Federal Reserve Q2 2016 Z.1 “flow of funds” report.
For the second quarter, Total Non-Financial Debt (NFD) expanded at a 4.4% rate, down from Q1’s 5.4% (while matching Q2 2015). Household debt growth jumped to a 4.4% pace (from Q1’s 2.7%), the strongest expansion in two years. Total Business (including financial) debt growth dropped to 4.1% from Q1’s 9.4% pace (and vs. Q2 2015’s 7.9%), the slowest expansion in 10 quarters (Q4 2013). State & Local borrowings expanded at a 2.2% rate, up from Q1’s 0.8% to the strongest rate since Q4 2010. Federal government borrowings slowed slightly from 5.6% to 5.0%, which was about double the growth from Q2 2015 (2.7%).
In seasonally-adjusted and annualized (SAAR) dollars, NFD expanded $1.999 TN, right at my theoretical bogey for Credit growth sufficient to sustain the U.S. Bubble. During Q2, Household debt expanded SAAR $622bn, surpassing Total Business ($540bn) for the first time since Q1 2011. State & Local borrowings expanded SAAR $66bn.
Leading the Credit charge – once again - was the federal government. Federal borrowing jumped SAAR $751bn, down from Q1’s $852 but still the strongest Q2 borrowings since 2012. Federal expenditures rose to a record SAAR $4.137 TN, up 41% compared to pre-crisis Q2 2007. At SAAR $3.470 TN, Q2 federal receipts were up 30% compared to Q2 2007. Deficits have this year been running at the fastest pace since 2012.
Also keeping quite occupied in Washington, GSE holdings jumped SAAR $348bn. This was up sharply from Q1’s $9.9bn growth and Q2 2015’s $70.9bn. GSE holdings enjoyed their strongest quarterly expansion since Q2 2008. The second quarter saw FHLB (Federal Home Loan Banks) Loans increase SAAR $168bn (up from Q1’s $51bn), the biggest quarterly growth since Q3 2008. (Worth noting from FHLB financial statements, Advances to Member Banks expanded almost 9% in the year’s first half to $690bn). Again, Like Old Times.
Total Agency- and GSE-backed Securities expanded SAAR $581bn (GSE debt $422bn and MBS $159bn) during Q2, up from Q1’s $60.4bn and Q2 2015’s $216bn. Here as well, Q2 saw the strongest expansion in GSE Securities since Q3 2008. For perspective, GSE Securities increased $293bn in (bond crisis) 1994, $474bn in (Russia/LTCM) 1998, $593bn in (Y2K) 1999, $642bn in (tech crash) 2001 and $547bn in (corporate Credit crisis) 2002. The big buyers of Agency securities during Q2? Money Market Mutual Funds increased GSE holdings by SAAR $403bn during the quarter. ROW snapped up SAAR $104bn.
Security Brokers/Dealer holdings expanded SAAR $301bn (strongest quarter since Q1 2012), up from Q1’s SAAR $195bn and Q2 2015’s SAAR $135bn contraction. Debt Security holdings rose SAAR $174bn and Repos surged SAAR $328bn. Miscellaneous Assets declined SAAR $250bn. On the Liability side, Repos rose SAAR $228bn and Misc. - Other increased SAAR $92bn.
Riding a nice GSE tailwind, securities finance enjoyed a banner quarter. Federal Funds and Security Repurchase Agreements increased SAAR $627bn, the biggest quarterly increase since Q1 2008. This reversed two quarters of Repo contraction, in what has been extraordinary quarter-to-quarter volatility. Funding Corps expanded SAAR $27bn during Q2, increasing one-year growth to $233bn, or 16.8%.
Corporate (and Foreign) Bond issuance slowed to $90.5bn during the quarter, down from Q1’s booming $494bn and Q2 2015’s $591bn. And while there may have been some temporary tightening of corporate Credit, the opposite was true elsewhere. Consumer Credit expanded SAAR $230bn, up from Q1’s SAAR $199bn and compared to Q2 2015’s SAAR $267bn. Trade Credit surged SAAR $250bn, up from Q1’s $53.1bn and Q2 2015’s SAAR $170bn.
Private Depository Institutions (banks) increased Debt Securities holdings SAAR $316bn, up from Q1’s $148bn and Q2 2015’s $142bn. Loans expanded SAAR $679bn, down from Q1’s $783bn and compared to Q2 2015’s $639bn. For comparison, Loans increased $261bn in 2013, $579bn in 2014 and $676bn in 2015. Notably, mortgage loans, held as bank assets, jumped SAAR $390bn during Q2, the strongest mortgage lending since Q3 2007 ($433bn).
Total Mortgage Debt expanded SAAR $521bn, the biggest mortgage debt increase since before the crisis (Q1 2008). Total Home Mortgage Debt increased SAAR $259bn (up from Q1’s $205bn and Q2 2015’s $215bn), matched by an almost equal amount of Multifamily and Commercial mortgage debt growth.
Rest of World (ROW) increased holdings of U.S. Financial Assets by a notable SAAR $1.193 TN during Q2, up from Q1’s $444bn to the highest level since Q1 2015. ROW Debt Securities holdings increased SAAR $417bn, led by a SAAR $324bn increase in U.S. Corporate Bonds. Foreign Direct Investment (FDI) jumped SAAR $606bn. Also noteworthy, ROW U.S. Liabilities jumped SAAR $1.061 TN, led by a SAAR $383bn increase in Repos. Like Old - 2006 and 2007 - Times.
Total Debt Securities (Fed’s compilation) ended Q2 at a record $40.581 TN, up a nominal $252bn for the quarter and $1.618 TN (4.2%) over four quarters. Total Debt Securities expanded $9.635 TN, or 31%, since the end of 2007. Over this period, Treasury Securities increased to $15.385 TN from $6.051 TN, for growth of 154%. The increase in Treasuries accounted for 84% of the growth of Total Debt Securities. Outstanding GSE Securities increased $926bn (13%) over this period to $8.324 TN. As such, the combined growth of “Washington finance” (Treasury & GSE) amounted to 92% of the Total Debt Securities expansion since the beginning of 2008.
Total Debt Securities ended Q2 at 220% of GDP. This compares to 200% to end 2007. Equities ended Q2 at $36.112 TN (down $1.415 TN y-o-y), or 196% of GDP. Equities peaked at $26.433 TN, or 181% of GDP, during Q3 2007.
Total (Debt and Equities) Securities ended Q2 at $76.693 TN, or 416% of GDP. Total Securities to GDP began the eighties at 117% ($3.086 TN) and the nineties at 193% ($10.937 TN). This ratio ended Bubble year 1999 at 360% ($34.753 TN) and Bubble year 2007 at 378% ($54.768 TN) - (peaked Q3 2007 at 379%).
The Household balance sheet remains fundamental to Bubble Analysis. Household Assets inflated $1.238 TN during Q2 to a record $103.750 TN, with both Real Estate ($25.6 TN) and Financial Assets ($72.3 TN) at record highs. Household Assets increased $3.053 TN (3.0%) y-o-y and were up $8.023 TN (8.4%) in two years. With Household Liabilities increasing $163bn during Q2, Household Net Worth jumped $1.075 TN during the period to a record $89.063 TN. Since the end of 2008, Household Net Worth has inflated $33.30 TN, or 60%. Household Net Worth had peaked previously at $67.744 TN during Q2 2007.
The ratio of Household Net Worth to GDP increased two percentage points to 483%. Net Worth to GDP peaked at 379% (1989) during the eighties Bubble; 435% (Q4 1999) during the “Tech” Bubble; and 473% (Q1 2007) during the mortgage finance Bubble period.