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Extra!
Mended portfolios havent healed bruised egos
Weve nearly recovered the amount of wealth lost to the bear market since 1999. But the last few years have left their mark: were more anxious and personal bankruptcies are soaring.
By Scott Burns
Sometimes you have to examine the whole enchilada.
We get that kind of data every three months when the Federal Reserve releases the quarterly flow of funds figures. In addition to showing where money has come from and where it has gone, the figures also show us something called the "consumer balance sheet," information on our collective assets, liabilities and net worth.
The most recent figures, released Sept. 9, tell us our condition at the end of June. They prove the Great Bubble is behind us.
The figures for net worth show two things clearly. Our net worth peaked at the end of 1999. And it bottomed about 12 months ago. Since then, we've been plugging ahead. A further increase of just 1.4% would take us back to where we were at the end of 1999. There is a good chance we'll see that, or better, when the third-quarter figures are released next January.
So why don't we feel better?
Were new to losing money
I found one answer in the Burns Library of Incredibly Musty Documents. Going back to 1950, I found a simple truth. We don't have much experience with major losses of money. We may have our ups and downs -- the S&L busts, the 1987 stock market bust, etc. -- but national declines in consumer net worth are very rare. In fact, there were only three in the last 52 years.- We had a tiny decline between 1961 and 1962, a period of weak stock prices. The decline, however, was insignificant -- about $5 billion on a $2 trillion net worth.
- We had another small decline between 1989 and 1990. We lost $22 billion on a $19 trillion net worth.
- We just had a more uncomfortable decline, shedding $3.8 trillion of the $42.2 trillion net worth we had at the end of 1999. Unlike the others, this one wasn't rounding error.
When you measure the declines, the last one was significant -- a whopping 9%. The other two were well under 1%. Significantly, while many remember the market crash of 1973-1974 as terrible, our collective net worth rose in the period. Ditto 1987 and its October crash. While ownership of individual corporate stocks fell slightly, mutual fund holdings actually rose during that year.
The bottom line: This is the first time in the entire post-World War II period that we've felt a real ding on our collective net worth. No wonder our psyches are bruised.
Were used to the good life
A closer look at the historic data, however, convinced me that we might be suffering from inflated expectations. Listen up and you'll understand why.
In the 1950s, our collective net worth grew at a 6.06% compound rate in nominal terms, 4.26% after adjusting for inflation. In the 1960s, the corresponding figures were 6.28% nominal, 3.38% real; in the 1970s, it was 11.11% nominal, but only 3.01% real; and in the 1980s, the growth in wealth was 4.5% nominal, but only 2.47% real.
The roaring 1990s took the prize. Net worth grew at 8.25% nominal, 5.55% after adjustment for inflation. It was the best decade in half a century, well over the 3.8% average annualized growth of all five decades.
Now let's ask an odd question.
Suppose the 1990s had been different? Suppose the growth in our net worth had simply reflected the 3.8% annualized rate for the half-century, where would we be? When you add the 2.7% inflation for the decade, our collective net worth would have grown to $35.5 trillion at the end of 2000. That's well under the $42.2 trillion of the 1999 peak.
More important, it's well under the $38.4 trillion of the 2002 bottom.
Does wealth cost more today?
Does this mean we have nothing to worry about, that we're a nation of neurotics being led around by an anxiety-driven press?
Hardly. Real people have lost real jobs, fortunes and retirements. As the old saying goes: "If your neighbor loses his job, it's a recession. If you lose your job, it's a depression." All of us are more anxious and uncertain than we were three years ago.
So here's a thought: Collectively, we are awesome creators of wealth. The price of creating that wealth, however, appears to be a rising amount of trauma and upheaval for individuals and families. One indication is the rising rate of personal bankruptcy.
I'd like to know what readers think about this idea. Has it always been like this? Or has there been a change? If there has been a change, what is it? Write me at: scott@scottburns.com. I'll report the consensus and disagreements, and ferret out our collective wisdom.
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