Wednesday, February 1, 2017

Is America in a Bubble & Will America Ever Return to "Normal"

Analysts and talking heads have an awful lot of opinions.  Are we in a bubble or aren't we?  Rather than offer another opinion, I'll offer the relationship of US economic activity (GDP) against the Wilshire 5000 (representing US equities) and the Federal Reserves gauge of American wealth, Z1 Household Net Worth series.  These are the preferred establishment gauges, so take a look and then you decide.


Gross domestic product (GDP) is a monetary measure of the market value of all final goods and services produced annually in the US.  The chart below shows the annual real GDP growth decelerating since 1950.
The Wilshire 5000 Total Market Index, or more simply the Wilshire 5000, is a market-capitalization-weighted index of the market value of all stocks actively traded in the United States.  The chart below shows the Wilshire 5000 vs. the yield on the 10yr US Treasury bond, since 1980.
Interestingly, each top in the equity market saw a "false dawn" or spike in the yield on the 10yr Treasury only to be followed by significantly lower yields on the 10yr.

GDP vs. Equities
The chart below shows the growth in GDP (blue columns), the Wilshire 5000 (red line), and the ratio of the Wilshire to GDP (black line).  Since the early 1970's, the US equities market, represented by the Wilshire, has grown more than 5x's faster than American economic growth (GDP).
GDP vs. US Household Net Worth
Given the sharp rise in asset values, I thought it worthwhile to view the total increase, as shown by the Fed's US Household Net Worth data, versus the growth in GDP.  The chart below shows US household net worth (all inclusive with real estate, equities, and all asset classes) is fast approaching $92 trillion against US GDP of $18.6 trillion.  A simple division of GDP as a % of HHNW (maroon line in the chart below) shows household net worth (asset values) is growing significantly faster than economic activity supporting those valuations. 
If you are curious what this looks like over different periods, the chart below suggests the current periods HHNW growth at double the pace of GDP is an aberration.
Finally, from 1950-->2000, the average GDP to HHNW ratio was somewhat consistent around 28%...if the HHNW and GDP ratio are to come back to their 50 year norm (before they were warped by long periods of near Zero Interest Rate Policy and actual ZIRP)...there are two basic options:
  • Either, GDP rapidly rises $7 trillion (a 38% increase)...Or, the other option is a 28% decline in HHNW, or a contraction of $25 trillion.  A $25 trillion decline in HHNW would equate to an average $200,000 decline in net worth for every household in America.
Those curious why the financial system has been turned upside down, I think an awful lot of the problems can be explained HERE.  The solutions are nowhere so simple.  There is no question the federal government will continue to attempt to spend our way out of what is a secular trend of slowing growth HERE, but who will be buying that debt is a very good question HERE.