Confluence Investment Management offers various asset allocation products which are managed using top down or macro analysis. We publish thoughts on asset allocation on a weekly basis in this report, updating the report every Friday, along with a podcast and chart book.
Each quarter, the Federal Reserve releases the United States Financial Accounts, previously referred to as the Cash Flow Report. The report is huge and provides a sort of balance sheet and income statement for the economy. The data provides an interesting snapshot of the financial condition of the economy. In this week’s report, we’ll highlight some of our favorite charts.
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This first graph shows the net savings for the economy.
Net saving is a balance sheet concept; saving in one sector must, by design, be offset by dissaving in another. The pandemic has clearly led to a historic build-up in household savings, mostly created by a similar increase in government dissaving. The use of these household savings will be the key to the economy and the markets for the coming years. If he goes to consumption, inflation is likely to accelerate. It could also go towards debt reduction, which would cause immediate growth to slow down but lay the groundwork for better consumption in the future. It could also go to financial assets; Later this month, the Fed will update the distribution data and we will update the breakdown of that savings by income group. Although household saving and government dissaving dominate the chart, data on foreign and corporate savings are also important. Foreign savings are the reverse of the current account; since the United States has a current account deficit, it mainly acquires foreign savings. This number has also started to increase. On the other hand, corporate savings have turned negative, which often supports increased business investment.
This graph shows the shares of national income by capital and labor as a percentage of national income. Since 1990, when communism fell, we have seen capital income rise against labor in every economic cycle. Labor tends to gain over capital during recessions, mainly because income from capital tends to fall more than wages during recessions. At some point, we believe this trend will reverse because it is not politically sustainable. But that change is unlikely to happen until much later this decade.
Finally, the last graph that caught our attention is the one that shows that we are approaching a normalization of housing finance.
This graph shows mortgage loans as a percentage of the value of real estate. At the height of the housing crisis, home loans represented more than 50% of the value of the home. This was partly due to leverage and partly due to falling house prices. The combination of prudent housing finance and rising house prices has resulted in an increase in home equity (and, therefore, lower leverage, as this graph shows). We are not at the level of the mid-80s, but we are approaching. As housing finance improves, it should support the expansion of the housing sector.
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This report was prepared by Confluence Investment Management LLC and reflects the current opinion of the authors. It is based on sources and data believed to be accurate and reliable. The opinions and forward-looking statements expressed are subject to change. This is not a solicitation or offer to buy or sell securities.