By David Rosenberg, Gluskin Sheff From Business Insider

The excesses in markets are virtually without precedent, according to David Rosenberg, the chief economist at Gluskin Sheff.
For example, US economic growth is more dependent than ever on asset inflation, and financial assets now make up a near record of total household assets.

My recommendation is to take a good hard look at the charts below and come back and tell me that we are in some stable equilibrium. The excesses are remarkable and practically without precedent. This is not a commentary as to whether the economy is doing well or not well, or whether fiscal stimulus at this stage of the cycle will be impactful. It is to say the following:

The US economy has never before been so dependent on asset inflation for its success. The ratio of household net worth to disposable income has soared to a record 673%, taking out the 2006-2007 bubble high of 652% and even the dotcom peak of 612% posted in 1999. This surge in paper wealth has enabled the savings rate to decline to a decade low of sub-3%, a move that has made the difference between 3% growth and 1% growth in the real economy.

Financial assets now comprise a near-record 70% of total household assets. Past periods of such excess in the late 1960s (Nifty Fifty) and late 1990s (tech mania) did not end well. Where is Duddy Kravitz when you need him? We are in one of these rare periods of time when financial assets now exceed hard assets like real estate on household balance sheets by a three-to-one margin.

While US households did not participate in this cycle in classic mutual funds, they did so via passive ETFs and their exposure to equities has only been topped once before and that was during the tech bubble of the late 1990s. The equity share of U.S. financial assets is now up to over 36%, surpassing the prior cycle peak of 34% back in 2007; the share of total assets also is at a 17-year high of 26%.
This is not to say anything more than the elastic band looks extremely stretched and the charts below show that we hit similar peaks in the past just ahead of a turning point, and right at a time when investor complacency and bullish sentiment was around where these metrics are today.

I want to finish off this section with a question and a thought. The question is how can this possibly be viewed as the most hated rally of all time when US household exposure to equities has rarely been as high as it is currently. And the thought is merely a piece of advice to heed Bob Farrell’s rule #4 – exponentially rising markets usually go further than you think, but they do not correct by going sideways.

David Rosenberg is chief economist and strategist at Gluskin Sheff, previous chief North America economist at Merrill Lynch, and the author of the daily economic report, “Breakfast with Dave.” Follow him on Twitter @EconguyRosie.

Read the original article on Gluskin Sheff. Copyright 2018.

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