This Stock Market Growth is all a Mirage

He is very wealthy.’

That’s how people would usually describe a businessmen I used to cross paths with, often while I lived in Spain. Let’s call him John.

You would always see John driving flash cars, wearing nice clothes and expensive watches. You could spot him at every trendy restaurant. He was the life of the party.

He was a fixture at every major event. His photo was a constant in every magazine’s ‘society’ section, always surrounded by the rich and famous. He always seemed to be at the right place at the right time.

Looking at John’s lifestyle, one could only assume that he was wealthy, very wealthy.

But John had a secret. You see, it was all an illusion.

It turns out John lived in a very modest apartment. He funded his luxuries with debt. And, once his debt ran up too high, his whole lifestyle came crashing down.

The reason why I bring this up is because Credit Suisse has just released their Global Wealth Report.

In the 12 months to mid-2018, global wealth has increased by US$14 trillion to US$317 trillion. This 4.6% higher than the average growth since 2008.

The US has accounted for much of that growth. As Credit Suisse wrote:

The United States continued its unbroken spell of wealth gains since the global financial crisis, adding another USD 6 trillion to the stock of global wealth. China and Europe also made significant contributions to the new record level of global wealth, which is equivalent to USD 63,100 per adult. […]

[A] prominent feature of the world wealth outlook this year is the seemingly relentless rise in household wealth in the United States. Total wealth and wealth per adult in the United States have grown every year since 2008, even when total global wealth suffered a reversal in 2014 and 2015. The United States has accounted for 40% of all increments to world wealth since 2008, and 58% of the rise since 2013.’

What’s behind all that growth in the US?

Financial assets suffered most during the financial crisis and recovered better in the early post-crisis years. They continue to make a substantial contribution to growth of house-hold wealth, accounting for 41% of the increase in gross wealth worldwide, and more than two-thirds of the rise in North America.

However, non-financial assets have grown faster in recent years. Over the past 12 months, they have provided the main impetus to overall growth in all regions except North America, accounting for more than 75% of the rise in China and Europe, and all of the rise in India. Household debt rose even faster at an overall rate of 7.1%. According to our estimates, debt increased in all regions except Africa and achieved double-digit growth in China and India.

North America added USD 6.5 trillion to its stock of household wealth in the last year, almost all in the United States, which accounted for USD 6.3 trillion. Europe contributed an additional USD 4.4 trillion, China USD 2.3 trillion, and Asia-Pacific (excluding China and India) almost USD 1 trillion.’ 

The stock market has provided for much of the growth. But, much as John’s story at the beginning, this is all a mirage — a sham.

We didn’t really get over the 2008 financial crisis. Instead, central banks around the world decreased interest rates and pumped in a lot of money to keep the economy going. This has fuelled the recovery.

If you want to protect your family wealth, you need to know why this financial expert is predicting economic collapse. Find out more.

Yet these unconventional monetary policies have resulted in ballooning central bank balance sheets, as you can see below:

Central bank balance sheets

Source: Bloomberg

[Click to open in a new window]

They have also inflated asset prices all over the world.

There are property bubble warnings everywhere: Hong Kong…Canada…London…Australia…

And markets have been feeding on optimism. Below is a graph from the S&P 500 for the last 30 years. Can you honestly tell me that this ‘growth’ looks sustainable to you?

S&P 500 Index

Source: Yahoo finance

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Much of the crisis back in 2008 was caused by debt. Since then, asset prices have been increasing but salary growth has been meek. Which means that people have had to fund asset purchases by taking on more debt…debt that has conveniently remained cheap, with interest rates low.

As you can see below, in the last 15 years debt has almost doubled in all areas of the economy to reach almost US$250 trillion:

Bar graph of the debt snowball

Source: Bloomberg

[Click to open in a new window]

Yet now the tide could be changing.

Interest rates are rising. The Fed is continuing on their path to rate hikes, which will eat up company profits and will make that mountain of debt that has been fuelling our lifestyles more expensive.

Which could mean that all that ‘wealth’ could soon evaporate.

Best,

Selva Freigedo,
Editor, Markets & Money

PS: Author and economist Harry Dent thinks the next economic upheaval is very much at our doorstep…and he has a chilling warning for Australians. To find out more click here.


Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.


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