One of the most misunderstood data reports is that on personal savings and debt levels. Various pundits bemoan the low level of savings and the high level of debt. None seem to recognize or report that the data do not include growth in assets. If, for example, one trades up to a more expensive home, taking on more debt, this looks very bad on the debt front, even if net worth is unchanged or higher.
At "A Dash" we have tried to point out this problem. Readers are urged to use a little common sense. The average person, at death, has a home as the greatest asset. Very wealthy people often are big real estate and stock investors. Many have wisely locked in low long-term rates (a move that looks especially good right now) and enjoy dividends, rent flows, and capital appreciation.
Almost unnoticed in today's data was the Fed's Flow of Funds report, but it was highlighted by David Malpass, Chief Economist for Bear Stearns. Regular readers know that we have often cited Malpass as having had the best read on economic trends for several years, including economic strength and the probability of higher interest rates.
Here are a few of the highlights from today's Malpass commentary (which you can get regularly if you have a trading account with Bear.)
- Household net worth grew by $587 billion in the first quarter.
- Real consumption grew by 4.4% despite a reduction in mortgage equity withdrawals.
- The four-quarter savings rate, judged on a change in net worth basis, is 30% of disposable income! Please think about this! Those looking for a consumption decline should ponder this fact.
- US households have $29.1 trillion in net financial assets, more than the rest of the world combined.
- Household liquid assets (deposits and financial assets like mutual funds and credit market holdings) rose to a record level of $21 trillion.
Malpass concludes that this shows consumer resilience and continued economic strength. He is also looking for another interest rate increase by the Fed, possibly as soon as September, with another increase possible in 2007.
When one reads a pundit or economist talking about savings, but not discussing assets, it is time to apply the "sniff test." Such commentators are missing the biggest part of the story, and have probably missed the multi-year rally in stocks.
The interest rate increases are more problematic in the intermediate term, as we have noted in past articles. While we continue to see a valuation advantage for stocks, many market participants continue to believe that they are smarter than the Fed. They think they see economic weakness and the need for rate cuts.
While stocks should move higher, it will be the classic method of scaling the wall of worry.