The following comes to us courtesy of Annaly Capital Management. If you haven’t read Mike Farrell’s recent comments I highly recommend taking a look. Farrell is an expert in the mortgage markets and really has his pulse on the health of the U.S. economy and real estate markets. His outlook is less than optimistic. The interview is a must see:
Mike Farrell will be appearing as a guest on Consuelo Mack’s “WealthTrack” this weekend. On the show, Mike discusses a number of macro themes, and several of the graphs maintained by our research group will be highlighted. Since graphs are rarely on screen long enough for thoughtful contemplation, we reproduce them here along with some context.
The first two graphs illustrate how different actors in our economy are behaving through the current environment. Households, businesses and financial institutions alike have begun the process of increasing their savings, refinancing their debt and de-levering their balance sheets. It’s a painful but necessary process. The progress made by the private sector, however, has been more than offset by the borrowing and spending of federal, state and local governments. The headline savings rate that we usually think about is the household one, but the same calculation can be applied to the government. On a national level, think of households, businesses, financial institutions and governmental entities all contributing their savings to one big piggy bank. The first graph below shows what each is contributing to our national piggy bank in the form of net savings. Gross savings is simply income less expenditures, and net savings is calculated by subtracting the consumption of fixed capital from gross savings. As the graph shows, net savings of the private sector has been generally rising and net federal government savings lately has been plummeting.
The graph below sums up the total of private and government net savings and presents it as a percentage of gross national income. It’s clear that government spending is draining the national piggy bank.
The third of our graphs that appears on this weekend’s WealthTrack is the one below, which demonstrates how the mortgage market-and thus the housing market-is on government life support. There has been a collapse of non-conforming loan originations or bank-retained originations, and virtually no mortgage-backed securities have been issued in the last two years without the benefit of a government wrap of one kind or another.
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.