Net Worth looks fine…
June 9, 2024 – Weekly comment
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The global economic system is debt-based. Below is an image of US Household Net Worth, released by the Fed last week in the Z.1 report, updated through Q1.
Liabilities are barely increasing (red bars), yet assets (equites and residential RE) just keep powering higher. That’s what various officials mean when they say Household balance sheets are in good shape. Of course, that’s in the aggregate. The coveted assets of the lower end of the balance sheet spectrum are torches and pitchforks. I guess this chart would make sense if productivity were on a tear higher, and maybe part of it is the AI craze. The other way it makes sense is if the measuring stick of the US dollar is deteriorating, which of course it has done, in terms of purchasing power.
After the 2007/09 Great Financial Crisis there was a lot of talk about the shifting of liabilities from the private sector to the Gov’t balance sheet. In that context, the above chart makes more sense.
Around 10 years ago, Q4 2014, HH Assets were $101T, Liabilities $14T and NW $87T. In Q1 2024, Assets are $181T, Liabilities $21T and NW (rounded) has nearly doubled to $161. The liability side has really been kept in check, up only 50%. Must be a really frugal and innovative populace. Of course, when one considers that at the end of 2014, Federal Gov’t Debt was $14.4T is 2014 and has now more than doubled to $29.9T (Z.1), it begins to appear as though private debts HAVE shifted to the public balance sheet, boosting equities, but perhaps making the aggregate snapshot look less healthy. FT’s top headline Sunday is ‘IMF warns US on ballooning fiscal debt’.
In the movie Planes Trains and Automobiles, there’s a funny scene where Del Griffith, shower curtain ring salesman (John Candy), and Neal Page, slick advertising exec (Steve Martin) are stranded on the highway, watching the rental car they were just in smolder and burn after a harrowing accident. Neal Page starts to laugh a little and Del Griffith, who caused the accident, is surprised, but he starts to laugh too.
Finally Del says, “What?” And Neal responds, “You finally did it to yourself. Good luck turning the car in!” Now they’re laughing harder and harder and Neal asks, “How could you rent that thing anyway, without a credit card?” Del, “Oh I gave this girl behind the counter a set of shower curtain rings.” Then Neal becomes serious and says, “You can’t rent a car with shower curtain rings Del.” It turns out that Del used Neal’s Diner Club credit card (a relic of the past).
I sort of consider Del Griffith to be the Federal Gov’t and Neal Page the public. I came to that conclusion after Friday’s employment data which sparked a 15 bp jump in the 10y yield to 4.428%. I’m not saying the data was manipulated to appear strong (though there seems to be quite a divergence between the establishment and household surveys). Maybe it’s just that the BLS’s Birth/Death plug factor isn’t quite capturing the latter half. In any case, Fed’l Gov’t efforts to juice economic growth in whatever way possible before the election might come back to scorch the public through higher yields. Maybe it’s going to be hard to pay for things with a charred Diner’s Club card. It’s funny when it just appears that an inept gov’t is buried in debt (You did it to yourself!). It’s not so amusing when the public starts to get the bill, in one way or another.
Auctions of 3 ($58b), 10 ($39b) and 30 ($22b) years are Monday, Tuesday and Thursday, bracketing CPI and the FOMC on Wednesday. The last auction cycle didn’t go that well…everything tailed. With respect to the FOMC, the new 2024 FF dot projections should be interesting. In March, the 2024 estimate was 4.6% or three eases, and the 2025 estimate was 3.9, up from December’s 3.6. The main question is whether the 2024 dot will shift to just one cut or two; my guess is two. So that would take the end-of-2024 FF estimate to 4.9. (SFRZ4 settled Friday at 9505 or 4.95%, essentially pricing 2 cuts). But then can 2025 remain constant at 3.9? That may have to shift up slightly as well, which the market expects. SFRZ5 settled 9584.5 or 4.155%; Z4/Z5 spread at -79.5. Considering the PCE deflator, for end of 2024 the PCE price index was penciled in at 2.4, last reported at 2.7%. Core was estimated 2.6, last at 2.75%. Those will likely remain the same, though the risk is a shift higher. Overall, I would deem the dot-plot risk to be slightly hawkish, which will be countered perhaps, by a more dovish press conference. A counterbalance to the ECB’s ease followed by a hawkish press conference.
FFQ4 settled at 9469 or 5.31%, just 2 lower than the current 5.33% Fed Effective and down 1.5 on the week. Therefore, there is little priced in for a July 31 rate cut. FFF5 settled 9504 or 4.96%, pricing between 1 and 2 cuts by year end.
CPI yoy expected 3.4% from 3.4 last. Ex Food and Energy expected 3.5 from 3.6. On Monday, NFIB Small Business Optimism is expected 89.6 from 89.7 last, still lower than the COVID spike. The divergence between data points like NFIB and Chicago PMI, which both indicate recession, and data like NFP is rarely more stark.
| 5/31/2024 | 6/7/2024 | chg | ||
| UST 2Y | 489.1 | 487.0 | -2.1 | |
| UST 5Y | 452.6 | 445.2 | -7.4 | |
| UST 10Y | 451.2 | 442.8 | -8.4 | wi 442.7 |
| UST 30Y | 465.2 | 454.7 | -10.5 | wi 454.7 |
| GERM 2Y | 309.7 | 308.3 | -1.4 | |
| GERM 10Y | 266.4 | 262.0 | -4.4 | |
| JPN 20Y | 187.2 | 176.5 | -10.7 | |
| CHINA 10Y | 231.9 | 231.0 | -0.9 | |
| SOFR U4/U5 | -81.5 | -88.5 | -7.0 | |
| SOFR U5/U6 | -38.5 | -41.0 | -2.5 | |
| SOFR U6/U7 | -8.5 | -10.0 | -1.5 | |
| EUR | 108.48 | 108.18 | -0.30 | |
| CRUDE (CLQ4) | 76.73 | 75.22 | -1.51 | |
| SPX | 5277.51 | 5346.99 | 69.48 | 1.3% |
| VIX | 12.92 | 12.22 | -0.70 | |
