$6 Trillion Down, $33 Trillion To Go

US households saw their net worth decline by more than $6 trillion in just three months during the second quarter. In absolute terms, it was the single largest one-quarter wealth shock in American history.

Fed data released Friday showed household wealth in the US dropped by $6.099 trillion during the period, as losses tied to a bear market in stocks more than offset another blockbuster quarter for property prices.

The decline eclipsed the wipeout catalyzed by the onset of the pandemic (figure below), although when calculated as a percentage of the total at the time, the pandemic drop was larger.

Thanks to a record $1.7 trillion gain in real estate values during this year’s first quarter, overall household wealth barely retreated despite a near $3 trillion loss in Americans’ equity holdings. In Q2, by contrast, the depth of the stock rout easily overwhelmed gains seen across other assets.

The cumulative gain since the second quarter of 2020 was trimmed to “just” $33.43 trillion. The Fed now realizes that massive windfall contributed to inflation. Knowing they can’t solve supply chain problems, drill for oil, produce natural gas, grow wheat or mediate a ceasefire in Ukraine, policymakers believe taking back a portion of America’s accumulated wealth gains is among the most expedient ways to cool price growth.

Remember: The surge in household wealth worked on both sides of the equation. It helped drive up demand for goods and, later, services, but it almost contributed to early retirements, thereby exacerbating America’s labor shortage. Given the scope of the inflation overshoot and the extent to which mismatches in the labor market have the potential to embed a wage-price spiral in the economy, the Fed likely wants to destroy a meaningful portion of the pandemic wealth gains it helped facilitate.

If that’s true (and it most assuredly is) Q2 represented real progress. The value of household equities dropped a remarkable $7.72 trillion, more than the decline witnessed during the pandemic bear market (figure below).

In the first half of 2022, the value of Americans’ corporate equity holdings plunged by almost $10.7 trillion. At the peak late last year, the accumulated stock gains since Q2 2020 were around $23 trillion. As of June, they were $12 trillion.

The value of real estate logged another steep quarterly increase. The $1.4 trillion rise was the seventh consecutive quarterly gain of at least $1 trillion (figure below).

Although the pace of home price appreciation has slowed sharply, almost no one currently predicts a collapse, even if many are now belatedly on board with the idea that prices may decline nationwide, not just in select locales.

The Fed has repeatedly referenced the slowdown in housing market activity as evidence that rate hikes are cooling the economy. After a reprieve that accompanied a pull back in Treasury yields, mortgage rates are back to the highest levels seen since the financial crisis.

At this point, I’ve exhausted my capacity to paraphrase myself while documenting the Fed’s quarterly update on household wealth. Rather than try, I typically recycle a set of familiar talking points, on the way to citing a prescient passage from the incomparable Zoltan Pozsar who, in February, warned that the Fed would likely attempt a controlled demolition of household wealth gains.

Soaring stock and home prices minted countless American millionaires, even as the property boom put homeownership out of reach for countless millions of Americans. It’s now painfully obvious that showering money on homeowners and stockholders compelled a meaningful number of people to consider exiting the labor force — some of them permanently. At the same time, all that free money contributed to voracious demand for consumer goods, juxtaposed with a broken global supply chain.

Although it’s impossible to precisely quantify the Fed’s role in America’s inflation crisis, it’s not difficult to document the channel through which monetary largesse contributed. It wasn’t “money printing,” per se. The Fed didn’t send out checks totaling $40 trillion. Instead, they flooded the financial system with liquidity and binged on mortgage bonds, in what amounted to a Bernanke flex on steroids. The result is illustrated in the figure (above), which also gives you some additional context for Q2’s stock-inspired drop.

“If something indeed happened to the supply of labor post-pandemic (and some of that is wealth related), then to cool price pressures, maybe a pre-pandemic wealth level is appropriate indeed,” Pozsar famously speculated in May. A few months previous, he wrote that,

If the young feeling Bitcoin-rich are less inclined to work and the old feeling mass affluent are eager to retire early, labor force participation drops to the detriment of real growth prospects. Maybe the path to slower services inflation — OER and all other services — is through lower asset prices. Volatility is the best policeman of risk appetite and risk assets. To improve labor supply, the Fed might try to put volatility in its service to engineer a correction in house prices and risk assets — equities, credit and Bitcoin too.

In the same February note, Pozsar suggested that soon enough, “the Fed will incorporate some version of this thought process,” extreme though the prescription seemed at the time.

Ultimately, he was correct. If he was also correct to suggest the entirety of the pandemic wealth gains need to go, you owe Jerome Powell another $33.43 trillion. Even after handing back $6 trillion in Q2.


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5 thoughts on “$6 Trillion Down, $33 Trillion To Go

  1. Is it really “correct to suggest the entirety of the pandemic wealth gains need to go”?? Rather, i would suggest that some portion…perhaps excepting some amount in line with healthy long term average increases…of gains measured against PRE-PANDEMIC.levels. Measuring vs. 2Q ’20 seems a bit like measuring my portfolio performance from the “Haynes Bottom” in 2009…

    1. You’re absolutely right. The way I present it is a straw man of sorts. The problem (as you alluded to) is that it’s hard to say what the “correct” portion should be, and really there’s no “right” or “wrong” answer.

      The only issue I have with measuring from pre-pandemic levels is that, if you recall, there was no shortage of “bubble” banter in February of 2020. 3400 SPX seemed very stretched at the time, so you could argue that something like 3000 SPX (i.e., pre-August 2019 trade war escalation peak) is more apt if what we’re trying to do is make a real dent without being draconian.

      The truth is, I have no idea what the “correct” amount is, so for these articles (i.e., the quarterly household net worth coverage), I usually just employ the straw man to make it “fun” (with the scare quotes there to acknowledge that wealth destruction isn’t actually enjoyable).

  2. Prior to the pandemic, the average 3 bedroom, 2 bathroom home in my area of Southern California cost about $750,000-850,000. About a year ago, the average price had risen to about $1.2 M. A couple of months ago, I looked at a projected value for my home on a real estate web-site, and it claimed my house was worth $1.6 M. (I nearly fell out of my chair laughing, as they have obviously never seen my home–it’s simply not worth that much!) A few weeks ago a very nice home in my area went up for sale at a cool $3.9 M (I don’t know what they were thinking, but imagine what that would have done to neighborhood comps?) It did not sell, and has since been pulled from the market. It would be nice to see the Fed somehow push real estate markets back closer to “normal” without collapsing the temple on its own head. How are young couples supposed to buy a starter home if they all cost $1 M or more?

    1. The last boss I ever had (so, almost a decade ago now, which feels surreal to say), had a mansion just outside of Manhattan which, at the time, was worth several million. It was just him and a giant poodle roaming around in there, which was just as hilarious at it sounds. He had a real theater (not just a “theater room”) and an absurdly overwrought home office that looked like the cockpit in the Millennium Falcon. I have no idea if he still owns that gaudy monstrosity, but if he does, he’s probably sitting on an eye-watering windfall given the location and the pandemic bubble.

      Then again, I read a couple of years ago in the press that he got married, and then quickly divorced. As any regular reader knows, I’ve never been married (or anything close to it), so I don’t know how the math works out, or what someone is entitled to if they marry into a house after the fact. That may have cost him his bubble gains.

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