Wednesday, September 25, 2013

Dramatic improvement in household balance sheets

The Federal Reserve today released its estimate of households' balance sheet as of the end of June. The report contained some significant upward revisions to past estimates of financial assets and net worth, with the result that household net worth now stands at $74.8 trillion, up some $4.5 trillion from the previous (March '13) estimate, and up $18.4 trillion from the recession low. Virtually every metric of households' financial health has shown significant improvement over the past several years. Owner's equity in household real estate has surged 50% since 2009; net worth and financial assets are up 35% from their March 2009 low; the value of households' real estate holdings is up 17% in just the past two years; owner's equity as a percent of household real estate has jumped to almost 50%, up from its all-time low of 37% four years ago; household debt has declined by almost $1 trillion from its 2008 high, and is now back to the levels of early 2007.

Net worth at a new high, financial assets at a new high, real estate values recovering, debt declining: what's not to like?

And the improvement is not limited to the U.S. As the chart above shows, global equity market capitalization has now reached a new post-recession high, up by 130%, or more than $33 trillion, from the March 2009 lows.

To be sure, the economy has still not fully recovered from the effects of the Great Recession. But the pace and magnitude of the improvement in the past several years is far better than anyone would have dared hoped for just four years ago. This should be the stuff of major headlines, something to shout from the rooftops.

Why, then, is monetary policy still in panic mode, with short-term interest rates hovering near the zero bound for more than four years? Why are 10-yr Treasury yields still under 3%, at levels last seen during the Great Depression? Why is consumer confidence still down at levels associated with every recession in the past 35 years?

Just because things could (and should) be a lot better?

Pessimism has its place, and there is no shortage of things that could be improved. To name just a few: the federal deficit is still relatively large; the unemployment rate is still relatively high; the labor force participation rate is miserably low; owner's equity should be at least 60% of real estate holdings; regulatory burdens are a huge, deadweight burden on almost everyone; entitlement spending is on an unsustainable path; and Obamacare promises to self-destruct.

Yes, there are many things wrong out there, but at the same time there has been a whole lot of improvement. Those who have viewed the glass as half empty, and who have thus avoided taking on risk, have passed up tens of trillions of dollars of gains. Those optimists who have viewed the glass as half full have been richly rewarded. If things continue to improve, and if we can simply avoid a recession, there are more gains to be had by taking on risk and avoiding cash.

The market has consistently underestimated the ability of the U.S. economy to grow and improve. Even though we remain stuck in the weakest recovery ever, the economy has still managed to exceed the market's apparently dismal expectations. The improvement in households' balance sheets lends a lot of strength to my argument. There is real, significant, and fundamental improvement that has taken place in the U.S. economy, and the market has either ignored it or chosen to believe that it is ephemeral. It's not.


Golden said...

Please explain if you then think now is a good time to invest significantly into the stock market.

Scott Grannis said...

My thesis of the past several years still holds. I believe the market has been consistently underestimating the economy's ability to improve. The market is dominated by risk aversion, which shows up in very low (and even zero) interest rates, huge increases in cash balances and savings deposits, deleveraging, and average PE ratios despite record earnings. The market is effectively priced to a very gloomy and pessimistic outlook, but the economy has consistently done better than the gloomy expectations, and the dramatic improvement in household finances underscores that point. Even though this has been the weakest recovery on record, the economy has consistently exceeded meager expectations, and that is why prices of risk assets and equities have been rising. I think this process is continuing, and that equities still have upside potential.

Benjamin Cole said...

Nice wrap-up.

However, one quibble:

"Even though this has been the weakest recovery on record, the economy has consistently exceeded meager expectations..." -- Scott Grannis.

In fact, the economy and inflation rate have both been lower than forecasted by the Fed.

The Fed simply cannot believe we are doing the Japan thing....

theyenguy said...

I comment that Liberalism was defined by fiat investment wealth, specifically ETFs such as Gaming and Casinos, BJK, and Vice Stocks, such as those traded by the Fidelity Mutual Fund, VICEX, all of which were leveraged up by first the trade in debt, such as Eurozone Debt, EU, as well as the toxic debt taken in by the US Federal Reserve, such as that traded by the Fidelity Mutual Fund FAGIX, under QE1, and secondly by carry trade investing, such as the EUR/JPY. The Fed be dead, and its twin Yen based Carry Trades, be dead as well; both died the week ending September 20, 2013, on the climax on the No Taper Rally, which pivoted the world from Liberalism to Authoritarianism. Now, Authoritarianism is defined by the diktat of statist regional nannycrats, as well as by the physical possession of gold bullion for wealth preservation, and physical possession of silver bullion for bartering.

On Wednesday September 25, 2013, Silver Miners, SIL, and Gold Miners, GDX, and the Silver ETF, SLV, and Gold ETF, GLD, traded higher, as Spot Silver, $SILVER, traded higher to 21.78 and Spot Gold, $GOLD, traded higher to 1,333, continuing above its $1,300 breakout level.

The Gold ETF, GLD, moved higher in its Elliott Wave 3 UP, to close at 128.79, a move that commenced in July 2013, as Gold started to rise from its July 2013 bottom, as is seen its Weekly Chart, as Bloomberg reported US Budget Concerns Escalate. The Elliott Wave 3 Ups are the most dramatic of all economic waves, and create the bulk of wealth gains, of all of the five waves.

The chart of the US Dollar, $USD, shows a death cross, as it traded lower on September 20, 2013, to $80.00, terminating the US Dollar’s power to be the world’s reserve currency.

As seen in the Statue of Empires, presented in Daniel 2:25-45, liberalism was characterized by the twin iron legs of global hegemonic power of the British Empire, and the United States of America. Now, authoritarianism is characterized by ten toes of iron diktat of regional goverance and totalitarian collectivism, manifesting as statism in the Eurozone, and alliances in other regions, such as the ASEAN group of nations.

GoldSilverWorlds reports CFTC Believes That Silver Is A Free Market After 5 Year Investigation. I comment that I hope this news puts to rest the ongoing debate as to potential of the price of silver to rise higher over the price of gold. Silver will never, ever, leverage higher over the price of gold. One of the reasons is because of the huge potential for production by Silver Standard Resources Inc, SSRI, which has been one of the most speculative and carry traded investments of all time. The company does not have a forward PE, and it has plenty of contracts to sell its production, so the result is that the price of silver will never, ever outperform gold. Silver Standard Resources is a dead investment, and serves as an epitaph on Liberalism’s age of speculative leveraged investment.

In the last month, Gold Mining Stocks, GG, ABX, and NEM, have been unable to leverage up over the price of Gold, GLD, as is seen in their combined ongoing Yahoo Finance Chart. Gold Mining Stocks are now lagging the price of Gold because their PE’s have topped out; for example, Goldcorp, GG, has a Forward PE of 20; American Barrick, ABX of 8, and Newmont Mining, NEM, of 15.

William said...
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