Here is a chart that should make the Fed uncomfortable. You are looking at the net worth of American households as a percentage of their disposable income. The three lines in the chart are the mean, and plus and minus one standard deviation.
What should stand out immediately is how for five decades the ratio moved in a relatively narrow range than then soared and crashed, and then soared again and crashed. Now the ratio has soared again and it has exceeded prior highs.
Part of the driver here is that growth in household liabilities has slowed from its historic path, but the biggest driver is rising asset prices—that includes both real assets and financial assets.
If the past is prologue, you don’t want to be reaching for return in this environment.
Jeremy Jones, CFA
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