Mailbag: Mind the Gap!

Category: In Brief

A quick question about the chart on pages 5 and 6 please [Things Fall Apart (Part 2)]: If you assume all other assets stay the same, how far would US equities need to fall to close the gap between US Household Net Worth and US GDP?

– Stuart E.

For 46 years, from 1951 to 1997, we were no more and no less rich than our economy grew.

That’s the neutral vision of monetary policy, where you’re not trying to pull forward future growth through leverage and easy money in order to create more wealth today.

For the past 20 years, however, we have had a series of wealth bubbles – first the Dot-Com bubble, then the Housing Bubble, and today the Financial Asset Bubble – that have made us (temporarily) richer than our economy grows.

Here’s the chart since 1992, which shows the bubble blowing more clearly. Both data sets are nominal (meaning neither is adjusted for inflation), measured in exactly the same units – billions of US dollars – and normalized at 100 to show relative growth rates. Don’t @ me about semi-log charting … doesn’t add anything here. FYI, U.S. Household Net Worth includes nonprofit organizations, so it includes the assets of pension funds (but not social security).

To put some numbers to all this, as of January 1, 2018, U.S. household net worth is about $100 trillion, and it would need to fall about 10% to close the gap with GDP. So we are $10 trillion richer than we “should” be. Not a chump change bubble.

Stuart’s question: how much would U.S. equities need to fall in order to bridge that gap? Of course U.S. household net worth includes a lot more than U.S. equities (home equity is the largest single component), but I get Stuart’s point. After all, this is a Financial Asset bubble. The total market cap of the S&P 500 is about $24 trillion, so call it a 40% decline to eliminate $10 trillion in wealth. Obviously there are more owners of the S&P 500 than U.S. households and pension funds, and obviously there’s more to U.S. equities than the S&P 500, and obviously if the S&P 500 is down a lot you’ve got everything else down a lot. Again, don’t @ me. But put it all together … I think you’d need a U.S. equity market decline of 25-33% to pop this bubble.

Mind the gap.

To read the full article: Things Fall Apart (Part 2)


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