The U.S. is the King of Net Worth

The U.S. economy is the undisputed powerhouse of them all. Nothing says it better than the $170 trillion net worth of the U.S. private sector, and the fact that the market capitalization of U.S. equities is greater than the sum of all other global equity markets' market cap. The following charts provide interesting perspectives.

Chart #1

Chart #1 compares the market cap of the U.S. market against the market cap of all other equity markets. (I'm using Bloomberg's calculation, which excludes the value of ETFs and ADRs, so as to avoid double-counting.) The U.S. market cap just edges out non-U.S market cap, for the first time in the past 20 years.

Chart #2

Chart #2 shows the breakdown of the net worth of the U.S. private sector (households plus non-profit organizations). What jumps out to me is the fact that debt has increased by far less than financial and real estate assets. 

Chart #3

Chart #3 shows the net worth of the U.S. private sector adjusted for inflation. In real terms, private sector net worth has increased by 12,656% since 1952. A 13.66-fold gain in 72 years—annualized growth of just over 3.6% per year. And over the long haul, growth in real net worth has been relatively constant.

Chart #4

Chart #4 divides the data in Chart #3 by the population of the U.S. Per-person real net worth has increased by about 2.4% per year for almost 75 years. (The chart implies that the net worth of the average person in the U.S. is almost $500,000.)

Chart #5

To flesh out the implications of Chart #1, Chart #5 demonstrates that the overall leverage of the U.S. private sector has declined significantly since the Great Recession (2008-09), and is now back down to the level that prevailed in the early 1970s. This further suggests that the U.S. private sector is very financially secure on the whole. It's the U.S. government, of course that has been on a borrowing binge like the world has never seen.

Chart #6

Chart #6 details one measure of the evolution of the U.S. government's borrowing binge, which began in the wake of the 2008-2009 Great Recession. 

Chart #7

Chart #7 makes an important qualification regarding government debt. The true burden of debt is not the nominal amount (now $28.85 trillion, or about 96% of GDP), but the cost of servicing that debt (interest expense as a % of GDP). According to this latter measure, the burden of debt was much greater in the 1980s than it is now. Why? Because interest rates today are much lower.

Christmas treat: subscribe to Steve Moore's Hotline

Do yourself a favor and subscribe to my good friend Steve Moore's "Hotline" newsletter (you can see today's edition here). It's free and VERY informative.

Here's one item from today's newsletter:

1) Stop the Social Security Steal

As early as today, the Senate will vote on an absurd bill to give state and local government employees a $200B+ Social Security bonus.

Social Security runs out of money in 10 years and is on a course to insolvency.

But instead of fixing the finances, 62 senators - including many Republicans who pretend to be fiscal conservatives - are sponsoring a bill to raise monthly benefits for public employees, even though their complaints are phony. This group of workers ALREADY receives pay and benefits that are 30% higher than comparable private sector workers. Most are already eligible for supersized state pensions. Roughly 80% of government employees are Democrats and more than 90% of the political spending by their unions goes to defeat Republicans.

The bill (H.R.82) passed the House in November with 327 votes.

We are running $2 TRILLION deficits and Social Security has a $22 trillion unfunded liability, yet senators in both parties are voting to dig the hole deeper and move up by nearly a year the date when the SS trust fund runs out of money. They are hoping no one notices this swindle. WE notice.

Mr. President - stop the steal.

Headwinds and tailwinds

Optimism is on the rise, and valuations arguably are a bit stretched, so headwinds should prevail for the near term: watch out for growth disappointments and setbacks. DOGE can't eliminate bloated bureaucracies overnight, and when they do manage to cut some fat, the ranks of the unemployed will grow. Large-scale deportations could be especially painful. It will take awhile to remove redundancies from the public sector and relocate those resources to the private sector. 

Over the long term, tailwinds should prevail as the economy becomes more efficient, government spending cools, and tax and regulatory burdens ease, generating growth in the range of 4-5%.

Chart #1

Headwind: Private sector jobs growth (Chart #1) has been decelerating for the past three years, from a high of 6% to now a mere 1% a year. Public sector jobs growth will likely be heading to zero as DOGE kicks in. As a result, the economy is quite unlikely to experience a near-term boom.

Chart #2

Headwind: The Civilian Labor Force (Chart #2) consists of all those of working age who are either working or looking for work. The recent drop in growth likely stems from a slowdown in illegal immigrant crossings and increasing self-deportations ahead of Trump's plan to do both. 

Chart #3

Headwind: The unemployment rate (Chart #3) currently is very low, and unlikely to fall further. Deportations and government spending cutbacks may lead to some worrisome signs of impending recession in the months to come, but an actual recession is unlikely given very healthy corporate profits, a further relaxation of monetary policy, and abundant financial market liquidity. 

Chart #4

Tailwing: A recent survey of small businesses (Chart #4) shows a huge jump in optimism. As the green asterisks show, this has happened only twice in the past 50 years, and both times were immediately following Trump's election victories. Business owners see a friend in Trump, and his promise of sweeping deregulation is music to any business man's ears. Increasing business optimism should lead to a gradual pickup in jobs and investment.

Chart #5

Chart #6

Tailwind: Chart #5 shows the intriguing correlation between the level of real yields on TIPS and the value of the dollar which began back in early 2020. Higher real yields make the dollar more attractive, and vice versa. Capital has flooded into the dollar in recent years, as the Fed has tightened monetary policy and corporate profits have surged. Real yields are the best measure of how tight monetary policy is (higher real yields being tighter). Real yields are also driven by the strength of the economy, since it takes a strong economy to drive the profits necessary to pay real returns on investments. At the same time, strong returns to equity create competition for capital, and that tends to increase yields on bonds.

Chart #6 shows a big-picture, long-term view of the dollar's strength vis a vis two currency baskets. This is the best measure of the dollar's overall strength, since it takes into account changes in relative inflation between the U.S. and other major economies. By any measure, the dollar today is quite strong from an historical perspective. Strong currencies tend to beget strong economies.

Chart #7

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Tailwind: The November CPI report was good. As Chart #7 shows, inflation is not materially different from the Fed's 2% target. Shelter costs have single-handedly kept headline inflation from falling below 2%.

Chart #8

Tailwind: Chart #8 shows the pronounced but irregular decline in the shelter component of the CPI. As this continues, the gap between headline inflation and inflation ex-shelter costs should narrow. At a minimum, this all but precludes any near-term tightening of monetary policy while leaving the door open for more easing. The market fully expects the Fed to cut rates by another quarter point next week, but only expects moderate easing over the course of next year.