The Primacy Of Income
Ever since the central banks became serial bubble blowers twenty years ago, household wealth has mostly been driven by asset price inflation:
But this has been a quixotic pursuit. Created by pulling tomorrow’s prosperity into today, these asset price bubbles are unsustainable, and invariably suffer violent corrections at their end.
So far, the central banks have responded to these corrections by simply doing more of the same, just at greater and greater intensity. To keep the current Everything Bubble going, the world’s central banks have not only had to more than quintuple their collective balance sheets, but have recently had to resort to the extreme (desperate?) measure of injecting the greatest amount of liquidity ever in 2016 and 2017.
History has shown us that the height an asset bubble reaches is proportional to the damage it wreaks when it bursts. Applying this logic, the coming pop of the Everything Bubble will be devastating.
So devastating that analysts like John Hussman forecast a 0% (or worse) total market return over the next twelve years:
Moreover, the primary driver and supporter of asset price appreciation over the past seven years, central bank easing, is now gone. For the first time since the GFC, the collective central bank liquidity injection rate (the solid black line in the below chart) is now net zero.
And plans to tighten much further from here have been clearly committed and communicated to the world:
As a consequence, we fully expect yesterday’s capital gains to become tomorrow’s capital losses. What goes up on thin-air money comes down with its removal.
And while this is going on, interest rates are suddenly exploding higher around the world after spending a decade at all-time historic lows:
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