Federal Reserve Q3 2004 Z.1 “flow of funds” report.
The Fed’s third quarter “flow of funds” and Credit report was released yesterday. It once again did not disappoint. Before I do my usual grind through of all the mind-numbing detail, I will make one general comment: History’s Greatest Credit Bubble runs unabated, although the scope of the Credit Inflation is more clearly illustrated by going back some years. Since the beginning of 1997 (31 quarters), Total Credit Market Debt has ballooned 80%, Total Mortgage Debt 109%, GSE Assets 193%, “Fed Funds and Repos” 128%, Securities Broker/Dealer Assets 177%, oustanding MBS 107%, ABS 217%, Rest of World holdings of U.S. Financial Assets 122%, Household Assets 60%, and Total Bank Assets 78% (and, of course, there is some “double-counting”).
Household Mortgage Debt, the focal point of the current Credit Bubble blow-off, expanded at an 11.3% annualized rate during the quarter, up from the second quarter’s 9.8%. Total Corporate Debt expanded at a 5.1% rate, up from the third quarter’s 3.6% and the strongest rate of growth in five quarters. State & Local governments increased borrowing at a 14.2% rate, and one has to go all the way back to 1985 for stronger annual growth. The Domestic Financial Sector increased Credit market borrowings at a 6% rate (down from Q2’s 7.8%), although this slower growth largely can be explained by the rapid expansion of deposit and other bank liabilities.
Total Non-Federal Debt expanded at an 8.0% rate, up from the second quarter’s 6.2%. Federal Government borrowings increased at a 4.9% rate, down sharply from the second quarter’s 10.7% rate. Total – Federal and Non-federal – non-financial debt expanded at a 7.4% rate, up from the second quarter’s 7.0%. For the first nine months of the year, Federal debt has expanded at a 9.4% rate, Total Household debt at 10.1% rate, State & Local Government debt at a 9.4% pace, and Total Corporate (including financial) borrowings at a 4.5% rate.
In nominal dollars, Total Non-Financial Debt increased $479.7 billion during the quarter, second only to last year’s second quarter ($538.7bn). Total Credit Market Debt increased $676.4 billion (7.7% ann.), or at an annual pace of $2.71 Trillion (23% of GDP). Total Non-financial Debt increased to 199% of GDP, with Total Debt at 303%.
The Mortgage Finance Bubble certainly runs untethered. Total Mortgage Borrowings expanded at a 12.4% rate during the quarter to $10.1 Trillion. The $305 billion increase was an all-time quarterly record, and compares to the second quarter’s $247.8 billion and the comparable 2003’s $270.4 billion. Total Mortgage Debt has increased $1.025 Trillion during the past year, or 11.3%, and $1.931 Trillion, or 24%, over the past two years – and now debt growth is accelerating in true blow-off fashion. In just seven years, Total Mortgage Debt has increased $4.95 Trillion, or 96%. Total Mortgage Debt has increased to 87% of GDP, up from 64% to begin 1998 and 68% to commence the new millennium.
During the quarter, Household Mortgage Debt increased a record $251.6 billion (to $7.77TN), which compares to the second quarter’s increase of $196.2 billion and last year’s third quarter increase of $212.7 billion. For comparison, Household Mortgage Debt increased $241.8 billion during the entire year 1997. We now surpass this amount in one quarter. Household Mortgage Debt expanded at a 12.2% rate during the first nine months of the year.
Total “structured finance” (GSE, MBS, and ABS) expanded at a 6.8% rate during the quarter to $9.0 Trillion. This was up from the first quarter’s 2.6% and the second quarter’s 6.1%. GSE borrowings increased at a 6.7% rate to $2.89 Trillion. This was the strongest growth in a year. With variable-rate and “jumbo” mortgages taking a large chunk of mortgage lending these days, (GSE) outstanding MBS increased at a rate of only 2.3%, to $3.54 Trillion. Leading the “structured finance” charge, however, was ABS. Outstanding Asset-backed Securities expanded at a 13.3% annualized rate to $2.57 Trillion. ABS is up 9.8% over the past year. Since the beginning of 1998, GSE Assets have increased 163%, MBS 94%, and ABS 160%. Total “structured finance” is up 130% in 27 quarters.
