People say that trends and opportunities are defined by the difference between perception and reality. I will take this winter blog post as a basis to illustrate this on example. Let speak about wealth and consumption.

Wealth and consumption are friends, foes, neighbors and sometimes they sleep in the same bed. Wealth affects consumption. Consumption creates wealth. Wealth created by consumption affects consumption. And so one. We need just few numbers:

  1. The wealthiest 20% of U.S. population possess 90% of all financial assets (stocks, bonds and so one), 91% of non-financial assets and 65% of real estate equity
  2. The bottom 80% of population owes 50% of all debt
  3. The bottom 80% also make up 62% of all consumption

In order to make conclusions we just need to plug in some numbers:

  1. All equities are $7.86 trln (2004, we don’t need exact data for 2006)
  2. All non-financial assets $40 trln
  3. All housing equity $9.4 trln

Suppose that this year the change in values of those assets were (we don’t need exact numbers):

  1. All equities +10%
  2. All non-financial assets +5%
  3. Housing equity -10%

After we do just a little math we will find that total asset change this year was:

  1. The wealthiest 20% of population gained $0.7 trln on equities, $1.8 trln on non-financials and lost $0.6 trln on housing for a total gain of $1.9 trln
  2. The bottom 80% of population gained $0.08 trln on equities and $0.18 trln on non-financials. They lost $0.33 trln on housing equity – for a total loss of $0.07 trln!

The conclusion is simple. Wealth and consumption are disconnected now. Those who make up 62% of all consumption are losing wealth, but those who are gaining wealth this year do not consume that much. But wealth may not increase for a while without gains in consumption, as all those profits and valuations are derived, after all, from consumption.

Consumption has to drop and the wealth has to follow. It’s all as simple as that.