The Unsustainable Distortion That Is America - The Peril of a Two Class Society

By Gordon T. Long

Since the end of WWII the US might be considered as being divided into two eras. The first from after the war untill 1979 and the second from 1979 until today. The era’s are determined by the growth of family income.

As dramatically different as these two eras are, they are even worse when we consider the structural change, where the US family income shifted from a single to a two family income, which closely mirrors these two eras.

The good news, at least on the surface, is that while topping $81 Trillion, the US Household Sector Net Worth is now at a historic high after recovering dramatically from the 2008 financial crisis. It is up over $25T from the post-crisis low and 17% above its pre-crisis peak.

According to global macro strategist Richard Duncan at Market Watch, this is actually a major concern! Why? Because though the Federal Reserve has engineered a “required” Wealth Effect recover since the dotcom bubble implosion, the Household sector net worth is moving up geometrically, while US Disposable Personal Income is only marginally rising on a linear basis.

Mathmatically, something has to give because they are connected.

When we consider that Household Net worth is rising primarily due to housing price increases and financial market performance, it becomes apparent that real disposable income will at some point no longer be able to sustain nor afford elevated asset price levels. History has show us that this is a pattern to be most concerned about.

Richard Duncan demonstrates this trigger point (below) by comparing Household Net Worth as a percentage of Disposable Personal Income. The average from 1952 to today has been 525%. With a high during the 2000 Dotcom bubble of 615% and a Housing Bubble high in 2007 of 660%, we now find ourselves at 639%.

The chart is flashing an ominous Head & Shoulders pattern.

CONCLUSIONS

A 70% Consumption based economy such as the US cannot support an elevated Household Wealth Effect without Real Disposable Income increasing at a sufficient rate to support elevated asset prices.

When we additionally consider the degree to which margin is presently being used (once again) in the equity markets, we see not only the excess, but that investors have never been poorer while falsely believing themselves to be rich!

How long can this be sustained? Not that much longer because new credit is steadily generating less GDP growth from which to support an ever increasing debt burden.

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Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that you are encouraged to confirm the facts on your own before making important investment commitments.

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