We have run this chart before, but a recent update from the Federal Reserve shows that the ratio of household net worth to income is now at a record high. On the surface, higher net worth would seem to be a plus for the economy. Consumers don’t have to save as much which should boost growth and there is an equity cushion to soften the blow of a recession. But increasing net worth is only a positive when it is supported by greater underlying cash flows.
The record high in the ratio of net worth to income is an indication that the underlying cash flows of financial assets aren’t keeping pace with asset prices. As the aftermath of the last two big peaks in this ratio signals, caution is warranted.