Tuesday, January 16, 2018

A 30% to 50% Fall in Net Worth Is Dead Ahead...Will The Fed Allow This &/Or Can It Stop It?

Private investment (yellow line in the chart below) makes up just under 17% of US GDP.  Interestingly, the year over year change in 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).  Based on this, in the coming quarters, a deceleration to 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 coincided with a recession.  The same circumstances that led to the '91, '01, and '08 recessions is again presently underway in '18.  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 (year over year on a quarterly basis).  Household net worth as a % of disposable income has clearly exceeded any previous period.  Federal debt creation (YoY) has decelerated by almost 75% from the '09 peak.  The federal funds rate is rising.

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 slowdown).

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

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