Just some brief thoughts here following the release of yesterday’s Z.1 Flow of Funds:
The sector financial balances chart shows us the relationship between the three sectors of the economy – foreign and domestic with domestic broken down by private and public. As I’ve discussed in some detail in the past the deficit has fallen in the USA primarily because the private sector is healing and tax receipts are increasing. You have to dig past the three sector model here to understand the drivers at work here. Otherwise one might conclude that a declining deficit is always bad.
I should add that there has been some minor degree of austerity as the government could have done much more to support the private sector in recent years via tax cuts or spending increases. The current picture is largely reflective of better times, but as times get better we also have to be mindful of the reality that stability tends to breed instability as the cycle advances. Given the unusual weakness of the economy I think this sort of thinking is particularly pertinent in this cycle.
The private sector’s net worth is at an all-time high. This is largely the result of substantial gains in assets like real estate and stock holdings.
Gross private domestic investment remains somewhat weak, but continues to come back from its worst decline in the last 50 years.
Household and nonprofit equity holdings as a percentage of net worth continue to climb, but are not as high as they were in some past equity market bubbles like the period preceding the Nasdaq bubble. This means that households are levered to stocks, but not as levered as they have been in the past.
Corporate profits have been increasingly driven by trends in the corporate sector including dividends and private investment. The government has played a substantial role in the corporate profits picture in the last 5 years, but the government effect has waned over time as the private sector has healed and slowly picked up the pace.
There’s nothing earth shattering from this report, but it does support the muddle through perspective I’ve maintained for the last few years. We’re crawling out of a very deep hole, but still headed in the right direction, albeit very slowly.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.