Monday, October 14, 2019

Net worth and risk aversion

Recent releases of estimates of households' balance sheet and financial burdens (as of June '19) reveal that net worth continues to rise at the same time that households' leverage continues to decline. This bears repeating: asset values are rising, but risk aversion remains strong, and that's quite healthy.

Chart #1

As Chart #1 shows, the net worth (total assets less total liabilities) of the US private sector (households plus non-profit organizations) in June 2019 reached the staggering sum of just over $113 trillion. That's almost double what it was at the depths of the 2008-9 Great Recession and almost 60% above what it was at its 2007 peak, according to the Federal Reserve. This was achieved as a result of strong gains in every category of assets: savings accounts, stock and bond holdings, real estate, and privately held businesses. What is perhaps most remarkable is that liabilities today have increased by only $1.5 trillion (10%) from their 2008 high.

Chart #2

As Chart #2 shows, for the past several years, the inflation-adjusted level of household net worth has increased by an amount that is very much in line with its historical trend: about 3.6% per year.

Chart #3

Chart #3 adjusts the data in Chart #2 for population growth. Here, too, we see that recent gains in real per capita net worth are very much in line with historical trends (about 2.4% per year). If there's anything unusual about this, it is that these gains have come despite the fact that the current business cycle expansion has been the weakest ever. Fortunately, it seems that unusually strong corporate profits have offset relatively weak growth, thanks largely to globalization, as I discussed here.

Chart #4

Chart #4 shows the ratio of recurring financial obligation payments to disposable income. Thanks to modest increases in liabilities and lower interest rates on debt, the true burden of household debt has declined significantly. Household financial burdens today are lower than at any time since the early 1980s.

Chart #5

As Chart #5 shows, household leverage (total liabilities as a % of total assets) has declined almost 35% since its high in early 2009, and has returned to levels not seen since the mid-1980s.

Chart #6


In my last post, I mentioned that recessions typically follow periods of excesses. The only "excess" that's obvious today is federal debt, which has risen to 78% of GDP, as shown in Chart #6.

But that's deceptive.

As an astute reader ("Cliff Claven") recently pointed out, the true burden of debt must take into account the amount of interest being paid on outstanding debt relative to GDP. Debt outstanding is quite high relative to GDP these days, but interest payments on that same debt are relatively low, thanks to historically low levels of interest rates. Federal debt interest payments this year will total about 2% of GDP, well below the all-time highs of 3% reached in 1991, according to the Office of Management and Budget (see Chart 4.05 on the aforementioned link). This may worsen, of course, if interest rates rise. But rising interest rates would probably be accompanied by faster growth and/or higher inflation, which in turn would increase nominal GDP, and that would mitigate the burden of rising interest rates. Moreover, faster nominal GDP growth would likely boost tax revenues.

In short, while federal debt looks bad on the surface, in reality we are far from facing a disastrous situation.



14 comments:

steve said...

And voters would change these conditions by embracing draconian policy of Lizzie Warren? I just don't believe it. There was an interesting piece in the WSJ a few days ago about 19 counties that correctly "called" every presidential election since 1980. That's 6 GOP and 4 Dem. On average, all the counties were rural and below average in education. Classic Americana. In order for the Democrat to win they'll have to convince these voters to turn 180 degrees AWAY from what brought is here. Barring something that I can't see right now (recession?) I just don't see it.

Todd said...

Does your chart 6 plot of debt burden include social security, Medicare, etc.? I don't believe so. If not, what is the impact of those burdens? I wonder if we're in worse shape than chart 6 implies. Thanks.

Scott Grannis said...

Todd: The blue line in Chart #6 is the result of dividing Federal Debt Held by the Public by nominal GDP. That measure of debt is currently $16.8 trillion, and it can be found here: https://www.treasurydirect.gov/NP/debt/current. There is another measure of debt called Total Public Debt Outstanding, and that is currently $22.8 trillion. The latter measure of debt is flawed, however, because it includes Intergovernmental Holdings, which primarily consists of money that has been borrowed from Social Security. Debt held by the pubic is the true measure of the debt that the federal government owes to the rest of the world. Debt owed to Social Security is an accounting fiction, since all Social Security revenues go into the same federal account from which all expense are paid.

Benjamin Cole said...

Great post.

The question of federal debt continues to amaze me. Like a Mobius strip.

A Mobius strip obviously has two sides, but then it does not.

If interest rates fall to zero on US treasuries, then what is difference between cash and Treasuries?

The Federal Reserve recently digitized a couple hundred billion dollars and bought short-term Treasuries, and plans to buy another $60 billion a month for a few more months.

