Fooling Investors For A Third Time

After being fooled by dot-com mania at the turn of the century, many stock investors vowed that they would not make the same mistake twice. So they turned to “can’t-lose” real estate. Of course, the housing bubble made fools out of many of the very same fortune-seekers.

Today, circumstances are more precarious. It is not stocks or real estate. It is stocks AND real estate. In fact, it is stocks, bonds and real estate – the assets that constitute record household net worth.

The “Everything Balloon” is not a figment of doomsayer prognostication. A little common sense tells people that household wealth cannot grow faster than an economy ad infinitum.

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Sure. With enough debt – with enough leverage — household wealth can outpace U.S. gross domestic product (GDP) for a period of time. And I have to acknowledge that this period has gone on far longer than I ever could have imagined.

Yet the ultra-low interest rate accommodation alongside years of quantitative easing (a.k.a. balance sheet expansion) has left the world incapable of functioning without extraordinary stimulus. Indeed, the Federal Reserve abandoned plans to raise overnight lending rates as well as reduce its commitment to reducing its balance sheet solely because the financial markets were free-falling in the 4th quarter of 2018.

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Does the recent risk asset rally alter the effervescent particulars? Hardly. If anything, it may be fooling more folks into believing that future financial market bailouts will work precisely when the S&P 500 plummets -19.9%. (Long live the “Fed Put.”)

Ultimately, however, household net worth is going to revert back to the mean growth of the overall economy. A corrective phase for the S&P 500 alongside pockets of price drops in Seattle real estate won’t do the trick.

The entirety of the major assets — stocks, bonds, and real estate — will find their way lower in revisiting the economic growth (GDP) trendline. The only question is… “When?”

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ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser ...

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