Thursday, March 12, 2009
Since the peak of global prosperity in 2007 until today, the value of global equities has dropped by $34 trillion, as shown in the first chart. The second chart shows the components of U.S. households' net worth as of the end of last year. Most of the $12 trillion decline in net worth has come from the collapse in equity markets, not real estate values. As of today's prices, I estimate that U.S. households' financial assets have declined another $6 trillion since the end of last year, putting the total wealth loss to U.S. households at approximately $18 trillion, and probably more if you figure that housing prices have continued to decline this year.
So in round numbers, and adding in the losses in real estate values outside the U.S., figure that the world has lost at least $40 trillion in wealth in the past 18 months, while U.S. households have lost about $20 trillion. This is pretty remarkable when you consider that the initial catalyst for this mega-decline was $1-2 trillion of subprime mortgage debt that went sour. And even after 3 years of housing price declines, real estate values in the U.S. have only declined by about $5-6 trillion from their peak.
How can the real estate tail wag the global equity dog? Real estate losses have been only a fraction of total wealth losses. Lots of paper wealth has vaporized, to be sure, but the physical assets (roads, machinery, computers, factories, office buildings) that make the global economy function are still very much intact. The physical size of the global economic appartus has surely grown over the past 7 years, hasn't it? (The market cap of global equities today is about the same as it was 7 years ago.)
It doesn't seem unreasonable to me to say that the equity market is exceedingly bearish on the prospects for the future, and/or there is something else, such as a major shift in the direction of U.S. fiscal policy, with its attendant surge in future tax burdens, that is to blame. I've been arguing for quite some time that equity valuations have been extremely pessimistic, and I continue to believe this. We don't need much in the way of good news for things to turn up.
Posted by Scott Grannis at 5:01 PM