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Berkshire Hathaway Inc. (BRK.B), Bank of America Corp (BAC), Wells Fargo & Co (WFC): Why the Richest Americans Could Be Set Up for Disaster

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Let’s face it: We’d all like to own a private jet, get driven around by chauffeurs in rare automobiles, eat at the priciest restaurants, and in essence never worry about money again. I’d speculate for more than 99% of us, this is just an aspiration, but for some of the wealthiest Americans in the United States, this is their everyday life.

Source: Elaine & Priscilla Chan, Wikimedia Commons.

A common misconception about the rich is that many were born into wealth. On the contrary, many of the wealthiest individuals in the world — or at least the ones most commonly in the spotlight — have earned their fortune, including Berkshire Hathaway Inc. (NYSE:BRK.B)‘s CEO Warren Buffett, who, through disciplined investing, has built his company into the 58-subsidiary-strong conglomerate that it is today. Facebook Inc (NASDAQ:FB) CEO Mark Zuckerberg is another prime example of a self-made billionaire, building Facebook from the ground up through partnerships and hard work. In short, it may not seem fair for someone to possess such a disproportionate amount of money relative to the average working-class citizen, but in more cases than not, they’ve earned it through hard work and/or smart investments.

However, according to a report out earlier this week by The New York Times, that disproportionate wealth relative to the working class may be at far greater risk than many of the richest Americans realize.

Surprise, surprise: The rich got richer
According to The New York Times‘ report, three factors have contributed to a surge in income among the United States’ wealthiest individuals. First, a gigantic rebound in the stock market from its March 2009 lows have boosted the overall wealth of America’s richest individuals. Just for comparative purposes, the Dow Jones Industrial Average (INDEXDJX:.DJI) and broad-based S&P 500 (INDEXSP:.INX) have bounced 134% and 149%, respectively, since their lows four and a half years ago. As of 2011, the top 1% of income earners in America owned about half of the United States’ stocks, bonds, and mutual funds, as compared with the bottom 50% of Americans, whp own just 0.5% of these investments. Expanding that even further, the top 10% of households own 90% of all stocks in the United States! As the markets continue to march higher, so does the wealth of our nation’s top income earners.

The second source of growing income for the United States’ wealthiest individuals is real estate. Home prices are on the rebound thanks to rapidly shrinking new and foreclosed housing inventories and historically low lending rates, which have spurred new home buying as well as investment-oriented borrowing and purchasing. According to Forbes in 2012, of the then 425 worldwide billionaires, 27 of them were made because of real estate investments. As of the latest Case-Shiller Index report, which is a measure of home prices in 20 of the United States’ largest cities, home prices between June 2012 and June 2013 had risen by 12.1%, putting a good chunk of change directly into the pockets of the United States’ richest individuals.

Finally, favorable tax code helped out the rich in 2012, with the U.S. government deciding not to roll back all of the Bush-era tax cuts on the wealthy. This isn’t to say that the United States’ wealthiest individuals aren’t paying their fair share so much as it points out that they aren’t paying nearly as much as everyone expects they should.

Added together, these three factors allowed the top 1% of income earners to accumulate 22.5% of all U.S. income in 2012, with the more expansive top 10% of income earners accounting for better than 50% of all income last year — the highest level in 100 years of record-keeping. To put it another way, the rich just keep getting richer.

But that trend looks as if it could come to a grinding halt. Here’s why.

The coming disaster for America’s wealthiest individuals
For one, with the wealthiest individuals controlling a vast majority of stock, bond, and mutual fund investments in this country, they’re at the greatest risk of wealth depreciation if the U.S. economy stalls. Given this week’s initial jobless claims figure, which came in at a seven-year low, that might seem highly unlikely, but I’d beg to differ.

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