There’s no safe place to hide from the consequences of the biggest bubble yet, this economic expert says
Today the United States sits in the midst of the largest wealth bubble in post-World War II history, as measured by household net worth relative to gross domestic product. As I showed in detail recently in the Journal of Business Economics, only two other postwar bubbles come close, with peaks in 1999 and 2006, just prior to the tech stock crash and the Great Recession.
If valuations stay at current high levels, the expected return is closer to today’s 0% to 2% real interest rate on bills and bonds or a 5% earnings rate on corporate stock, but not the 7% or 10% total returns on a diversified portfolio many people have become used to receiving. Many conventional theses associate the 1999 bubble with tech stocks and the 2006 bubble with owner-occupied housing. True, those markets were at the forefront of asset appreciation just prior to the two recent recessions with which they are associated, but, more generally, appreciation stretched across most asset markets during those times.
But it doesn’t tell us what to do when we have a unique situation. We’ve had only two other sets of data points in which we reached a peak near to this one. And they both involved a crash. Those investors who came out best in those prior cases were those who did diversify more into safer assets during the peak appreciation period.
By limiting downturns in wealth valuations to new and higher plateaus, monetary and fiscal authorities may have made investors more secure and added to risks in new ways.
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