The Wealth Effect

This morning I would like to take a moment and offer some updated context for what many are (hopefully)experiencing. Perhaps you’ve heard of the concept known as The Wealth Effect. Here’s a definition from Investopedia:

Jun 26, 2019 – The wealth effect is a behavioral economic theory suggesting that people spend more as the value of their assets rise. The idea is that consumers feel more financially secure and confident about their wealth when their homes or investment portfolios increase in value.

The Wealth Effect has deep roots which have been cited by Fed officials in the (not too distant)past and drive their actions to this day. 

For example, Ben Bernanke, former Chairman of the Federal Reserve on November 4, 2010 after 2yrs of the Great Financial Crisis had past:

…With short-term interest rates already about as low as they can go, the FOMC agreed to deliver that support by purchasing additional longer-term securities, as it did in 2008 and 2009. The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August. 

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate this additional action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion… 

I mention this as we’ve recently gotten an update from the Federal Reserve showing household net worth INCREASED by $7.6 trillion (6.8%) up TO $119 trillion … This would be the biggest quarterly gain since records began (1952). The data comes from the Federal Reserve (Z.1 Financial Accounts of the United States HERE)

Z.1 Financial Accounts of USA -- household net worth
household net worth experienced a record QUARTERLY gain of $7.6tril (click to enlarge)

This is both the GOOD news and the bad news, as this globally coordinated central banking EVERYTHING bubble can be viewed in context OF percentage OF GDP …

The Wealth Effect; household net worth as percentage of GDP
The Wealth Effect in context … the EVERYTHING bubble — CLICK IMAGE to enlarge

This will make it very difficult for the Fed to raise rates in the future as the risks (low rates have influenced not ONLY the debt markets but also housing markets as well as equities) of HIGHER RATES may outweigh their benefits, given the increasing sensitivity TO low rates.

And so, the good news (lower rates translating into a global bubble of everything, ie a higher Wealth Effect) can at some point raise concerns of becoming the bad news SHOULD the Fed ever need to increase rates. And while that day will come, it will most likely NOT be any time soon…In the meanwhile, stay safe and in touch with your Etico advisor who is prepared to help navigate these choppy waters!

Steven J. Feiss

Managing Director, Fixed Income

Etico Partners, LLC

1795 Rout 9 Clifton Park, NY 12065

Office: (732) 683-9222
Mobile: (914) 450-9668

Meet the Author

Financial markets veteran with more than three decades of experience working with high profile, domestic and international asset managers and trading desks, producing customized and actionable solutions for strategic alpha generation and risk mitigation. Author of a unique daily (6x per week) cross-asset macro market commentary (the BondBeat) to inform and assist INSTITUTIONAL FIXED INCOME investors and trading desks.