Feel the Flow

Investors dread decreasing home prices will translate to lower net worth and slower consumer spending. But the Federal Reserve's latest report on the US household reveals the largely unappreciated strength and vigor of the American consumer.

Story Highlights:

  • Household net worth continues to display strong growth and corporate balance sheets are as liquid as they've ever been
  • These positive economic fundamentals have been largely ignored or underappreciated by media pundits and financial professionals alike
  • Declining home equity is nothing to fear: It's an evolution in the way we save and little connected to consumer spending


Ignorance is the source of human suffering—so said Buddha. Overcome ignorance and you'll tap the universal flow, become a still point at the center of the madness, and transcend birth and death.

Whew. That's some deep thinking only two days into the business week. (Philosophical discussions around here tend to be limited to debating the merits (or mostly demerits) of the latest Dancing with the Stars.) But like most great wisdom, it's a profoundly simple concept and can easily be applied to investing: Read primary sources, check the facts, and get the real story before making potentially harmful decisions. Yet, investors frequently trade universal truth for mainstream malarkey—and in light of today's Fed funds rate cut and subsequent big stock movement, it's important to focus on what most people are not.

For example, just recently MarketMinder did tap the universal flow. OK, maybe it was really the Federal Reserve's latest flow of funds report, but it effectively put us in a trance—what we discovered was very positive:

  • Q3 year-over-year total household net worth increased 7.3% to a record $59 trillion.
  • Q3 year-over-year financial net worth grew 10.2% to a record $31 trillion—more than the rest of the world combined!

Just what does this mean for American households? It means folks, in aggregate, have more money now than ever. It means the value of homes might be down (from historical highs, we might add), but most people have not sacrificed their financial wellbeing. As we observe ever-darkening dour sentiment in the face of consistently bright economic data, we doubt very much such positive news will make it to the headlines of your local paper.

The report also found corporate balance sheets about as cash-rich as they've ever been (corporate net liquid assets rose to a new record $2.3 trillion). All that extra cash is just begging to be leveraged at the stubbornly low interest rates that prevail for average-rated (or better) large publicly-traded companies in today's still-benign interest-rate environment.

And the lone negative point covered in the report? Percent home equity is down. (This number compares how much of their home an individual owns to the market value of their property.) But percent home equity has been steadily decreasing for over 20 years. Its gradual decline can be attributed only in small part to the recent decline in home prices. Most of that decline is due largely to the increasing popularity of tax-advantaged mortgage debt, historically-low mortgage rates, and smaller down payments—essentially portraying the evolution of mortgage products over the last 20 years. Folks today just borrow differently than they did 20 years ago.

The big worry is declining home equity must result in slower consumption (a big slice of the GDP pie). But compare home equity's consistent, long-term decline to regularly positive nominal consumer spending growth over a similar period, and the connection breaks down. There just doesn't seem to be a strong relationship between how much wealth folks store in their home and how many neat new gizmos they buy.

In other words, most people don't lever their home for a new iPhone or a blazer/designer jeans/aviator sunglasses ensemble—such purchases are typically the domain of discretionary income. So, it's good news wage growth in November exceeded expectations—wages relate more to discretionary spending than the value of even the coziest pile of bricks. And though we occasionally find it difficult to abandon a roaring fire, lighted tree, and good cup of hot cider to fight crowds of rabid holiday shoppers, wages increased, and surprise of all surprises, according to the following article, folks are out shopping!

Retail Sales Probably Increased
By Joe Richter, Bloomberg

Media headlines preach widespread doom and gloom—and it may seem they've got it right when flipping through the evening news.

Economists Say Recession Risk Is Climbing
By Phil Izzo, Wall Street Journal

But two paths diverged in a wood—one reality, the other media absurdity—we advise you take the path less traveled.

And if you're still not convinced the truth is out there and it's a beautiful thing then close your eyes and focus on this: Even real estate assets were up slightly. Sure, prices were down, but the value of new construction won the day, boosting the growth rate just north of positive. So, take a deep breath, slow your roll, and check in with reality—feeling the flow will dramatically improve your investment decision-making process.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.