Monday, December 9, 2013

Household balance sheet recovery continues

The net worth of U.S. households hit a new all-time nominal and real high of $77.3 trillion last September, after having risen by $7.65 trillion or 11% over the previous 12 months. Most of the gains in recent years have come from rising financial asset prices, with assists from rising real estate prices and stable to declining debt. It's been a long and difficult recovery, but a recovery nonetheless. 



It's not just the U.S. that has recovered significantly. As the chart below shows, the market cap of global equities has surged $35 trillion since March 2009. This is a global recovery of epic proportions.


Of course it's also true that the U.S. recovery has been the weakest ever. Household net worth should be much higher by now, and many millions more people should be working. The problem? The economy is facing formidable headwinds: high marginal tax rates on income and capital, unprecedented regulatory burdens (e.g., Obamacare, Dodd-Frank), unprecedented efforts to redistribute income, and unprecedented monetary policy uncertainty. In short, there is a lot of bad news out there that has obscured the otherwise significant economic and financial market recovery in recent years.

I take a "glass half full" approach to the headwinds and the bad news. If we're doing this well despite all the negatives, just imagine how much better things could be if these headwinds and uncertainties abated. There is a fantastic amount of upside potential that could be unleashed with the right policies.

Meanwhile, it is of great comfort that policies are not getting worse. The burden of government spending has actually been declining: federal spending has not increased at all for the past four years, and has therefore declined from a high of 24.4% of GDP in 2009 to less than 21% today. As Milton Friedman taught us "spending is taxation," so the relative decline in spending has reduced significantly our expected future tax burdens. The federal budget deficit has plunged from a high of 10.2% of GDP in 2009 to less than 4% today, and that means it will be very difficult for anyone in Washington to argue for higher tax rates.

I continue to believe that Obamacare is so fundamentally flawed (and operationally flawed as well) that it will not survive. Every day that goes by we learn of more and more serious problems: 7 out of 10 doctors in California are opting out of the exchange networks; the potential for fraud is enormous; students are finding out that Obamacare is a bad deal and are opting out; Democrats are increasingly worried and distancing themselves from Obama; more and more people are losing their existing policies and facing higher premiums and higher deductibles, in addition to losing their doctors. Not to mention Obama's oft-repeated pledge that none of this would happen. These are deep-seated problems that cannot be easily fixed and will likely only get worse. It's a political and policy nightmare for an administration that has "amateur hour" written all over it.

If Obamacare goes down in flames, so will the left's dreams of an ever-expanding state. Free market policies are most likely the only thing that can fill the gap, and that would be very good news indeed.

I'm reminded of a post from August '12, in which I recited the litany of woes that were keeping investors awake at night, which in turn implied that the key risk that investors faced was not the risk of something going wrong, but rather the risk of something going right. I think that argument still holds today.


15 comments:

steve said...

never underestimate the duplicity of Obama. he'll figure out some scheme to keep his signature program alive while in office. he may not be competent but he is unmercifully sly.

William said...

OECD Composite leading indicators (CLIs), designed to anticipate turning points in economic activity relative to trend, show signs of an improving economic outlook in most major economies.

The CLIs point to economic growth above trend in Japan, and to growth firming in the United Kingdom. The CLI for Canada indicates a positive change in momentum. In the United States, the CLI points to growth around
trend.


In the Euro Area as a whole, in France and in Italy, the CLIs continue to indicate a positive change in momentum. In Germany, the CLI points to growth firming.

In the emerging economies, the CLIs point to growth around trend in Brazil and to a tentative positive change in momentum in China, Russia and India.

http://www.oecd.org/std/leading-indicators/CLI_Eng_Dec13.pdf

William said...

ECRI Weekly Leading Index Rises

A measure of future U.S. economic growth strengthened last week to its highest level in three and a half years, while the annualized growth rate ticked higher.

The Economic Cycle Research Institute said that in the week ended Nov. 29 its Weekly Leading Index rose to 132.8, its highest since April 2010. The index's annualized growth rate increased to 2.9 percent, its highest since early October.

http://www.businesscycle.com/ecri-news-events/news-details/economic-cycle-research-weekly-leading-rises-11

William said...

