The following chart shows the total net worth of households and nonprofit organizations divided by wage and salary disbursements.
Click to enlarge.
I now offer three different ways to look at this data. Keep in mind that they are just my opinions though.
1. We could simply return to the blue median trend line someday. I certainly don't see any reason why we couldn't. We can't blow bubbles forever. At some point, we'll simply run out of ideas.
If we do return to the median trend line, then the most likely outcome would not be that wages rose to justify the current net worth. Rather, I think the evidence would support the idea that net worth would fall relative to wages. One piece of supporting evidence is that the real yield on the 10-year TIPS is negative. Investors are now willing to lock in a small loss over the next decade for fear of what alternative investments may yield. Another piece of evidence that supports this theory is that housing prices are still falling. And lastly, contrary to popular opinion the stock market is not cheap. It has more than doubled from the bottom found just a few years ago. We're now in squeezing blood out of a turnip mode. Good luck on that one.
2. From 1974 through 2006 we were on an unsustainable exponential growth path (as seen in the red trend line). Many believed they could extrapolate it forward forever. Note that hindsight shows that it could no more be extrapolated forward starting in 2007 than it could be extrapolated back into the 1960s. This trend has failed both going forward in time *and* going backward in time. There's no getting it back.
3. I'm not a fan of technical analysis. It's just tea leaves and crystal balls to me. That said, there is a head-and-shoulders pattern in the data and I have shown it on the chart. The "head-and-shoulders" pattern is believed to be one of the most reliable trend-reversal patterns. If you do believe that technical analysis has merit, then make of it what you will. I'll stick to points #1 and #2 personally, which offer the same conclusion.
St. Louis Fed: Custom Chart
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