It’s hard to believe that we’re already staring down the barrel of the last 90 days of 2018. 

In fact, it’s stunning really how fast time is flying by.

The Latest on Earnings...

In short, they continue to be solid.

Q3 should show another 22% plus year on year growth. That said, we are approaching the "lapping" effect in Q1, where the pace of growth will fall. 

That should not scare any of you at all. It’s the complete misunderstanding of this process that I suspect has led to the rather flat broader market results this year - outside of Tech and Bio.

To Make That Point:

The NYSE Comp is up a scant 2.14% year to date as of the end of Q3 on Friday's close (Barron's).

Also, roughly 82% of the S&P 500's return comes from FANG and 3 extra tech stocks. Be that as it may, the Barbell Effect is underway – where the Baby Boomers are handing over the economic reigns to the new largest ever age cohort of Millennials - and the game is just getting going.

Better News?

This set of charts below come from Calafia Beach Pundit Scott Grannis who always has some excellent updates for review.  This time around records abound!

In a nutshell - the country has never collectively been wealthier.  And before anyone takes the political slant, note the record is set per capita as well (see below with notes):

Feelings Chart1

Feelings Chart2

The first chart above - simply put – is a real positive. 

As a country of consumers America has spent the last decade paring down leverage everywhere. 

Indeed, on a per household basis private sector (households and non-profit organizations) leverage (liabilities as a percent of total assets) has now fallen 36% from its early 2009 high. 

These are levels not seen since early 1985! 

Back then the economy was in full bloom - and the Dow Jones was 4-digits long…the first digit being a “1”.

Can you say "First Batter Up?"

There is some poor news as well.

While we all did a great job of saving again and paring down leverage, the federal government did not.

Unfortunately, it has borrowed with abandon and we now have to work on that, which growth will do for you. 

In the meantime, the burden of federal debt (federal debt owed to the public, as a percent of GDP) has shot up from 37% to 83% over the same 33-year period.

And if our government was run with the same discipline as households have displayed, that might be termed nirvana.

The Real Point

Just remember that we're as well off as we are today despite the ministrations of US government.

The second chart is even more compelling. 

Note the colourations of types of debt and asset categories. 

The “Debt bar” is basically where it has been for a decade, with very little movement in real terms. 

And the real estate value bar has just returned to previous 2006-07 highs (and more recently breaking to new highs); yet total household net worth is now roughly 60% higher than it was at the peak just before 2008-2009 disasters. 

So, the strong increase in financial assets can be "blamed" on a surge in savings (still nearly $14 Trillion in the bank) and rising equity prices. 

See the chart below for a note on liquidity:

Feelings Chart3

Now that's what a call a "rainy day fund." 

The US consumer now has $14 Trillion plus socked away in "just in case" 2008-2009 returns. 

And even if you take out that currency type category that number remains above $12 Trillion.


Keep this in mind: The M2 supply measure is generally considered to be the best barometer of "money."

As that last chart shows, M2 consists of currency, checking accounts, bank savings deposits and retail money market funds.

The largest component by far is bank savings deposits, which grew from $4 trillion at the end of 2008 to now $9.2 trillion.

This is very important because until recently bank savings deposits paid almost nothing in the way of interest. Yet people were happy to hold them because they offered safety and liquidity.

The demand for cash was very strong, and that is evidence of the world's strong desire for safety in the wake of the Great Recession.

It's also the reason behind quantitative easing (QE), which almost no one has ever truly understood.

Finally, for now - check that third chart above - Real Per Capita Net Worth. 

Note that since 1950, the average annual increase has been on trend at about 2.2% annually. 

We are above that now trending higher and at records.

Yet fear is still the magic word. Give me a bad headline series or a down month in the market and I will show you an investor crowd who is as afraid today as they were in the depths of March 2009, when the Dow Jones was ub-7,000.

Go figure.

Mike Williams
Founder and Managing Partner