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A Big Picture Chart You Cannot Ignore

Charts are germane to finance/economics/investing. Put them together in a certain way and you can tell any story you want.


Here’s one chart that tells a story all by itself – see below(1). It simply takes the broadest measure of household wealth (primarily real estate, stocks, bonds) and compares it to gross domestic product (GDP), a broad measure of U.S. economic output. And the story is that the ratio of household wealth to GDP started to change in the mid-1990s as the Federal Reserve changed its approach to monetary policy (Greenspan put > Bernanke put > Yellen put > Powell put…) to more actively address various economic crises (and perceived crises)…and skeptics might argue, to both enable profligate fiscal policy and Wall Street – cheap money being the lifeblood of both.  Regardless, the result has been an expansion of household wealth that is historically inconsistent with economic output. 

We shared this chart in our most recent client commentary. We’ve shared similar charts over the last few years and it’s remarkable to us how little attention these kinds of metrics receive - as if all the monetary manipulation since the late 1990s and its consequences are perfectly normal. We see the manipulation in the data for stocks; we see the manipulation in the data for housing. Consider our economic experience 2009-2021: little to no inflation in the real economy but lots of asset price inflation in the financial economy.  These monetary (and fiscal – Congress has hardly been the standard bearer of prudence and discipline) actions have persisted for so long that they now pass as standard procedure.


So the question we must ask is: what would trigger asset price deflation and a return to more normal household net worth to GDP ratios? Maybe it's more volatile inflation in the real economy (i.e., inflation levels not as high as 2022/23 but similar variation). Maybe it’s more economic inequality, with political, social, and economic consequences. Or perhaps we’ll see asset prices move sideways (roughly) for an extended time while GDP catches up to household net worth. Or is there another explanation for why household net worth should inherently trade at 5-6x GDP rather than 3-4x? If there is such a credible explanation, we have yet to hear it.


And so we expect that one way or another asset prices will come back into line with the real economy - eventually. We are prepared for that outcome; however, it may unfold.



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