Earlier this week the Fed’s QE3 ended… and less than 48 hours later the Bank of Japan boosted its own bond (and stock) monetization program. The good news is that by now it is clear to everyone, including CNBC, that the world is so addicted to some form of global central bank liquidity injection that the mere thought of going without a monetary policy “flow” backstop can only last for a couple of days.
Why is that? That answer, by now, is also obvious: the “wealth effect”, i.e., the rich getting richer and leading to wealth inequality that surpassed the levels of either the pre-Great Depression days, and according to some, the pre-French revolution.
However, until now it was virtually impossible to quantify the “wealth effect” channel courtesy of the Fed. Overnight, however, JPMorgan did the math, and we now know. Here is JPM’s Nikolaos Panigirtzoglou with the explanation:
The decline in asset yields especially during QE3 created large wealth effects. Since the Fed’s QE started at the end of 2008 the PE multiple of the S&P500 index (12-month forward) went up by five points, from 10.5 at the end of 2008 to 15.5 currently. This PE multiple expansion is responsible for around 650 index points or 32% of the current S&P500 index level. Extending that to the total stock of US corporate equities ($29tr currently), it implies an equity wealth boost of $9tr.
Actually according to many the current PE, when one strips away the non-GAAP gibberish of the second dot com bubble and those hundreds of billions in recurring, ordinary course of business “one-time, non-recurring” legal charges for America’s criminal banks, is about 19, which means 9 points of S&P PE expansion, or about 1100 S&P points, which also means that virtually the entire increase since the lows of 2009 has been due to the Fed. Nuances aside, you get the message.
Similarly, the yield compression in property over the past few years also created large wealth effects. On our calculations the yield compression alone boosted US house prices by around 10% and US commercial property prices by around 20%. Applying this to total US housing universe of $22tr and a tradable US commercial property universe of $2.3tr, it implies a property wealth boost of around $2.5tr.
Indicatively, property is where the vast bulk of the “non-1%” wealth is located, suggesting that even its wealth channel itself has been abnormally levered toward those who own the vast majority of financial assets: less than 10% of the population.
Another way of showing this finding is with the Household Net Worth chart from the Fed’s quarterly Flow of Funds report. In it we find that of the $13.6 trillion increase in household net worth from the last bubble peak in 2007, when households had an aggregative wealth of about $68 trillion (mostly in financial assets), through the most recent, Q2 $81.5 trillion, $11.5 trillion is due to the Fed.
Finally, we doubt this needs to be highlighted, but in case anyone is still confused who was the only beneficiary of this surge in financial-related “wealth”, here it is again:
Household Net Worth Just Hit A Record High: Here Is Who Benefited
Since the end of the first quarter of 2009 — when the stock market bottomed — households’ collective net worth has increased by $26.5 trillion. More than 75% of that increase — $20.1 trillion — reflects the change in market value of assets. Gains in the value of real estate assets account for $3.6 trillion of that increase, while gains in the value of financial assets account for the rest.
Of various classes of financial assets, equities held directly by households increased in value the most over the last six years, rising in value by $9.2 trillion. Today’s Chart of the Day shows the cumulative gains in the market value of equities held directly by households.
Not that many households hold equities directly, however. (And it’s important to remember that the household data in the Z.1 report includes holdings of hedge funds, private equity funds and personal trusts.) The Fed’s 2013 Survey of Consumer Finances showed that just 13.8% of families held stocks directly in 2013, down from 17.9% in 2007 before the financial crisis. Our next chart shows the percentage of families with direct holdings of stocks by income percentile in each of the SCFs since 1989.
The share of all families holding stocks directly peaked in 2001, after the dot-com bubble. The share of families holdings stocks declined for most income percentiles from 2001 to 2013, even those families in the 90-100th income percentile.
Bottom line: the gains in net worth associated with holding stocks directly have been concentrated among a relatively small number of households.
* * *
We lay this out there just in case the Fed’s Chairperson Janet Yellen is again “confused” in the not so near future about the source of America’s record wealth inequality…