Bubble-nomics

Authord by Chris Hamilton via Econimica blog,

Question: What is a bubble?

Answer: A bubble is trade in an asset at a price range that strongly exceeds the asset’s intrinsic value.  Or it could also be described as a situation in which asset prices appear to be based on implausible or inconsistent views about the future.

Question: How do you know when you are in a bubble?

Answer: Gauge asset prices against a standard, foundational premise to determine if the price appreciation is warranted.

Lucky for us, the Federal Reserve provides exactly what is needed to show how unjustifiable current prices are against households disposable income.  The chart below is all US household’s net worth (current value of all real estate, stocks, bonds, etc.) as a percentage of their disposable personal income (disposable income is what they have left to spend or save after paying their taxes).  To round out the picture, I’ve added in the net growth in full time workers during each period, dramatically decelerating.

 
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Since 1970, every time asset values have risen above 520% of households disposable income (the dashed line in the chart) then the US has been in a bubble and a subsequent crash has followed.

This has simply meant asset values growing much faster than households income or households capability to sustain those price increases.  The depth of each crash has been relative to the overshoot of asset values on the upside.

Why???

I hear much discussion that the millennials are the largest age group in US history and are expected to drive growth in demand.  However, most people fail to understand what this truly means. 

The millennials are just marginally larger than the boomers but what this truly means is zero growth.  The millennials are just meeting the previous high water mark the boomers set.  When the boomers came through, they nearly doubled the previous high water mark.

The chart below shows annual population change of the 25 to 54year old US population vs. the HHNW as a percentage of disposable income.  They are essentially mirror inverse images of one another.

If we broaden out to view the annual change of the entire working age population (15 to 64 year olds) since 1970 vs. HHNW as a percentage of their disposable income…we have something.

I think we are pretty safe to say the bubbles have been in response to the decelerating population growth (said otherwise, decelerating growth in demand).

What’s it all about…I take my best guess HERE.  However, discussions of EROI should probably also be in the mix as well.

 

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4 Comments
Wip
Wip
October 17, 2017 3:41 pm

If you have decelerating growth, how does that translate into higher asset prices?

kokoda - AZEK (Deck Boards) doesn't stand behind its product
kokoda - AZEK (Deck Boards) doesn't stand behind its product
  Wip
October 17, 2017 5:06 pm

Don’t think it has anything to do with growth.
In order for HH net worth to increase as it has from 2010 and for the 24-54 group share to decrease, it just means the 1%-5% and the older set made all the gains.

Which is what QE and ZIRP accomplished, as it was intended.

Wip
Wip

Fuck me, I fall in that age group