Tuesday, January 23, 2018

Gauging Contemporary Bubbles

Those curious to gauge just how big the current equity bubble has grown need some kind of "measuring stick".  In the chart below I use the total disposable personal income of the US (the national total income available after taxes are paid) as that measuring stick versus the Wilshire 5000 (a market capitalization weighted index of the market value of all publicly traded US equities).

To gauge how the current bubble rates against those going back to 1975...simply divide the DPI versus the Wilshire 5000...and voila, we have a winner (chart below)!  Modern market valuations have never been higher versus disposable personal income.

As an aside, from 1975 to 1995, DPI and the Wilshire essentially grew at the same rate.  Since 1995, the Wilshire has grown at twice the rate of DPI (the DPI has slowed to half the rate of the '75-'95 period while the Wilshire has actually slightly accelerated over the '75-'95 period).  Perhaps there is some linkage with THIS.  Unfortunately, an imminent large decline in household net worth (as described HERE and HERE) is a very high probability.

Just to ensure I'm being fair...one more look but from a different perspective.  Real disposable income on a per capita basis versus the Wilshire.  Again, asset prices have de-coupled from incomes.  Of course, most of the income gains are due to a tiny fraction and are not representative of the reality of flat to declining real incomes for the vast majority of households.

Of course, equity bulls will point to corporate profits as the rationale for the Wilshire's elevated levels.  I will point out that this is primarily due to Corporations cutting back on their greatest expense, adding minimal labor since '01 (chart below).  However, if surging corporate profits aren't ultimately driving like growth in employment, wages, or tax revenue, the value of corporate profits and wellness to the broader economy should be in question?
To round out the picture, the chart below shows the shifting tax burden to personal income taxes away from corporations (federal personal tax receipts versus corporate receipts).  The most recent tax cuts will only further the divide.

Regardless whether the Federal Reserve will allow a recoupling of market valuations based upon personal incomes or not, a systemic crisis is likely imminent.