Economist ED Yardini had a discussion of the ECRI WLI and the Conference Board's Leading Economic Indicator with a chart comparing them back to 1973 entitles: "US Economy Back in the Fast Lane?"

http://blog.yardeni.com/2013/12/us-economy-back-in-fast-lane-excerpt.html

Hans said...

This is an economy lead and feed by the Central Bank and I shall continue to believe dat until it and it's fellow ICB begin selling their asset hoard...

This not withstanding the horrible impact Socshevik policies have on productivity and the free markets.

The great recession followed by the phony recovery...

Hans said...

This just buttress my case:

http://www.realclearmarkets.com/articles/2013/12/09/the_facts_are_in_more_government_means_less_growth_100783.html

Benjamin said...

Actually, the USA economy has faced much higher marginal tax rates (90 percent tops) and regulations (rates regged in transportation, telelcommunications, and finance). In the 1960s.
Egads, remember Reg Q? How about Ma Bell? Or pretty stewardesses. Regged trucking rates?

Or big unions, Big Steel, No foreign trade?

So things are better now.

I dislike Obamacare, and the 12 million vets and SSDI'ers collecting disability and the several million more on unemployment.

But, really all that could be overcome with an aggressive, pro-growth fed policy. Until we see inflation north of 3-4 percent, the Fed should be kicking down the money doors.;





William McKibbin said...

According to Scott, "The economy is facing formidable headwinds: high marginal tax rates on income and capital, unprecedented regulatory burdens (e.g., Obamacare, Dodd-Frank), unprecedented efforts to redistribute income, and unprecedented monetary policy uncertainty."

All of these problems can be solved by collapsing Federalism and forming three independent nationstates -- a west coast power lead by Sacramento, CA -- a Gulf coast power lead by Austin, TX -- and a northern tier power lead by Washington, DC. A major attraction of dividing the nation into three separate countries is that the west coast and gulf coast powers would begin in a debt-free status, while the northern-tier country would be saddled with vast debt and entitlement obligations that would no doubt elevate the notion of default -- conversely, the new west coast and Gulf coast powers would have to contend with how to create (or not) social welfare programs for the retired, disabled, and indigent -- I suspect that the Gulf coast country would become the epitome of "rugged individualism", while the west coast country would become a socialist nation -- but, who knows.

I see no hope of economic/political reform in the USA today -- none whatsoever...

William McKibbin said...

PS: It's easy to imagine how the west coast nation would create strong ties with Asia, the Gulf coast nation would develop strong ties with Latin and South America, and the northern tier nations would continue its efforts to sustain its banking hegemony over the rest of the world -- let me add that no one can predict the future, but if we search our hearts, we can all see the viability of separatism in North America -- we will all have to watch and learn.

PPS: Investors with internationally diversified portfolios of dividend and rent-earning equities would thrive under the above scenarios -- of course, the bond market as we know it would be wiped out, which is fine with me.

William McKibbin said...

PPPS: I can also imagine how the new west coast country would endorse a "BitCoin" currency, the Gulf coast country would embrace a commodity-based (e.g., precious metals) currency, and the northern tier would country would continue to foster expansion of Federal Reserve dollars -- the currency, debt, and entitlement pieces would be the driving forces at the heart of what would become powerful separatist movements lead by populists...

Hans said...

Why is not the Net Worth chart adjusted for inflation.?

Joseph Constable said...

I have been advocating the split up of the USA since 2008. I agree the northeast get the banks and the debt. California gets the Mexicans on welfare. I think New England will form its own country as well as the mid-west. The Southeast will go with Texas. Texas, the Southeast, and the gulf states will inherit the military.

The only thing I don't like is that the people in the eastern parts of Washington, Oregon, and California get screwed as they won't want to go with the new West Coast country. Perhaps only the coastal counties and those liberal counties that reach inland should be included.

We are a nation of vastly different cultures.

William said...

@Joseph Constable - did you read this article: In which of the 11 North American nations do you live? It's very interesting and helps explain the point you made.

http://www.washingtonpost.com/blogs/govbeat/wp/2013/11/08/which-of-the-11-american-nations-do-you-live-in/?tid=pm_pop

Hans said...

Dr McKibbin, has been drinking too much holyday egg nog!

Joseph Constable said...

Thank you William for the link to that Washington Post article.

It gives me conviction that the U.S. should hold one massive election by county as to what country they want to live in.