US Household’s net worth inflated By the Fed’s QE programs

 The US Federal Reserve recently released its Z1 – Flow of Funds report for the last quarter of 2012. This report shows the composition of US households net worth as detailed by asset and liability classes. According to the report, it seems US households have reasons to be happy since their net worth is now currently sitting at $66.1 trillion – just a tad below their record level seen prior to the onset of the great financial crisis that began in Q3 2007.

The Z1 report we reproduce in part below shows an improvement of $1.2 trillion in household net worth over the 3rd and 4th quarters of 2012. Total assets actually amount to $79.5 trillion but liabilities of $13.5 trillion must be set against this. The household net worth which is in fact just $2 trillion below record levels has risen sharply in recent years and is, given the moribund housing market, almost exclusively due to the increase in financial assets courtesy of every equity holders favourite central banker – Mr “Helicopter” Ben Bernanke.

Household net worth has actually been rising since 2008, rising some 27% – being pulled in 2 directions by the US populace’s twin primary assets – property and equity (largely through 401k’s).

Looking further into the table, we see that the most important contributors to the rise are corporate equities, mutual fund shares, pension fund reserves, and home mortgages (which have dropped and se flattering the net worth). As you can see in the chart below, financial assets have in fact been increasing in an exponential way while non-financial assets (largely property) are mostly unchanged. On the liabilities side, home mortgages being paid down where, ironically,  the large number of foreclosures which have actually contributed to a diminution of outstanding mortgages as these have been taken back onto the banks’ books, has contributed to the decrease in liabilities and so further helping on the increase of net worth.

What does all this mean?

The first conclusion we can draw from this is that the efforts by the Federal Reserve to re-inflate the domestic economy and head of a debt induced depression has, from a top down basis, been successful. Households financial assets have been inflated by the quantitative easing programs and with the FED committing to buy $40 billion in mortgage backed securities and an additional $45 billion of Treasury securities per month with no end date there is every likelihood that in the near term at least, these elevated levels will remain supported. But in terms of the real “active” economy the effects have still to be seen with real cost of living issues amongst great swathes of the middle class and lower income groups who are struggling with rising living costs and not having the counter balance of financial asset bases to offset this. Growth and unemployment have been improving but at a low and frustrating pace hence the continued commitment to QE in the near term by the Fed. 

Monetary policy helps to fine-tune the economy and, under the Greenspan and Bernanke era’s, has increasingly been used to stabilize markets. The emergence of the “Bernanke Put”, is producing increasingly loud voices that the present ZIRP structure is only storing up late stage inflation and in the process creating new bubbles. At some point, the Fed, unless they really want to trash the dollar as the Globe’s reserve currency, will need to normalize monetary policy. With equity valuations at elevated levels and massive liquidity to withdrawn from the economy, the financial assets side is likely to prove rather less buoyant in the medium term…

With regards to bonds and rising inflation, if this should come to pass, then a flattening of the yield curve will also cause a rise in mortgage rates and so pressure the household side of the equation too.

The lesson? Right now, things are likely to be as good as it gets. The smart trades over the next 5 years are likely to be heavy profit taking in equities – particularly tech orientated ones where valuations are most disjointed with reality; land purchases with fixed rate mortgages (3.3% for 30 years in the US – effectively free money!) and shorting bonds.