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The Wealth Effect Half-Life

Tyler Durden's picture




 

Wild swings in asset prices have produced two recessions in the last 15 years - and, we suspect, FOMC members are keen not to see a repeat of the collapses of the last decade. As the following chart shows, measured relative to an equally nominally inflated USD-based disposable income, the wealth effect is nothing like as strong as some suggest and indeed it should be clear that time after time in the last 20 years we have seen the artificially blown 'wealth-effect-creating' bubbles implode back to what was an old-normal level of 'sustainable' wealth (and in fact the Fed is having to work harder to keep us from that level).

 

As Barclays notes,

There is no major asset price that could be considered depressed in any way and the rate of asset price inflation has been extremely high by any historical standard. Prior to the recent correction, household net worth as a percent of disposable income – a rough measure of asset prices – had risen by 80% as much as it did during each of the two recent asset price booms (and by twice as much as had occurred in any other post-WWII cycle).

 

Against a background where increasingly wild swings in asset prices have been the key factor undermining economic performance – producing two recessions in the last 15 years – it is not surprising that most members of the FOMC see that historically extreme measures aimed specifically at boosting asset prices have pretty much served their purpose.

Chart: Barclays

 

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Wed, 06/26/2013 - 21:11 | 3697497 cifo
cifo's picture

I like to buy good stuff at 50% off.

Wed, 06/26/2013 - 21:46 | 3697587 DeadFred
DeadFred's picture

You're willing to forego that extra 20% discount?

Wed, 06/26/2013 - 21:16 | 3697510 LetThemEatRand
LetThemEatRand's picture

Kind of like building a sand castle on the shores of Fukishima when the tide went out after the earthquake.   Anyone hear that strange roaring sound?

Wed, 06/26/2013 - 21:28 | 3697538 FieldingMellish
FieldingMellish's picture

Nice head and shoulders pattern forming there. Target 350.

Wed, 06/26/2013 - 21:54 | 3697616 HeliBen
HeliBen's picture

Lol. Beat me to it.

Wed, 06/26/2013 - 21:30 | 3697539 francis_sawyer
francis_sawyer's picture

Help!... I'm being held hostage by a 'Pedro' from South of the Border!

~~~

http://www.thesouthoftheborder.com/wp-content/uploads/2009/03/border_sig...

Wed, 06/26/2013 - 21:31 | 3697545 Yes_Questions
Yes_Questions's picture

 

 

"Wealth" Effect.

 

There.

 

Wed, 06/26/2013 - 21:43 | 3697581 Whatta
Whatta's picture

bubbles are wunnerful wealth creators IF you are one that knows you are in a bubble, and not one that says "this time it's different".

Thu, 06/27/2013 - 09:17 | 3698727 marathonman
marathonman's picture

You just have to own the asset and seel to the 'greater fool' close to the peak.  Then buy it back at depressed prices after the bust.  I'm not that good at it either.

Wed, 06/26/2013 - 22:15 | 3697659 Dr. Engali
Dr. Engali's picture

If your "assets" are somebody else's liability then they aren't really yours and they aren't really assets now are they?

Wed, 06/26/2013 - 22:08 | 3697668 disabledvet
disabledvet's picture

oooops.

Wed, 06/26/2013 - 22:11 | 3697680 honestann
honestann's picture

The wealth effect is a fraud --- OPPOSITE of the truth.

Think about it a bit.  Which is a better economy?

#1:  Home prices are super low.  So people can save for a few years and buy a home with cash, or with a little help from their parents, or be given a home as a wedding gift by their parents.  This eliminated what is otherwise the number one expense for most people, which leaves their entire income free to spend on other goods and goodies, or perhaps starting a new business.  All this spending on other goods or new business development boosts the economy with real, natural, organic demand.

#2:  Home prices are super high.  So people make a tiny down payment and become debt-slaves forever (30 years, plus another 10~20+ years after subsequent refinancing).  So people end up paying 2x~5x the price for their home (including interest), which means a huge percentage of every paycheck for their entire lives goes to pay their mortgage.  Further, since they are always strapped for free cash (due to huge mortgage payments), they also tend to buy cars, furniture and other goods on credit, thereby increasing the cost of those goods due to interest.  Because a huge percentage of their paycheck is consumed to pay mortgage payments and other debt payments, very little remains to buy other goods, thereby reducing demand and restraining the economy.

This is so obvious that only endless propaganda is sufficient to obscure this fact.

For most people the phrase "everything you know is a lie" is rather close to true.

Wed, 06/26/2013 - 23:48 | 3697981 FieldingMellish
FieldingMellish's picture

The whole thought that homes are some sort of wealth repository sickens me.

Thu, 06/27/2013 - 06:12 | 3698436 e-recep
e-recep's picture

actually they are. gold and land, they have been wealth repositories for thousands of years now. it's the fucking property tax that makes land less attractive.

Thu, 06/27/2013 - 07:11 | 3698503 I need Another Beer
I need Another Beer's picture

Agreed. it pisses me to know the property I own, I don't own if I don't make the taxes. The people in S Dakota had their chance to abolish property taxes , but chose to keep taxes in the end. The oil discoveries there caused land values to rocket upward and now the folks who voted to keep land taxes in place are living at the Y.

The only good tax is a dead tax, I hate'em all.

Thu, 06/27/2013 - 07:11 | 3698504 I need Another Beer
I need Another Beer's picture

Agreed. it pisses me to know the property I own, I don't own if I don't make the taxes. The people in S Dakota had their chance to abolish property taxes , but chose to keep taxes in the end. The oil discoveries there caused land values to rocket upward and now the folks who voted to keep land taxes in place are living at the Y.

The only good tax is a dead tax, I hate'em all.

Thu, 06/27/2013 - 07:59 | 3698568 PT
PT's picture

Welcome to the modern world, where you are born with zero entitlement to any land, other than whatever your parents pass on to you.  Now where will you live?  On whatever land you buy at the manipulated "market" rate?  How much is that land worth?  20 years?  Half your life?  60 years plus you return the land to someone else's kids after you die?

Or perhaps it is time to find some "pre-foreclosed" homes and declare squatter's rights.  You're only learning what was taught to you by MF Global and Cyprus.  If they ain't using it then they won't be needing it.

Or do we keep playing "competition and capitalism" while the other side of the transaction keeps playing "beg, take, bribe and extortion"?  Time to think a little harder.

Thu, 06/27/2013 - 08:34 | 3698639 TheSilverJournal
TheSilverJournal's picture

Homes (not the land), though, are not appreciating assets in a normal monetary environment. A home must be maintained, which COSTS money, or else it will crumble to the ground. This 100+ year bubble in the making have been lifting home prices for so long that people have forgotten that homes cost money.

Thu, 06/27/2013 - 05:11 | 3698383 zhandax
zhandax's picture

"everything you know is a lie" is rather close to true.

How do we brand this in the brain of the sheep?

Thu, 06/27/2013 - 02:40 | 3698263 Handful of Dust
Handful of Dust's picture
Barnes & Noble's loss more than doubles

 

http://news.yahoo.com/barnes-nobles-loss-more-doubles-125717894.html

 

Moar Green Shutz.

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