The markets do not seem to care. The Federal Reserve can evidently by back trillions of dollars of US Treasuries with scant effect on the economy, inflation or interest rates.

So, the federal debt does not strike me as much of a problem.

The Cliff Claven of Finance said...

An analysis of households without an analysis of government debt and corporate debt is incomplete and also data mining.

I disagree that risk aversion is low -- it is as high as it has even been.

The only exceptions are in 2006, when real estate valuations were higher than today.

And in 2000, when large cap technology stock valuations were higher than today.

For the median stock, the valuations today are unprecedented -- they have never been higher, using valuation measures that have consistently predicted ten year stock market returns, over many decades. The P/E Ratio is not one of them, although the Shiller 10 year P/E Ratio is decent.

So I guess we have a "slight" disagreement here.
Based on my "unbiased" analysis, I have decided that
I'm right and you are wrong !

And who is that model that you hired to hang
all over you in your official picture?
Your daughter ?
.
.
.
Mr. Grannis wrote in a comment:
" ... all Social Security revenues go into the same federal account from which all expense are paid."

That's not true for SS or for Medicare tax revenues.

SS and Medicare tax revenues, and Medicare fees, go to separate "trust" accounts.

And the trustees of those separate accounts write annual reports.

I used to read them, believe it or not.

In the good old days, the SS trust account had a surplus, so that money was invested in non-marketable Treasury bonds which actually paid "interest" to the trust account.

Only lawyers and politicians could have come up with this convoluted scheme.

A much more important point is that SS taxes NO LONGER (probably for the past decade) cover 100% of SS spending, so additional money is required from the "Federal Goobermint".

That's also true of Medicare, but Medicare expenses were never intended to be 100% covered by the Medicare taxes and fees.
.
.
.

Mr. Cole:
High levels of federal debt as a percentage of GDP are associated with low rates of economic growth, based on studies of many nations, over many decades.

High levels of deficit spending also encourage excessive government spending -- spending on things the taxpayers would NEVER be willing to pay for with higher taxes.

Deficit spending is a major factor in the growth of government spending because it feels "painless" to the taxpayers.

The Trump Administration and Congress may be the worst offender in US history -- the current deficit is unprecedented at this point in the business cycle, after ten years of economic growth, and with a very low unemployment rate.

Trump spends money like a drunken sailor on shore leave ( just like Bush and Obama ! )

The Cliff Claven of Finance said...


I wrote;
"I disagree that risk aversion is low -- it is as high as it has even been."

I meant to say risk aversion is very low,
and as low as it has ever been

Mac said...

Scott says "As Chart #5 shows, household leverage (total liabilities as a % of total assets) has declined almost 35% since the mid-1980s."

Can you walk me through that? Didn't you mean to say it has returned to levels not seen since the mid-80s? And 35% down from recent highs?

Scott Grannis said...

Mac: thanks for spotting that error. I've edited the sentence accordingly.

Mac said...

Glad to have helped. Really enjoy your writing

Tom Nugent said...

Why do analysts continue to dwell on federal debt? According to the Federal Reserve Bank of St. Louis, "total public debt to total government financial assets has decreased by 27% since 2004; with debt increases of 192% being offset by asset increases of 300%." If we had both sides of the federal balance sheet to look at, the story would be very different. If growing federal debt was such a bad thing, why are inflation and interest rates so low?

randy said...

The team at Ken Fisher's firm are apparently reading this blog. Smart.

https://www.fisherinvestments.com/en-us/marketminder/headlines


Net Worth and Risk Aversion

By Scott Grannis, Calafia Beach Pundit, 10/16/2019

MarketMinder’s View: First, a caveat: These data are as of June 2019, and they won’t tell you much about what is to come. However, we found these charts illustrative since they show US households’ finances are in fine shape, overall and on average. Households and nonprofits’ net worth is “almost double what it was at the depths of the 2008-9 Great Recession and almost 60% above what it was at its 2007 peak, according to the Federal Reserve. … Thanks to modest increases in liabilities and lower interest rates on debt, the true burden of household debt has declined significantly. Household financial burdens today are lower than at any time since the early 1980s.” We think this is worth keeping in mind the next time concerns of over-indebted US households pop up, as they have throughout the decade-long expansion. The closing discussion of federal debt is spot on, too: Debt’s sustainability depends on servicing costs—currently at manageable levels—not total debt or debt as a percentage of GDP.

randy said...

Lordy, what a bad time to bring up Ken Fishers name.

steve said...

I thought of you Benjamin when I read this piece;

https://www.theatlantic.com/ideas/archive/2019/10/how-minneapolis-defeated-nimbyism/600601/

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