One would think US household net worth soaring above the $100 trillion mark for the first time would be cause for celebration.
But when that figure is compared to actual US household income, things look decidedly less rosy. The latter has only recently climbed back to levels seen in 2007, before the financial crisis caused it to decline.
In other words, there’s been a sharp divergence between the two measures over the past decade — one that will create an increasingly untenable situation as it gets more distorted.
It’s a dynamic that played out before the last two market crashes. And experts at AJ Bell warn that we’re currently dealing with similarly excessive conditions.
“Household net worth cannot sustainably grow this much faster than incomes,” Russ Mould, investment director at AJ Bell, wrote in a note to clients. “Assets have been bid up (and up) and at some stage there has to be chance that they correct, just as happened in 2000 and 2007.”
The chart below shows US household net worth over history. Note how its two most glaring pullbacks occurred around the past two stock-market bubbles.
The swelling of US household wealth to unprecedented levels is directly linked to the surging valuations in the stock and housing markets, which many experts say are exhibiting bubble-like behavior.
Mould says this is why the discrepancy between wealth and income has widened to such an alarming degree.
“The difference is likely to be accounted for by the surge in the value of financial and other assets — equities, bonds, property and frankly everything from vintage cars to art to wine to baseball cards,” he said. “And this is one warning that at some stage another collapse in financial markets will sweep around the globe.”
In addition to stretched valuations through the market, Mould is wary of rising debt levels. Not only are global debt burdens higher than they were before the last two crashes, they also make up a larger percentage of gross domestic product (GDP).
So with all of these troubling elements in place, what could end up striking the death blow for markets? Mould raises the prospect of a Federal Reserve policy error as the central bank looks to increase interest rates from historically low levels.
He argues that more borrowing, combined with net worth being more linked to financial-market exposure, could make any negative impact of Fed rate hikes even worse. And that, in turn, puts increased pressure on the Fed to make the right decisions.
So as the central bank continues to tighten monetary conditions as a response to rising inflation, the risk of a mistake will continue to mount.
“The Fed seems determined to press ahead with rate hikes and the danger is that they overdo it,” Mould said. “Hence, Fed policy error remains the most likely candidate for a fresh tumble in markets.”