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.