The good news is household net worth as a percentage of disposable personal income has never been higher.1 The combination of both the bond and stock markets and the housing price recovery is sitting at all-time highs has allowed Americans’ wealth to soar.
The bad news, according to economists Daniel Thornton and Joe Carson, is that each time household net worth peaked recently, it became a sign of an impending recession as the wealth bubbles burst.1 The same surge in wealth proceeded the Dotcom market’s burst in 2000 and was also flashing warning signs in early 2007 as the housing bubble melted down into the 2008 Financial Crisis.
In each case, I believe, asset value increases were driven more by government policy decisions than improved underlying economic fundamentals. The current global net worth expansion is being driven by massive central bank intervention in the form of zero or negative interest rates and quantitative easing.
Our concern is that we have seen this move before and the current wealth expansion may end badly because asset price increases are way ahead of economic fundamentals. I believe the current slow growth of economic recovery has been engineered by using policies to promote “wealth effect”2 consumer spending. We are concerned that another downturn driven by asset price deflation could be even more severe than the last two downturns. Let’s hope that the current monetary experiment does not turn into a really bad sequel to previous bear market cycles.
Important Information
Past performance does not guarantee future results.
The views presented are those of Don Schreiber, Jr. and should not be construed as investment advice. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security. No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.
1 Miller, Rich. "Ex-Fed Official, Worried About Bubbles, Warns of U.S. Downturn." Bloomberg.com. Bloomberg, 22 July 2016. Web. 27 July 2016.
2 Wealth Effect: the idea that when the value of stock portfolios rises due to escalating stock prices, investors feel more comfortable and secure about their wealth, causing them to spend more.
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