Hamilton: A 50% Fall In Net Worth Likely Dead Ahead...

Authored by Chris Hamilton via Econimica blog,

Private investment (yellow line in the chart below) makes up just under 17% of US GDP, government consumption about the same, and the remainder of GDP is private consumption (mostly services...detailed HERE).  But it is the year over year change in private investment that seems to offer the greatest insight into the economic health of the nation.  It turns out that private investment mirrors federal debt creation with about a twelve to eighteen month lag time (red arrows showing peak YoY federal debt creation...yellow arrows showing subsequent peak YoY private investment growth).


Simply put, the cost of new debt is rising, the cost of rolling over record quantities of existing debt is rising, and the quantity of deficit spending projects and activities is decelerating (not exactly a recipe for growth).  So, this time is really no different.  Record quantities of federal debt creation spurred private investment post '09 (still with about a years lag)...and vice versa now with decelerating debt creation.  Based on this, in the coming quarters, a deceleration and outright decline in private investment is an odds on event.



If we focus solely on year over year change in private investment, same for federal debt creation, plus the federal funds rate...every period of rate hikes since '81 has coincided with decelerating federal debt creation...and resulted in a decline in private investment which concluded with a recession.  The chart below highlights the same circumstances that led to the '91, '01, and '08 recessions is again presently underway in '18.  Absent a reversal in deficit spending or a u-turn on the FFR...is there any reason to believe the result be different this time?

Finally, the chart below offers some perspective where we are in this cycle.  Household net worth as a % of disposable income has clearly exceeded any previous period (asset prices rising far in advance of income to support them).  Federal debt creation (YoY on a quarterly basis) has decelerated by almost 75% from the '09 peak.  However, during each downturn, yoy debt creation has doubled or tripled from the previous cycle (something to ponder as the next downturn is on the horizon).  The federal funds rate is rising but at a snails pace and not likely rising for much longer.


This particular set of circumstances has been a losing play every time since '81 and each rise and fall in household net worth as a percentage of disposable income has been greater than the last.  A 30% to 50% fall in net worth appears the most likely outcome (particularly with the Fed's inability to lower rates significantly from current levels in response to this likely slowdown).

Just two big questions remain.  Will the Federal Reserve allow this outcome?  Can the Federal Reserve stop this outcome?

My two cents on much of what has brought us to this point...domestically HERE...and globally HERE or HERE.


Blue Snowflake Wed, 01/17/2018 - 15:27 Permalink

This has been a cold winter but luckily the nice folks under the bridge let us share their trashcan fire warmth. Hopefully next year we will have our own trashcan. One can hope.

SixIsNinE syzygysus Wed, 01/17/2018 - 16:06 Permalink

i watched a youtube vid of the homeless tent cities of orange county california the other day - miles of Californians calling home a tent by the road home now.
But LA can build a dozen more high-rises for the EB5 visa crowd with money to buy citizenship. PETA is offering to take in the folks dogs who can't feed them anymore.
SPCA is offering to spay the homeless women.
they are seriously giving hundreds of homeless free bus tickets to cities across USA every day.
Thanks Oblammo. Shrub.

In reply to by syzygysus

wmbz Wed, 01/17/2018 - 15:29 Permalink

Just two big questions remain.  Will the Federal Reserve allow this outcome?  Can the Federal Reserve stop this outcome?

~ No to both, but that will not stop them in the least bit, from trying.

If anyone thinks that they will not come up with some new corkscrew ideas, then watch and see.

Endgame Napoleon wmbz Wed, 01/17/2018 - 15:44 Permalink

Well, maybe, if the affluent have less net worth from passive assets and global investments, they will have an incentive to create businesses and jobs to stay at the top of the economic food chain. Or, maybe not, because most of the ones I know have the investment income, but instead of creating jobs since they have their basic expenses (and more) met by income from investments, they take two safe jobs per household that could support 4 households out of the economy. 

