter, while earnings across the S&P 500 surged by more than 30% from a year earlier. The companies dominating the index are not imaginary businesses propped up by accounting tricks. They are some of the most profitable enterprises ever created.
But ownership of those profits is extraordinarily concentrated.
Federal Reserve data show that the wealthiest 10% of American households own roughly $48 trillion in corporate equities and mutual fund shares. The bottom half of the country owns less than $600 billion.
That distribution changes what a rising stock market actually means.
When the S&P 500 adds trillions of dollars in value, most of that wealth does not spread evenly through the economy. It flows overwhelmingly to people who already own large portfolios, retirement assets, businesses and real estate. A household living primarily from wages may see the same headlines about record markets without receiving anything close to the same benefit.
This is one reason America's economic statistics can appear so disconnected from public sentiment.
The country can produce record corporate profits while workers lose ground after inflation. It can create enormous financial wealth while first-time homebuyers become increasingly scarce. It can boast about rising asset prices while households rely more heavily on credit to maintain living standards.
The market is not necessarily misreporting prosperity.
It is reporting prosperity for the part of America that owns the market.
There is another force helping keep U.S. asset prices elevated: global capital still wants somewhere to hide.
Foreign investors continue buying enormous quantities of American securities because the United States remains extraordinarily difficult to replace. It has the world's deepest capital markets, its dominant reserve currency, enormous technology companies and a Treasury market capable of absorbing capital on a scale few other countries can match.
That matters whenever instability rises elsewhere.
Investors do not need to believe the United States is economically perfect to choose American assets. They only need to believe the alternatives are worse.
That flow of global money increasingly lands in a market dominated by a relatively small collection of enormous companies. The 10 largest U.S. stocks now represent roughly one-third of the entire market's value, an extraordinary degree of concentration for an index still commonly treated as a broad representation of the American economy.
The result is a powerful feedback loop.
Money flows into index funds and large-cap stocks. Their valuations rise. Because the indexes are weighted by market value, rising valuations give the same companies even larger index weights. New passive money then sends an even greater share of each dollar into the companies already dominating the market.
That concentration can keep the headline indexes looking remarkably strong even when conditions underneath them are far less impressive.
The more serious problem sits in Washington.
Federal debt crossed $40 trillion this month, more than doubling since early 2017. The number itself is staggering, but the interest bill is becoming far more important than the headline total.
Washington now spends more servicing federal debt than it spends on several of the largest government programs, including national defense. That creates a problem the Federal Reserve cannot easily solve.
Inflation remains stubbornly above target. The Fed's preferred inflation measure was still running at 3.7% year over year in July, far above its 2% goal. Under ordinary circumstances, that would argue for keeping monetary policy tight enough to prevent inflation from becoming entrenched.
But high interest rates also raise the government's borrowing costs.
Treasury debt constantly matures and must be refinanced. New deficits require additional borrowing. Every increase in market yields makes that process more expensive at a time when interest expense is already consuming a growing share of federal revenue.
This is why the phrase "fiscal dominance" is suddenly being discussed far more seriously among economists and central bankers.
Fiscal dominance describes a situation in which government debt becomes large enough that monetary policy can no longer be set solely around inflation and employment. Policymakers begin facing pressure to consider whether higher rates themselves could destabilize government finances or financial markets.
The United States is not there in the pure textbook sense. The Federal Reserve has not abandoned its inflation mandate, and Chair Kevin Warsh has continued signaling willingness to keep policy restrictive if inflation demands it.
But the tension is becoming impossible to dismiss.
Treasury has already expanded its use of bond buybacks designed to support liquidity in parts of the government debt market. Beginning in September, the maximum size of long-dated buyback operations is scheduled to at least double.
That is not the same thing as quantitative easing, and describing it as secret money printing would be inaccurate.
It does, however, show how much attention Washington now has to devote simply to keeping the world's most important bond market functioning smoothly while issuance continues at enormous scale.
The difficult question is what happens if inflation remains too high while debt-service costs continue climbing.
Washington's politically clean options are limited.
Massive tax increases would be unpopular and economically damaging. Severe spending cuts would collide with Social Security, Medicare, defense, debt service and other politically protected programs. Default on Treasury debt is almost unthinkable.
That leaves economic growth as the ideal solution, but growth has to outrun the expansion of debt for years to materially improve the picture.
History offers another route governments have often used when debt becomes difficult to manage: allow inflation to gradually reduce the real value of what is owed.
That process does not require hyperinflation or the destruction of the dollar.
It can happen quietly.
If wages and savings rise more slowly than prices, the government still repays its obligations in nominal dollars while those dollars gradually lose purchasing power. The burden falls most heavily on people whose wealth remains concentrated in cash and wages rather than assets capable of appreciating alongside inflation.
This is where the growing divide between Wall Street and household America becomes especially important.
Someone who owns millions of dollars in stocks, businesses and property has multiple ways to defend against a weakening currency. Rising prices can push the nominal value of those assets higher.
Someone living paycheck to paycheck has no comparable hedge.
He simply pays more for groceries, insurance, transportation and housing.
That is why a country can look richer on paper while large portions of the population feel poorer in practice.
Gold's extraordinary rise provides another clue about how investors are thinking about that risk.
The metal has traded around historic highs near $4,600 an ounce, while central banks continue accumulating it at an aggressive pace. Those buyers are not necessarily betting on the imminent collapse of the dollar. They are buying an asset with no sovereign issuer, no counterparty and no government debt attached to it.
That is an important distinction.
The world can remain heavily dependent on the dollar while simultaneously increasing its insurance against dollar risk.
The same logic helps explain why stocks and gold can rise together. Investors can believe America's most profitable companies will keep generating extraordinary cash flows while also believing the currency those profits are measured in will lose purchasing power over time.
Those positions are not contradictory.
They describe the same fear from two different directions.
America still possesses enormous advantages. It remains home to the deepest financial markets, the most important technology companies and the reserve currency that anchors much of the global system. There is no credible evidence that those strengths are about to disappear overnight.
The danger is subtler.
America has built a financial system in which soaring asset prices increasingly coexist with weakening purchasing power, enormous government borrowing and extraordinary wealth concentration.
That arrangement can persist for years.
It can even produce new stock-market records.
But each record becomes less meaningful if the currency used to measure it continues buying less and the gains remain concentrated among people already positioned to benefit.
That is why the disconnect between Wall Street and the household economy matters.
The S&P 500 can tell you what capital is worth.
It cannot tell you what your paycheck is worth.
And in America today, those two charts are moving in very different directions.
