Friday, September 18, 2015

Good news trumps bad news

Bad news seems more prone to get the headlines, whereas there's lots of good news that goes largely unnoticed. Some examples:

The bad news: this is the weakest recovery ever; the labor force participation rate has been falling for 15 years; productivity growth is dismally low; our national debt is at a post-war high of 72% of GDP; race relations have deteriorated; tax and regulatory burdens are suffocating the private sector; savers and retirees have been severely penalized by seven years of near-zero interest rates; the rule of law has been weakened by the emergence of the Imperial Presidency; crony capitalism (a euphemism for corruption in government) is rampant; the tax code is a nightmare; and transfer payments are at record-high levels that correspond to 20% of personal income and over 70% of federal spending.

The good news: despite all the bad news, household net worth is at an all-time high ($85.7 trillion), whether measured in nominal, real or per capita terms; households' leverage has fallen by more than 30% since the 2009 peak; the economy has been growing and jobs have been expanding for more than six years; 30-yr fixed mortgage rates are 3.84%, only 40 bps higher than their all-time lows of 2012; housing starts have increased by an annualized 15% rate for the past six years; the private sector has created over 4 million net new jobs since 2007; inflation has averaged only 2% for the past 10 years; and the dollar is still one of the world's strongest currencies.

Here are some charts which incorporate the data on Q2/15 household net worth released today:

Household net worth has reached an astounding $85.7 trillion. That represents an increase of almost 30% ($18.9 trillion) from the pre-recession levels of 2007. The increase was driven by a $16.7 trillion increase in financial assets, and it occurred—in very healthy fashion—alongside a modest reduction in liabilities.


After adjusting for inflation, household net worth now stands at a new, all-time high. That continues the long-term trend of annualized increases of almost 2.5% in real household net worth.

After adjusting for inflation and population growth, real per capita net worth is also at a new, all-time high of about $268K. 

Even if all this staggering amount of wealth were held by just a handful of people, it would still be the case that we all benefit from it. This wealth is the ultimate source of all jobs and our living standards. Because our economy can produce so much, so efficiently, the fruits of modern life (e.g., iPhones, air travel, clean water, abundant food) are available to virtually everyone. This is unequivocally good news.

As the chart above shows, all of the wealth gains have occurred against a backdrop of pronounced deleveraging on the part of the household sector. Leverage has been rolled back to the levels of the mid-1980s. Who says that deleveraging is bad for growth and prosperity?

The chart above shows the Fed's calculation of the average homeowner's percentage equity ownership in his or her home. Although still relatively low from a long-term historical perspective (it was over 80% in the early 1950s), it has rebounded significantly in the past six years. Households' real estate holdings today have just about regained their prior peak levels of 2006. You can almost hear the sighs of relief all across the country.


Lawyer in NJ said...

I think good news is, at least in part, a causality of the 24-hour news cycle, and the accompanying media fragmentation. That structural change has put the traditional media meme: "if it bleeds, it leads" on steroids, and has disproportionately impacted the financial media.

Benjamin Cole said...

Great post, one quibble: Interest rates today may in fact be artificially high.

The US government, and of course other governments, borrow money and pay interest. This set something of a floor for interest rates and provides "safe haven" for risk-averse investors.

It is true that one is entitled to a return on one savings, it is also true what is entitled to a loss on one savings in free markets.

Without government intrusion, it may be that today interest rates would be negative in the private sector for risk-averse Investments.

Thinking Hard said...

“One day everything will be well, that is our hope. Everything's fine today, that is our illusion." - Voltaire

Matthew Grech said...

Benjamin brings up an excellent point. And it underscores something that most simply can't understand or refuse to see: That despite a zero percent Fed funds rate, the Fed is still too tight. We see it in TIPS spreads, we see it in commodities prices, including gold, and we see it in the action of the PCE. As always, when these metrics move the way they have, the Fed is not meeting the demand for money. I know it's incredible when one looks at this situation juxtaposed against history, but there it is.

To see harmful inflation, we'd need to have a preposterous and continued mistake by the Fed, one that, for directional reasons, is highly unlikely to happen at this time.

Benjamin Cole said...

Mathew: I agree...the Bank of Japan id sticking with $55 billion a month in QE and IOER at 0.10% and 3% unemployment and they still do not have inflation.

This Fed is being far too timid and indecisive. They Fed could even be described as feeble and fearful. You would think an old lady was running the place.

steve said...

benjamin, you are truly THE most dovish of commentators! so may I assume that the only measure you care about re monetary policy is inflation? are you not concerned about ASSET inflation and can/has loose policy not affected this leading to "inequality" gap being artificially large? it would be nice if the MARKET could determine where short term rates should be as it does with longer rates. the fed has a distinguished history of error in determining latter.

Benjamin Cole said...

Steve--The Fed should be shooting for Full Tilt Boogie Boom Times in Fat City. I think prosperity is great.

On long-term rates, it is true that the market sets the level. On the other hand the federal government and other governments borrow long-term thus artificially boosting demand. And, there is FDIC insurance in place at banks, the provision of another artificial haven. It is a very open question whether interest rates would be negative now or not without federal intrusion. Interest rates are of course negative in parts of Europe.

One reason for the Fed to become expecially stimulative now: the US economy rarely goes this long without a recession, and we never seem to see the recession coming.

I am not concerned about asset prices, that is not a proper concern of the Fed anyway, and asset prices seem to be in a normal range.

As for inequality, I don't care much, but I do agree the policy of the US should be to pursue "labor shortages" and to legalize push-cart vending nationally.

If rich people make gobs of money under my policies, all the better.

Ramesh Pudhucode said...

Why is it German bonds rate is less than US treasuries.

Scott Grannis said...

Re whether the Fed is too tight: I don't see any signs of the Fed being too tight. Tight money is usually reflected in a very strong and rising dollar, very low and falling commodity prices, very high credit spreads (particularly swap spreads), a flat or inverted yield curve, high real interest rates and very low or negative inflation.

None of these conditions prevail today. The dollar has been relatively flat for most of this year, and it is apprximately equal to its long-term average relative to other currencies. Commodity prices are falling, but they are still very high from a long-term perspective (gold today is $1100/oz., in 2001 it was $250). Credit spreads are moderately elevated, but not seriously so, and swap spreads are very low. The yield curve is positively sloped. Real interest rates are unusually low. Core inflation is today equal to its 10-year average (~1.5-2%).

marcusbalbus said...

trite rehash of all the same old stuff.

amritsari said...

"race relations have deteriorated" = black folks are protesting too much.
"imperial presidency" = why hasn't congress stopped Obama from doing anything.
There, I simplified your English.
Stick to investing. You are good at that, not socio-political analysis.

Russ Kyncl said...

Scott- Thanks again for your perspective, and for the work you put into summarizing this information.

Scott Grannis said...

Thanks, Russ!

Jarrod Bailey said...

Thanks Scott for your analysis and thoughts on such a regular basis. Your reasoning is first rate. You stick to you indicators and don't 'cherry pick' after the fact to try and retroactively support your views. Your insight into the markets is excellent and I look forward to reading it when you publish.

Thanks again for providing it. There are many out in internet land who value it!



Scott Grannis said...

Jarrod: thank you!