This ratio signals recessions and inequality

In past articles I have reviewed sound models signaling the Fed’s money printing has made the economic expansion unsustainable. Those included Spitznagel’s Misesian Index, Shiller’s Cyclically Adjusted Price Earnings (CAPE) ratio, and others. I just discovered a new one, the ratio of asset prices to income.

I found the ratio in a report on inequality of wealth in the world published by the Credit Suisse Research Institute. Referring to the ratio, the report says on page six:

...the ratio is now at a recent record high level of 6.5, matched previously only during the Great Depression. This is a worrying signal given that abnormally high wealth income ratios have always signaled recession in the past.

Mainstream economists have learning disorder

After the onset of the Great Depression, many economists radically changed their views and adopted Keynes’ “revolution,” which was not a revolution but merely a resurrection of mercantile economics. Mainstream economists don’t understand that because they don’t take economic history in school. Keynesian economics dominated until the stagflation of the 1970’s.

Responding to their mistakes of the 70s, mainstream abandoned paleo-Keynesian economics and the profession split into the New Keynesian, monetarist and neo-classical schools of macroeconomics, though hard-to-kill paleo-Keynesian econ lives on in the writings of Nobel Laureate Paul Krugman. The three new schools rejected Keynes’ idea of having the state micromanage the economy through fiscal policy because they recognized it suffered from the three lags, cogitation, formulation and implementation. In other words, the state always shows up late to the economic “accident” because it’s slow to recognize the problem, slower to formulate policy and tardy in implementing the policy. As a result, fiscal policy tended to make things worse.

The bond market's head fake

The bond market fell this week, wiping out gains for the year. Some blame it on Mario Draghi’s comments after an ECB meeting in which he expressed indifference to volatility in bond markets. If it is true that Draghi’s statements motivated the selloff, it shows how fragile is an investing philosophy that is based solely on what central banks do. Such investors are terrified of rising interest rates but want to remain fully invested until the last bell. Of course, anyone investing in bonds or stocks at these altitudes should be as nervous as a long-tailed cat in a room full of rocking chairs.