Household assets have exploded recently with the rise in the stock market and home prices…but that also creates risk because the asset to equity (net worth) ratio is one indication of leverage.
Leverage exacerbates positive or negative swings (aka more volatility when things get nutty). Right now, leverage is at the highest point it has been in over sixty years:
On the flip side, assets have been moderating relative to GDP since the Financial Crisis (a good thing!), so that is one positive development despite the rise in assets (please note the scale though on this chart - it’s not as big of a change as it may seem):
Where do people have their money though? Unlike before the housing bubble, it’s not in real estate:
It’s actually in equity…more so than during the dot-com bubble. This is concerning because stocks are more volatile than real estate prices. And, with households so leveraged, we’re talking about volatility on volatility.
So, consumers are very exposed to swings in their net worth right now, which is not good for mental health and consumer spending stability (70% of the economy):
Furthermore, income has not kept up with net worth, so it is going to be more difficult to just “earn away” any potential drops in net worth:
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