The Peril of a Two Class Society
Since the end of WWII the US might be considered as being divided into two
eras. The first from after the war untill 1979 and the second from 1979 until
today. The era's are determined by the growth of family income.
As dramatically different as these two eras are, they are even worse when
we consider the structural change, where the US family income shifted from
a single to a two family income, which closely mirrors these two eras.
The good news, at least on the surface, is that while topping $81 Trillion,
the US Household Sector Net Worth is now at a historic high after recovering
dramatically from the 2008 financial crisis. It is up over $25T from the post-crisis
low and 17% above its pre-crisis peak.
According to global macro strategist Richard Duncan at Market
Watch, this is actually a major concern! Why? Because though the Federal
Reserve has engineered a "required" Wealth Effect recover since the dotcom
bubble implosion, the Household sector net worth is moving up geometrically,
while US Disposable Personal Income is only marginally rising on a linear
basis.
Mathmatically, something has to give because they are connected.
When we consider that Household Net worth is rising primarily due to housing
price increases and financial market performance, it becomes apparent that
real disposable income will at some point no longer be able to sustain nor
afford elevated asset price levels. History has show us that this is a pattern
to be most concerned about.
Richard Duncan demonstrates this trigger point (below) by comparing Household
Net Worth as a percentage of Disposable Personal Income. The average from 1952
to today has been 525%. With a high during the 2000 Dotcom bubble of 615% and
a Housing Bubble high in 2007 of 660%, we now find ourselves at 639%.
The chart is flashing an ominous Head & Shoulders pattern.
Conclusions
A 70% Consumption based economy such as the US cannot support an elevated
Household Wealth Effect without Real Disposable Income increasing at a sufficient
rate to support elevated asset prices.
When we additionally consider the degree to which margin is presently being
used (once again) in the equity markets, we see not only the excess,
but that investors have never been poorer while falsely believing themselves
to be rich!
How long can this be sustained? Not that much longer because new credit is
steadily generating less GDP growth from which to support an ever increasing
debt burden.
For more detail on how this distortion is being orchestrated
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