My Scary Chart

Jim Cramer and the rest of the captured MSM, along with their Wall Street puppet masters, captured political snakes, and crony capitalist corporate chieftains will tell you to ignore this scary chart. It’s different this time. The Fed has your back. The economy is booming. Stocks for the long term. Where else are you going to put your money? Trust us.

AND IT’S GONE!!!! 

Guest Post by Daniel Thorton

Hedgeye Guest Contributor | Thornton: My Scary Chart - Bubble bear cartoon 09.26.2014 1

 

I published the graph below in a recent essay titled, Why the Fed’s Zero Interest Rate Policy Failed, but the graph deserves special attention because of what it seems to imply for the economy going forward. The graph shows household net worth (wealth) as a percent of personal disposable income. Household net worth as a percent of disposable income increased dramatically in the mid-1990s. Its collapse precipitated the 2000 recession. It increased even more dramatically during the subsequent expansion only to collapse again, precipitating the 2007 – 2009 recession.

 

Hedgeye Guest Contributor | Thornton: My Scary Chart - thornton1

 

Once again, household net worth has increased dramatically. Since the end of 2012 it has increasing by nearly 100 percentage points to 640% of disposable income. This is scary; not just because it is an incredibly large rise in wealth in a short period of time, but because it happened twice before with very bad consequences.

The first rise in household wealth ended because of the bursting of what is known as the Dot.com bubble. It is called the Dot.com bubble because the NASDAQ composite index rose dramatically in the mid-to-late 1990s only to fall even more dramatically beginning in 2000Q1. The graph below shows that the rise and fall of household net worth was accompanied by the rise and fall of the NASDAQ.

 

Hedgeye Guest Contributor | Thornton: My Scary Chart - thornton2

 

The NASDAQ and household net worth reached their respective peaks at exactly the same time, 2000Q1, after which they both fell precipitously. Household net worth recovered quickly during the expansion, but the NASDAQ didn’t. Indeed, the NASDAQ didn’t reach its 2000Q1 level again until 2014Q3. In contrast, household wealth as a percent of disposable income rose quickly, increasing by 125 percentage points from 2002Q3 to 2006Q4 before declining even more precipitously.

 

The large increase in household wealth was largely driven by an equally large and, as it turned out, unsustainable rise in house prices, as shown in the graph below. Not surprisingly, house prices and household net worth both peaked in 2006Q4.

 

Hedgeye Guest Contributor | Thornton: My Scary Chart - thornton3

 

By 2015Q1, household wealth had surpassed its 2006Q4 peak. This time the rise in wealth was fueled by both equity and house prices. The relevant question is: Is the 100 percentage point rise in household net worth sustainable, or will house and equity prices fall dramatically again?

 

The latter answer seems most likely. One reason is behavior of household net worth has been unusual since the mid-1990s. The graph below shows the level of household net worth over the period 1952Q1 to 2015Q4. The graph also shows a quadratic trend line estimated over the period 1952Q1 to 1994Q4 and extrapolated to 2015Q4.

 

Hedgeye Guest Contributor | Thornton: My Scary Chart - thornton4

 

During the entire period from 1952Q1 to 1994Q4, household net worth tracks the trend line very closely. Since 1995Q1, however, household net worth has been consistently above the trend line and the gap has been getting progressively larger. Such behavior would be a concern in any circumstance, but it is particularly troubling because we know that the previous two boom cycles were followed by busts. The recent rise in household net worth has not been accompanied by a correspondingly large increase in output or the price level. Hence, it too does not appear to be supported by economic fundamentals—it appears to be unsustainable.

 

The Fed’s monetary policy has contributed to this problem. First, by keeping the federal funds rate below its own estimates of the normal or natural rate for much of this time and way below the normal rate for nearly a decade. The second, by unnecessarily purchasing a massive amount of government and mortgage-back securities, which Fed Chair Yellen and her colleagues are reluctant to sell. I don’t see the Fed doing anything different anytime soon.

 

I predict that the current level of household net worth is not sustainable. I believe that some unforeseeable event will prick the bubble, perhaps this year. The result will be recession which will, unfortunately, be accompanied by more misguided monetary and fiscal policies. I call this monetary and fiscal policy insanity: Keep doing the same thing and expect a different result! I would love to be wrong, but I doubt I will be.

 

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SpecOpsAlpha
SpecOpsAlpha

Extrapolations are usually not worth the effort it takes to create them. Interpolations are fine but weak within a chaos system, which human societies are without question.

DDearborn
DDearborn

Hmmm

There is a GIGANTIC problem with the very first graph “Household and nonprofit Organizations net worth”!

People given that the likes of Bill Gates, Warren Buffet and the rest of the Billionaires club collectively have well over 100 BILLION sitting in various “charities” which they actually control directly or indirectly themselves and which spend little or no money on “charity” in the traditional sense of the word, this chart is grossly skewed. Think a mere 100 billion to skew the chart? think again. The bottom half or about 150 Million Americans have essentially a zero or negative net worth. Why would “non profits” be included in this chart anyway? How do they relate to “households” in the context of the numbers as presented.

Perhaps someone could explain it to me. I seem to have missed the point.
And consider the source quoted: The Federal Reserve (US) in terms of damage done to the American people, the most vile, evil, dishonest organization in America’ entire History.

Rise Up

This is a Youtube interview by Greg Hunter of Bix Weir. I set it to start at the 31:30 mark. Interesting stuff–Weir says it could all go down quickly, starting at the end of the 3rd quarter this year.

http://www.youtube.com/watch?v=zMCC58IZfog&t=31m30s

Suzanna
Suzanna

Bix Weir gives some very dire “predictions!”
I sent this link to the Mr. Can this be true?

RHS Jr
RHS Jr

The 90% of working American’s total wealth is totally not visible in the charts; our total wealth is totally overwhelmed by the total wealth of the 10% swimming and bathing in the cash flowing like champagne from the Money Spigots in NYC, WDC, Chicago, Hollywood, etc. In a few months more the main difference between pictures of Flyover Americans in pictures during the Civil War (tintypes), the Great Depression (Black & White) and Flyover Americans today will be some color.

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