Monday, March 30, 2009

A View At The Consumer Balance Sheet

As more and more questions rise about the real worth of U.S. assets in the form of household net worth, it makes sense to summarize the balance sheet of the American consumer. The following snapshot compliments of David Rosenberg:
  • Households own $20.5 trillion of residential real estate, even after the value destruction of the past three years.
  • Households own $8.8 trillion of equities, despite the vicious bear market.
  • Households own a record $7.7 trillion of deposits and cash – earning next to nothing in yield.
  • Households own $4.1 trillion of consumer durable goods.
  • Households own $1.6 trillion of corporate bonds.
  • Households own $960 billion of municipal securities.
  • Households own $920 billion of agency paper.
  • Households own $273 billion of treasury notes and bonds.
David's conclusion is that even with China and other traditional foreign purchasers becoming skittish about U.S. debt purchases, it is only a matter of time before the U.S. consumer moves to allocate more and more wealth to this least represented holding.

It is possible to envision that as baby boomers seek stability and income, unable to rely on traditional pension funds, retirement accounts and a rapidly depleting Social Security basket, that more assets will shift to this last category. Of course, this will be at the expense of the $7.7 trillion in cash and deposits and, much more so, a transfer from the $8.8 trillion in equities which have demonstrated unprecedented volatility and riskiness, as more people shun this asset class entirely. Ostensibly, this is not a good datapoint for all those pricing in a bull market and working off of 2011 earning numbers.

Why 2011?

At yesterday's S&P closing level, the market was discounting a return to $70 earnings based on historical multiples. Rewind to March 9th lows, when based on the relationship between the fair value P/E multiple and the real Baa corporate bond yield, the S&P was priced for $55 in EPS, which would be high for 2009 but roughly in line for 2010 estimates. Fast forward to this past weekend, and the market was discounting $70 earnings, which is a) 75% higher than Merrill Lynch's 2009 earnings forecast and b) 30% higher than the bank's 2010 forecast, and 10% higher than the bullish consensus forecast. The $15 increase in earnings upside over a mere 3 weeks seems like a very aggressive (and likely myopic) shift in optimistic and perception. S&P over 800 is essentially assuming smooth macroeconomic sailing from the end of 2009 all the way into 2011, and not even pricing in a significant discount factor. Zero Hedge remains skepitcal on the viability of this assumption. Sphere: Related Content
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Old Guy said...

Anyone know how much gold US consumers own (not counting what is in their teeth)? I think probably a lot less than their treasury paper holdings, but that is a just a guess. Since short term yields are close to nothing, they might want to trade in some of their cash for gold at some point.

Anon1 said...

I started buying a bit of gold last year before the entire mountain started coming down in earnest. It is now between 6-8% of my net worth (with gold volatility).

I am leery of going for more at this point...unless I see consistent good warnings from sources I trust that inflation is going to start hitting hard.

Of course, it can't (gold) do worse than my maybe it is a better bet at this point.

Anonymous said...

According to S&P, the entire market cap of the S&P500 (which represents probably 90% of the total of US stocks) is $7.1 trillion. How can households possibly own $8.8 trillion in stocks?,3,2,2,0,0,0,0,0,1,1,0,0,0,0,0.html

RPB said...

why would i buy treasuries when they provide no real yield and i expect crushing inflation in the near future?

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