In reply to by wmbz

chubbar Wed, 01/17/2018 - 15:30 Permalink

Exactly the question posed earlier. Is the stock market a pump and dump or is the central bank going to continue to buy stocks until the end of time?

abgary1 Wed, 01/17/2018 - 15:45 Permalink

The central banks pursuit of perpetual economic growth and inflation is the precursor for this inevitable correction.

Recession, depressions and market corrections are necessary components of properly functioning economies and the central banks need to get fuck out of the way and let markets do what they do.

Asset and market valuations should left to the markets to determine, not the central banks! End the central banks.

Vlad the Inhaler Wed, 01/17/2018 - 16:04 Permalink

80% of household net worth is tied up in home equity.  You think these fuckers are going to let mortgage rates start rising for real and tank housing prices, nope.  The lesser of two evils is to put the brakes on the economy by raising the fed rates, even if it crashes the business cycle.

g3h Wed, 01/17/2018 - 16:06 Permalink

Not going to happen.  Why Trump appointed New Fed pal Powell, you think?


When that happens, the elites and the riches will go on strike.  Ever read "Atlas Shrugged"?

taketheredpill Wed, 01/17/2018 - 16:24 Permalink

"Can the Federal Reserve stop this outcome?"


Yes.  Unfortunately they will destroy the $, Bonds, and economy in the process.

But if you want to make an omelette etc.

MoreFreedom Wed, 01/17/2018 - 17:00 Permalink

If private investment follows public debt (and spending), that suggests private firms are serving the government to get that spending.  Unlike Hamilton, I'd celebrate a reduction in government debt and spending because that's less wasted resources.  Most of what government "produces" is associated with loss of overall prosperity (except of course, those who get that forcibly taken government money).   That's draining the swamp's money flows.

Dragon HAwk Wed, 01/17/2018 - 17:42 Permalink

Americans will just sell their guns and buy food ( not ),  not going to be pretty, can you imagine American Police officers being paid in Food and TP,  I don't think so.

khakuda Wed, 01/17/2018 - 20:31 Permalink

It is amazing that there is no actual discussion outside of very limited circles of the central bank takeover of the markets and economy over the past 10 years.  They have colluded globally to take over all markets and blow prices through the roof and cannot normalize without substantial asset volatility and declines. so bubbles will continue to blow.

At every decline of 50 points in the Dow, Yellen has told us not to worry because the Fed is "not on a preset course" and they stepped in with the guarantee of the Fed put.  Here we are with the markets up 200 - 300 points EVERY DAY and the Fed sure appears to be on a present course of irrelevantly slow and small rate increases as asset boom parabolicaly.

Meanwhile, short rates at 1.25%, or about 85 basis points after income taxes, are below half the level of stated inflation. Even the 10 year at 2.5%, or 1.66% after income tax, is below the rate of inflation.  So, the Fed is guaranteeing every investor in cash and many bonds at this point 9 years into the recovery that they will lose purchasing power/value in those assets.  Still, no alternatives to stocks and housing.

Then, you go and drop corporate taxes from 35% to 21% and of course you get a boom on a boom in asset prices.  It is the perfectly rational expected result and it is far from over.  The Fed, instead of raising rates on this news, says with a straight face that they aren't convinced that the tax cuts should alter their preset course of rate increases.  Are you fucking kidding me???

This will go down as the biggest bubble ever by the time it is done.  Ever.

SixIsNinE khakuda Wed, 01/17/2018 - 23:34 Permalink

the zerolounge is one of the limited circles that talk about the road to serfdom.

thankfully the Bitcoin is holding Strong over 11,111 fiatskis and rising after an excellent BTFD opportunity today.

all the old skool zeros should harken back to 2009 when we were given the opportunity to (not me - but those with play money) to heed Oblammo's advice and don't fight the fed, AND the gold silver trains, which went up till 2011-12, - well, now we got the crypto btfd's. some folks made out like bandits today.
not me. my little hand played safe. lost 10 fiatskis worth and got back in and am averaged even agin...(gemini's cool!)
it'll go up

In reply to by khakuda