Household Deleveraging Continues As Net Worth Jumps On Stock Market Gains; UBS Sees Stagflation Coming As Real Estate Values Drop To Q4 2003 Levels

Tyler Durden's picture

Today the Fed released its quarterly Flow of Funds report which is traditionally used to keep track of household net worth and general leverage. While the far more important use of this data, namely tracking shadow banking data is never in the headlines (we will present an updated version later today), the media is more than happy to present any simplistic information without much thought. To be sure, based on nothing but a jump in the stock market, household net worth increased by $2.1 trillion to $56.8 trillion. This increase was due entirely to a change in the value of Corporate Stocks held by the public ($7.6 trillion to $8.5 trillion), Pension Funds ($12.3 trillion to $13 trillion) and Mutual Funds ($4.4 trillion to $4.7 trillion), for a total change of $2 trillion. What did not go up were tangible assets such as housing, which after reversing its plunge from an all time high of $25 trillion in Q4 2006, and hitting a low of $18.5 trillion in Q1 2009, has now officially double dipped, dropping to $18.2 trillion in Q4 2010: the lowest in over 6 years. In other words, the wealth effect is working, but only as long as the Fed can continue to keep the market high. Other real assets are losing value fast. And while consumers continue to deleverage, and non-financial businesses are just barely adding new debt ($11.1 trillion in Q4 2010, a $100 billion increase Q/Q),  the government, both federal and state and local, continue to binge like a drunken sailor on debt, which combined for the two increased to an all time record of $11.9 trillion. So while USA Today may rejoice at its simplistic interpretation that we are all getting richer even as real assets decline in value, UBS' Andy Lees thinks that the household leverage trends will ultimately result in stagflation.

To wit:

The Fed Z1 flow of funds report for Q4 just released. Total nonfinancial sector debt grew by 5.1% on an annualised basis. For 2010 as a whole debt was up 4.6%. Households did reduce debt so that was positive, but only by 0.6%. Business increased debt by 3.6% - (this could be seen as positive or negative depending on the return on its investments). States and local governments increased their debt by 7.9% whilst Federal debt grew by 14.6%, which I find hard to believe was invested in productive assets. In my opinion these figures are not indicative of the restructuring that is urgently needed and suggest that a continuation of this policy will result in stagflation as resource constraint mean there simply is no more road to kick the can down.

And here are the charts that confirm that the US "recovery" is based on nothing more than ongoing stock market manipulation.

Summary Consumer Balance Sheet:

Change in Household Debt:

Change in Business Debt:

And naturally total government debt:

And the confirmation of the housing double dip, and why stock better continue growing or else everything will come crashing down. The Q4 2010 real estate value of $18.2 trillion is the lowest since Q4 2003!