The monetary base in the United States increased 5-fold in just over five years after the 2008 financial meltdown.
Very little of that monetary expansion has been pulled back in the subsequent five years.
Both private and public debt increases have also accompanied that monetary expansion in the United States. $70 trillion in various debt instruments (public and private) are outstanding which is about 1/3 higher than it was a decade ago.
The same is true globally. There is now over $237 trillion of debt in the world. Total global debt has increased 42% in the last decade.
What happened as all of this monetary and debt expansion occurred especially considering the abnormally low interest rates that were in place for much of the decade?
The money flowed into assets. Stock prices. Housing prices. Commercial real estate. Tech start-ups.
In fact, interest rates were so low that savers and investors were penalized in the extreme by staying in cash. The low interest rates made it so unattractive to hold cash that many savers finally gave up and took a flyer on the stock market, bought a new house or invested in a tech start-up. There was no yield in cash or in many credit instruments. It was much better to buy an asset.
Of course, as more demand is created the price of each asset increases.
What did those low interest rates and the increased monetary base do for American households?
It made a lot them much wealthier.
In fact, the increase in aggregate household wealth has been staggering.
Household net worth increased by $45 trillion over the last 10 years and $60 trillion since 2000.
However, as this chart shows, U.S. gross domestic product, only increased about $4 trillion in the last decade and $9 trillion since 2000.
Another way to look at this is that in the last decade our aggregate household wealth increased at 10 times the rate that we actually increased our GDP over the same period.
This is unsustainable and it appears we may be in the early stages of the bubble bursting or (hopefully) the air slowly being let out of the balloon.
Over the last few weeks the stock market has been showing signs that the party is over after its 10-year bull market run. It is down over 10% from its highs earlier this year but about 40% of S&P 500 stocks are down at least 20% this year. Morgan Stanley sent a report to its clients yesterday that it believes we have entered a bear market in equities.
For a little perspective, this is chart showing the performance of the Dow Jones Industrial Average in the last 10 years through today.
It has been an amazing run. Each dollar invested ten years ago grew to over three dollars in the last decade.
2018 has been an different story. There have been a lot of ups and downs and volatility during the year. However, despite the recent losses, the DJIA is still only 1.5% below where it started the year. At the same time, it is off 9% from its highs at the beginning of October.
Some high profile individual stocks have fared much worse.
Apple is down 20% from its high this year.
Facebook is down 39%.
Netflix is down 37%.
Amazon is down 27%.
Alphabet (Google) is down 19%.
Crude oil has fallen almost 30% since the beginning of October.
Sales of new and existing homes have also fallen over the last few months. You can see what has been happening on the West Coast in particular in this graphic. Active listings up. Sales down. Change in the rate of appreciation is down.
We are just not seeing downward pressure in prices in stocks, oil and the housing market in the United States either.
In fact, Deutsche Bank annually tracks 70 different financial assets and commodity indexes around the world. It has been doing so since 1901.
At the end of October, 89% of all of these asset classes showed a loss for the year in dollar terms. That is the highest percentage of assets showing a loss in 118 years. That eclipses the 84% that showed a loss in 1920.
Compare that to last year when only 1% of those asset classes had a negative return for the year.
Have you ever heard "What goes up must come down"?
This is what Deutsche Bank said in its report accompanying this data.
This is what happens when the vast majority of global assets are expensive historically due to extreme monetary policy. When the tide goes out you’re more likely to get en masse negative months rather than rotation from day equities into bonds or visa-versa.
Are bigger losses ahead?
Time will tell.
However, bubbles can only expand so far. You only hope that they don't burst with a big bang. The chaos that follows can quickly become a financial and political crisis. At least that is what history teaches us.
However, bigger drops in asset prices often begin with asset prices acting like they have this year. They slip and slide, grinding away in an inexorable movement that trends downward. This gives people hope that we are only in a temporary lull before prices start moving up again.
That is my hope as well. However, looking at the free money and loose credit that has been made available over the last ten years tells me that it is more a question of "when" and "how bad" the day of reckoning will be than to think this is a temporary lull.
Be aware of the bubble that has been created.
And beware of the consequences to your wealth.
The last decade has been enormously beneficial to many American households. However, it has not resulted from a normal state of affairs. The monetary base manipulation, the expansion of credit and low interest rates have distorted normal market forces.
The worst thing you can do is believe that all the asset increases over the last decade we have seen are "real."
Thanksgiving might be a good time to consider the advice Nassim Taleb provided in his excellent book, "The Black Swan" back in 2007.
"Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race ‘looking out for its best interests,’ as a politician would say
On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey.
It will incur a revision of belief."
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| Credit: The Black Swan via Wikicommons |
Happy Thanksgiving!
However, don't be a turkey.
Review your beliefs with all this information in mind. You don't want to have your beliefs revised for you with the same surprise as consumed that poor bird.
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