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.
If you have decelerating growth, how does that translate into higher asset prices?
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.
Fuck me, I fall in that age group
The Arc of the Moral Universe
By Jesse
“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.”
Chris Hamilton, Bubble-nomics
It seems as though when I procrastinate long enough someone eventually does a very good job of making a point for something that is important, and does it in a way that I may not have been able to do as well otherwise.
A favorite refrain of financiers, fraudsters, politicians and their defense lawyers is to pose the questions in defense of a lie or a fraud in such a way as to blur the lines of recognition, so as to create room for a reasonable doubt. Indeed, the boldest among them will ask those would listen to them to question reality itself. What does ‘is’ really mean, for example.
Chris Hamilton of Economica as noted in the second quote above has come up with a very clever way to help to put a little rigor around the concept of financial asset bubbles. Obviously the crux of the problem is to find some metric, some reasonable and relatively stable or significant relationship against which to measure changes in one value and compare them over time.
Chris has chosen disposable income, which is actually pretty darn good. And since the link between disposable income and net worth has a suggestion of correlation, and not just causation, the shoe seems to fit fairly well.
One might rephrase it as ‘when is the economy unusually asset rich, and relatively income poor.’ There are other standards one might use, but modern fictionalization economic measures like money supply has knocked a few of them for a loop. And I am sure that there are economists aplenty who can cast a doubt on any of them.
Truth can become a very slippery thing, especially when a conspiracy of silence, or the subornation of perjury, in support of a lie becomes especially lucrative to the point of being de rigueur, a kind of badge of office among the elite, and sadly even among those who are sworn to uphold justice, and to protect the innocent.
This next bubble and crash cycle is going to put a tear in the social fabric, and may even leave a mark. The natives are clearly getting restless and their sahibs may be in danger of losing control.
What does it profit a man, indeed.