Financial Sector “Debt” expanded at the slowest pace in some time during the third quarter (6.0%), a figure actually distorted by the ongoing surge in bank deposit and other liabilities (not included as financial sector “debt.”). Year-to-date, Financial borrowings have increased $537 billion, or 6.5% annualized. Of this amount, about $100 billion has been borrowed by Banks and Savings Institutions. Yet over this period Total Bank Assets have increased $563 billion, or 9.6%. This is 17% above total 2003 Bank Financial Asset expansion and already surpasses the previous record for full year growth (2002’s $500bn). Bank Loans expanded at a 10% rate ($115.3bn) during the third quarter to $4.74 Trillion, with bank Mortgage Loans increasing at a 13.4% rate (up $81.4bn). Over the nine month period, Bank Loans have expanded at a 9.5% rate, with Mortgages increasing at a 15.5% pace. At the same time, Government Securities holdings increased at a 5.4% rate, while Corporate Bonds (including ABS) expanded at a 13% rate. Over two years, Bank Assets were up 16.9%, Total Loans 16.2%, Mortgage loans 28%, Corporate bonds 44%, and Government Securities 9%.
On the Bank Liability side, Miscellaneous liabilities expanded at a 14.7% rate ($58.6bn) during the third quarter (perhaps one factor in the divergence between heightened Credit creation and the lagging monetary aggregates). Total Deposits increased at a 7.0% rate, “fed funds & repos” declined at a 1% pace, and Credit Market borrowings increased at a 7.6% pace. During the first three quarters, Total Deposits increased at an 11% rate, “fed funds & repo” at a 12.4% pace, and Credit Market borrowings at a 12.6% rate of growth. And over two years, Deposits were up 16%, “repos” 27%, and Credit market borrowings 23%. It is, as well, worth repeating that Bank Assets have inflated 78% in less than 8 years (since the end of 1996). The Banks may have been a little slow to join the Credit Bubble Party, but they are today certainly making up for lost time.
The size of foreign U.S. Financial Asset purchases (the “recycling” of current account deficits and other financial flows) is becoming unfathomable. The Rest of World (ROW) increased holdings of U.S. Financial Assets at a seasonally-adjusted annualized (SAA) $1.111 Trillion pace during the third quarter. Year-to-date, U.S. Financial Asset holdings have increased $1.1 Trillion, or at a 13.9% pace, to $8.925 Trillion (foreign U.S. liabilities increased $425bn SAA during the third quarter to $4.4TN). Holdings began 1997 at about $4.0 Trillion.
By category, ROW Treasury holdings increased at a $204 billion SAA pace during the third quarter, U.S. Corporate Bonds $371 billion, Agencies $165 billion, Security “Repo” $201 billion, and Foreign Direct Investment $100 billion. Year-to-date, total Treasury holdings have increased at a 28% rate to $1.86 Trillion, total Agencies at a 20% rate to $761 billion, and Corporate Bonds (including ABS) at an 18% pace to $1.7 Trillion. In just nine months, Total “Official” (foreign central bank) Holdings have increased $315 billion, or at a 40% rate, to $1.37 Trillion. Simply Astonishing! Interestingly, Security “Repo” has increased at a 39% rate y-t-d to $600 billion. Over the same period, Foreign Direct Investment (FDI) has increased at a 7% rate to $1.62 Trillion. In what will go down in history as one of the “great” Bubble support operations, “Official” holdings were up $532 billion, or 63%, over the past two years.
