It’s important to appreciate that owners in the world’s most expensive real estate markets are the same top 10% of households holding the bulk of global securities individually and through pensions, mutual and Exchange Traded Funds, as well as private equity. They also owe the most debt.
Equity exposure as a share of disposable income leapt above 55% by 2018 compared with less than 20% in 1989. This higher concentration makes net worth more vulnerable to falling asset prices now than in past cycles. (If you have not yet read The High Beta Rich, by Robert Frank, this is another great time to do so).
With 78% of North American workers reportedly living paycheque to paycheque, and 60% having less than $1,000 in savings, people holding the bulk of equities also drive big-ticket consumer spending in the world. It makes sense then, that it is typical for luxury spending–things like jewelry, boats, personal aircraft and all manner of services– to fall with equity prices.
Eighty-five percent of vehicles in North America are financed (loan or lease). While some might think that higher-income households pay cash rather than finance their autos, the data does not bear this out.
Those with top percentile incomes tend to finance more expensive vehicles and change them every 2-4 years. Thus, autos sales too are sensitive to downturns in equity markets. Similarly, rising equity markets encourage asset owners to borrow against their holdings to fund consumption and further asset buying, while market drops have the opposite effect—they are forced to pull in spending, sell assets and raise cash to pay down loan balances.
By 2018 security holders owed the most debt margined against their portfolios ever in history. Prior margin debt peaks occurred in February 2000 and August 2008, respectively six and four months before the market peaked each cycle. The mountain of margin debt still outstanding today portends unprecedented forced selling yet to come.
Cash liquidity in the financial system topped in 2017 and fell to cycle lows in 2018. Asset market booms typically end 1 to 2 years after global liquidity peaks, followed by a banking crisis 1 to 2 years after cycle troughs.
This bear market and global recession have considerably more forced deleveraging to run. Best to move ahead of the herd than panic with it.
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