As a rule, Credit Growth drives Economic Growth. But that is not the case now. Credit growth is very weak, but the economy grew by 3% during each of the last two quarters.

Q: What then is driving the economy?

A: Asset price inflation.

Household Sector Net Worth jumped by $8.2 trillion between mid-2016 and mid-2017 to $96 trillion. And it has risen by an astonishing $41 trillion (75%) since the first quarter of 2009.

Quantitative Easing and ultra-low interest rates have pushed up the stock market and property prices, creating “Wealth” that has fueled economic growth.

But asset price inflation is a very unreliable source of economic growth; particularly when asset prices are as stretched as they are now. The Wealth to Income ratio has never been higher.

Moreover, the Saving Rate, at 3.1%, has only fallen this low during the peak of the NASDAQ Bubble and during the 2007 Property Bubble. Both these indicators are flashing warning signals that asset prices are overdue for a sharp correction.

That does not mean a crash is imminent. In fact, it is possible that asset prices will continue rising sharply. They often do spike higher near the peak of a bubble.

However, with Quantitative Tightening now beginning to drain money out of the markets, the risks of a selloff are clearly increasing.

When the correction comes, expect a recession to come with it.