The Household (including Non-profits) Balance Sheet also provides a treasure trove of insight into the current Bubble environment. And for bearish analysis that rests on the premise that the American consumer is “tapped out” it is worth noting that Household Assets increased $805 billion during the quarter. This is the eighth consecutive quarterly increase in asset values, whereby Assets have increased a noteworthy $9.85 Trillion (21%) to a record $57.0 Trillion. And with Household Liabilities up “only” $259 billion during the third quarter (10.3% rate), Net Worth jumped $546 billion to a record $46.7 Trillion. And although Assets (up 20.9%) and Liabilities (up 20.4%) have increased approximately the same percentages, Household (including Non-profits) Net Worth is up $8.1 Trillion, or 21%, over the past two years.
Since the beginning of 1997, Household Liabilities have surged 89% to $10.3 Trillion, while Assets have inflated 60% (to $57TN). The seductive magic of Asset Inflation and Bubbles has witnessed Net Worth inflate an astonishing $16.5 Trillion, or 55%. There should be no mystery behind the boom in consumption, especially luxury goods and virtually everything at the “upper end.”
Examining the (market value) Household Balance Sheet by category, Real Estate increased a record $834 billion during the third quarter – a rate of 19.5% - to $18.0 Trillion. This fully explains the entire increase in Household Assets for the period. This was up from the second quarter’s $512 billion growth and was 32% ahead of the previous record increase (Q4 2003). Real Estate Assets were up 14.7% ($2.3TN) from one year ago and 22.4% ($5.97TN) over two years. Since the beginning of 1997, Household Real Estate assets have increased $8.88 Trillion, or 97% (which, not coincidently, is the 7-year percentage increase in residential mortgage debt). And while Household holdings of Financial Assets were down slightly ($72bn) for the quarter, they were up 20.4% ($6.0TN) over two years to $35.3 Trillion. For the quarter, Deposits increased $57.6 billion (to $5.5TN) and Agencies $10.2 billion (to $435bn), while Credit Market Instruments actually declined $35.7 billion (to $2.05TN). There was little change in Equity values. I don’t believe it is possible to overstate the commanding role that the Mortgage Finance Bubble (and resulting Real Estate Inflation) is having on the U.S. Bubble Economy – not to mention U.S. and global financial market liquidity.
Examining other groups within the expansive U.S. financial sector, Security Broker/Dealer Assets expanded at a 20% rate (up $83bn) during the quarter to $1.77 Trillion. Holdings of Credit Market Instruments surged $121.6 billion over three months to a record $455.8 billion (speculating, positions to hedge derivatives or both?). Total Assets were up 13% ($205bn) from one year ago and 24% ($346bn) over two years. On the Liability side, Security “repo” (net) increased $74.8 billion to $479 billion. Since the beginning of 1997, Broker/Dealer assets have inflated 177%.
“Federal Funds and Security Repurchase Agreements” expanded at a 20% rate during the quarter to a record $1.676 Trillion. “Repos” have expanded at a 12.6% rate so far this year, with two-year gains of 24.4%. Since the beginning of 1997, Fed Funds and Repos are up 128%. It is worth noting that both the Banks ($1.06TN) and Broker/Dealers ($479bn) “repo” position is “net,” meaning sector repo assets have been matched against repo liabilities. The total primary dealer repo, as posted by the New York Fed, is approximately $3.1 Trillion. The largest holders of “repos” (excluding banks and brokers) are now Rest of World at about $600 billion, followed by Money Market Funds at $256 billion.
REIT Assets increased $38.9 billion during the quarter (90% annualized!) to $212 billion. REIT Assets are up 65% from one year ago. Finance Companies expanded assets at a 3.3% rate during the quarter, although two-year growth remains robust at 19%. Credit Unions increased assets at a 3.5% rate during the quarter, with two-year growth of 17.4%. Savings Institutions expanded at a 7.4% rate and 21% over two years. Money Market Fund assets declined at a 9.6% rate during the third quarter and were down 9.3% from one year ago (down 11.8% over two years).