Rabu, 25 September 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.

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