Household debt as an indicator of secular bull and bear markets

In my last post, I presented you with a bunch of data on debt levels broken down by sector of the economy (see “A brief look at the Asset-Based Economy at economic turns”).  I found it interesting that a secular pattern seemed to be at play when looking at the household debt charts.

Notice the three areas boxed in red on the chart to the right.


The chart measures the differential between the year-on-year change in household debt and nominal GDP.

The three areas show three distinct periods of household debt accumulation.

  1. 1951-1966. The first shows household debt changes generally outstripping nominal GDP by a wide but decreasing margin. This period coincided with a secular bull market in equities.
  2. 1966-1982. This second period is more volatile, but with the overall numbers lower.  In general, debt was accumulated less rapidly compared to the growth in nominal GDP. And when recession hit in 1970, 1974 and 1980, it induced a retrenchment (at least relative to nominal GDP growth). This period coincided with a secular bear market in shares.
  3. 1982-?. This last period shows an enormous increase in debt growth relative to GDP growth during the 1980s followed by minor retrenchment after the 1990-91 recession and strangely also in 1997 (could this be a butterfly effect to the Asian Crisis?). But after that it was off to the races right through the 2001 recession until mid-2007.  This period coincided with a secular bull market in equities.

The pattern seems to indicate that there is a relationship between debt build-up in the household sector and stock prices.  The build-up in debt relative to nominal GDP troughed in Q3 2008 at -0.4%. As of Q2 2009, the number was +1.2%.

I see this as evidence of the so-called Wealth Effect. The data suggest that the secular bear market may not have begun in 1998 or 2000 as I have generally believed. And they also suggest that, despite the recent rise in shares, a new secular bear market may have just started in 2007. I will be curious to see what the data look like for the second-half of 2009.


Z1 Data Series – Federal Reserve

  1. Reddweb says

    please check this article on latest consumer credit

    u mentioned short-term bullish, what is u r target for SP 1100s/1200s? thanks!

  2. doctorx says

    IMO the post WW II bull market in stocks arose from a DJIA with a 7% div yield, a single digit P/E and so many Graham and Dodd “net-net” stocks that in 1958 Graham found dozens of net-nets on the NYSE.

    When guns and butter came in under LBJ, ALL financial assets underperformed vs gold/oil.

    When the high interest rate policy and monetarism came in under Volcker, you will find if you do the math that from (say) 1980 or 1982 till now, a zero-coupon 30 yr T-bond outperformed stocks with less risk and volatility. If more fairly you substitute a high-grade corporate bond for the T-bond, the outperformance of bonds widens (the same if you take a high-grade muni).

    IMO researching this specific relationship is a waste of your valuable time. Consumer debt has been sold by the Merchants of Debt as part of the process of transforming wealth to the financial sector. It goes hand in hand with the ongoing reward to JPMorgan/Sachs of selling more and more debt (now governmental as for now the other sectors are constrained).

    IMO the healthiest thing for the country and our economy would be for debt on all levels to be reduced (per your companion post). If this were done in an organized way, it could be assoc w a major improvement in the business climate rather than the current trajectory of a better business climate for casino/crony capitalism. OR, other relationships could hold.

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