Which Consumer
October 20, 2024- Weekly Comment
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Does this make sense? I set the time period as the last twenty years, from 2004 to 2024. Covers the mortgage bubble, zirp, QE, covid, etc. In Q2 2004 Household Assets were $64.9T and Liabilities $10.5T. Currently, Q2 2024, Assets (green) are 185 and Liabilities (red) are 20.7. So assets up 3x and liabilities up 2x. Does it seem reasonable? I guess it does with an aging (old) population.
Let’s look for a second at Home Mortgage Debt Outstanding. In 2004 it was $7.86T, in 2005 $8.95T, in 2006 $9.95T and in 2007 $10.63T. Up about a trillion per year. Which would mean in 2024, 17 years later, about $27T right? Nope, it’s $13.17T. Not much higher than the GFC peak in 2007.
As an aside: Federal Debt in 2004, $5.25T and now $30.4T.
So I guess you MUST conclude, a more bigly indebted Federal Gov’t creates wealth.
Now look at HouseHold (HH) equity in real estate as a percentage of total value: It’s an astonishing level of 72.7%. The high since the 1960’s. It was higher before, but mortgages probably weren’t as prevalent or easy to get then. This is Fed data. Once again, I guess an older population owns assets outright. Everyone else can rent from Potter Blackrock. It’s Marie Antoinette type stuff.
Above all, one hideous figure grew as familiar as if it had been before the general gaze from the foundations of the world – the figure of the sharp female called La Guillotine.
Dickens knew and wrote about the Fourth Turning with a sweep of literary brilliance long before Strauss and Howe. It’s why, like so much fluff in our society, the new motto of ‘turn the page’ is a mockery of its own shallowness. But I digress…
Here’s the chart of HH, Owners’ Equity in Real Estate as a % of HH Real Estate.
The thread of this note was sparked by a post from @KobeissiLetter:
The median value of US consumers’ stock holdings spiked to $250,000 in October, the most on record.
Over the last 12 months, this amount has DOUBLED, according to the U of Mich consumer survey.
In 2010, American’s investments in single stocks, mutual funds and retirement accounts were worth just ~$50,000, or 5 times less.
Now, equities account for 48% of US households’ net worth, the highest since the 2000 Dot-Com bubble peak. This rally has truly been unprecedented. [chart below]
https://x.com/KobeissiLetter/status/1847318505743356410
When I look at the latest Z.1 report from the Fed, I see ‘HH and nonprofit corporate equities, asset’, as $33.953T as of the end of Q2 (line 15). Net Worth is around $165T. So I see the ratio of equities to net worth as 21%. HH Real Estate is $52.32T. HH Mortgages $13.17T, so about $39T in RE net worth. I am not going to quibble with Goldman and U of M, my only point is that we have a Tale of Two Consumers with respect to future economic growth:
Is it the highly indebted consumer with Credit Card and Education debt that slows things down? Or the older unlevered consumer, owning equities, t-bills and real estate that powers everything forward? My belief is that the former group is growing large enough at the margin to topple things, but I have no idea when.
What’s the limitation on Gov’t “increasing” wealth by deficit spending? It’s the interest expense on the debt. When is it too much? When the dollar loses value to alternatives: Gold and Real Estate for example. When long-dated rates start to ‘inexplicably’ rise. It feels like the end game is drawing nearer.
While I am not pulling these threads together to form a strong conclusion, I simply get the feeling that we’re closer to an inflection point.
A couple of interesting links to finish: The NY Fed is now releasing a new data set: RDE or Reserve Demand Elasticity.
https://www.newyorkfed.org/research/reserve-demand-elasticity/#interactive
The paper describing the need for this is “Tracking Reserve Ampleness is Real Time Using RDE”
“To operate in an ample reserves framework and avoid reserve scarcity, it is therefore important to identify the transition point between abundant and ample reserves.”
Basically, QT can lead to reserves NOT being abundant. And we want reserves to be “ample”. You better believe the Fed is worried about a funding hiccup with respect to rolling gargantuan debts.
And here’s link to the last BofA Participant Pulse, which has data on 401k plans and loans, hardship and otherwise:
https://business.bofa.com/content/dam/flagship/workplace-benefits/id20_0905/documents/Q2-Participant-Pulse.pdf
OTHER THOUGHTS AND TRADES
Rather than the above transitional economic themes, here are a couple of trades that went through last week which I found interesting. First, a buyer of SFRM5 9637.5/9612.5/9581.25 put tree for flat. Trade does well if the Fed stalls on easing and SFRM5 rolls lower. The only real problem comes on a hard break, but the downside breakeven of 9556.25 is actually below the current SFRZ4 price of 9563.5. SFRM5 settled 9635.5, trade worth 2 on ultimate settle there. No gain or loss > 9637
| 10/11/2024 | 10/18/2024 | chg | ||
| UST 2Y | 393.9 | 395.0 | 1.1 | |
| UST 5Y | 387.7 | 387.5 | -0.2 | |
| UST 10Y | 407.1 | 407.3 | 0.2 | |
| UST 30Y | 438.1 | 438.0 | -0.1 | |
| GERM 2Y | 223.5 | 210.8 | -12.7 | |
| GERM 10Y | 226.5 | 218.3 | -8.2 | |
| JPN 20Y | 173.4 | 174.9 | 1.5 | |
| CHINA 10Y | 214.7 | 212.3 | -2.4 | |
| SOFR Z4/Z5 | -96.5 | -99.0 | -2.5 | |
| SOFR Z5/Z6 | -2.0 | -3.0 | -1.0 | |
| SOFR Z6/Z7 | 8.0 | 7.5 | -0.5 | |
| EUR | 109.52 | 108.70 | -0.82 | |
| CRUDE (CLZ4) | 74.85 | 68.69 | -6.16 | |
| SPX | 5815.03 | 5864.67 | 49.64 | 0.9% |
| VIX | 20.46 | 18.03 | -2.43 | |
The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that R.J. O’Brien believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.
Above all, one hideous figure grew as familiar as if it had been before the general gaze from the foundations of the world – the figure of the sharp female called La Guillotine.
It was the popular theme for jests, it was the best cure for headache. It infallibly prevented the hair from turning grey, it imparted a peculiar delicacy to the complexion, it was the National Razor which shaved close who kissed La Guillotine, looked through the little window and sneezed into the sack. It was the sign of the regeneration of the human race, it superseded the Cross. Models of it were worn on breasts from which the Cross was discarded, and it was bowed down to and believed in where the Cross was denied.
