The Grim Game: Bubbling Asset Prices And Stagnant Wage Growth May Signal Correction

The manager of one of Britain’s biggest bond funds has urged investors to keep cash under the mattress.

In the UK, the prices of nearly all assets – property, shares, bonds – have been rising for years. Just like the US!

Jed Kolko at Trulia has an interesting chart depicting the bubble in house prices, particularly in The West.

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But Kolko thinks that New York City and Washington DC home prices are correctly priced? Sorry Jed, they are in a bubble too.

Here is the Case-Shiller repeat sales index for the US and Los Angeles compared with average hourly wage growth. While Los Angeles is clearly pulling away from other US cities, even the US home price index is pulling away from average wage growth.

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And with US real GDP humming along at a dismal 1.9% as of June 16th, one can argue that the massive Fed stimulus with low GDP growth is a recipe for a systemic event.

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Although stuffing your mattress with cash might not be the best recommendation.

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Starting in 2008, The Federal Reserve has helped repress interest rates and benefit large investors. The Middle Class needs Harry Houdini to help them, not Janet Yellen.

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The Failed Middle Class Housing Recovery In One Chart (Maybe A Few More)

True, house prices have been rising across the USA since the housing bubble burst. But the “recovery” has not been equal across income levels. The wealthiest Americans are doing quite well, but America’s middle class has not recovered.

Something happened in late 2008 that has skewed the recovery towards the wealthiest Americans. In part, it was the massive ,monetary intervention policies of The Federal Reserve. In addition, there has been a philosophy in Washington DC of managing the economy through regulation and non-growth policies. For example. the Brookings Institute has a study documenting the decline in business start-ups.

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The result of The Fed’s massive intervention in financial markets coupled with government policies favoring one group versus another (see George Stigler’s regulatory capture) has resulted in corporate profits after tax growing substantially since 2009 while wage growth is less than half of corporate profit growth.

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As you can see in the above chart, hourly wage growth is less than half of what is was in 2007 while corporate profit growth is over twice that of hourly wage growth … and substantially higher than it was in 2007.

The result has been malaise in mortgage purchase applications.

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While the housing market has improved in terms of price, it has been a slow recovery for the middle class.

But as a consolation prize, the middle class can be a “Lebowski Achiever.”

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