The good news is household net worth as a percentage of disposable personal income has never been higher. 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. 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” 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.
Don Schreiber, Jr., is founder of WBI Investments and manages $2.9 billion for advisors and their clients.