Question: What is a bubble?
Answer: A bubble is trade in an asset at a price range that strongly exceeds the asset’s intrinsic value. Or it could also be described as a situation in which asset prices appear to be based on implausible or inconsistent views about the future.
Question: How do you know when you are in a bubble?
Answer: Gauge asset prices against a standard, foundational premise to determine if the price appreciation is warranted.
Lucky for us, the Federal Reserve provides exactly what is needed to show how unjustifiable current prices are against households disposable income. The chart below is all US household’s net worth (current value of all real estate, stocks, bonds, etc.) as a percentage of their disposable personal income (disposable income is what they have left to spend or save after paying their taxes). To round out the picture, I’ve added in the net growth in full time workers during each period, dramatically decelerating.
This post was published at Zero Hedge on Oct 17, 2017.