Blog : You're Richer Than You Thought

by Ed Zwirn on March 6th, 2014

Americans are in the midst of a new Golden Age of Prosperity, with enough money to buy a chicken for every pot and asphalt for every pothole, at least if you check out the latest statistics coming out of the U.S. Federal Reserve Bank.

The net worth of U.S. households reached an all-time high as of late last year, meaning that assets outweighed liabilities in the collective household balance sheet by about $80.7 trillion.

Driven by a bull market for stocks and a partial recovery for real estate, this net worth rose by about $3 trillion in Q4 alone, according to a report issued by the Federal Reserve on Thursday. For 2013 as a whole, net worth increased $9.8 trillion, or 14%. This was driven largely by a $5.6 trillion increase in the value of stocks, with another $2.3 trillion coming from the gains seen in the real estate sector.

According to the Fed, the value of stocks in the portfolios of Americans rose 34% last year and has almost doubled since 2009 to $13.86 billion. Mutual fund holdings were worth $6.69 billion as of Dec. 31, 2013, up 27% on the year and ahead about 63% from four years ago.

At the lower rung of the risk ladder, however, there was no growth, as savers/investors moved their money from "safe" bets like Treasuries and money market funds in an attempt to gain some decent amount of yield on their investments. Holdings of Treasury debt fell 1.8% in 2013 to $944.3 billion. Similarly, the value of money market fund shares held by Americans fell 2%, to $1.18 trillion.

I guess you could at least say that the Fed got the bang out of its quantitative easing buck. The $1.02 trillion of U.S. Treasury and mortgage-backed paper not only served to pump money into general circulation, the direct support it lent into mortgages has served as balm to an ailing real estate sector, which has still yet to exceed pre-crisis levels, especially in some geographic areas.

But whoever gets the credit and/or blame, there is no denying that Americans got richer in 2013.

There was some small boost from wages: Personal income rose 2.8% in 2013, a slowdown from 2012's 4.2% increase, the Bureau of Economic Analysis reported this week.

This is dwarfed by the gains seen in the stock market and real estate over the period. As I have had occasion to commemorate in this investment blog, the stock market in the United States made many investors rich last year, with the Dow Jones Industrial Average up over 26%. The broader market, including penny stocks, actually outperformed last year, with the NASDAQ Composite Index up 38% and the small-cap Russell 2000, widely used as a benchmark for penny stock performance, was up 37%.

This is precisely the kind of relationship between these market indices that shows high risk tolerance. According to the investor ethos in effect throughout most of last year, particularly during the rally seen late last year, the smaller or less established a company was, the more speculative its business plan, the more worthy it was of receiving money, especially money that sought to outperform the near-zero yields offered in the risk-free arenas.

Thoroughly outclassed by the stock market rally, real estate nonetheless made plodding gains in 2013. As of December, the median price of a new home was 2.9% higher than it had been one year before that. The S&P/Case-Shiller Home Price Index showed national home prices up 11.3% on the year.

It is these two inputs into the household wealth rise that give us poignant insight into just what an ephemeral creature wealth can be. Unlike wage growth, stock market and real estate wealth are almost entirely subjective creations. As was seen in both the recent performance of real estate and stocks, investors can and do rapidly change assessments and wake up in the morning with a radically different estimate of what a given stock is worth or how much can be fetched for that home on Primrose Lane.

Looking at the near-term future another way, while the stock market and real estate gains may have slowed down lately, these wealth inputs are still at or near record highs and will remain so barring any major shock to the economy. Whether Americans still go on considering themselves rich enough to buy stocks is a matter better left to the psychologists and the politicians. These "experts," particularly those of the political variety, will go on and on about how good (or bad) things are, only to get their inevitable comeuppances from the market.

In any event, with a rising tide lifting all boats, I am busy deciding between precious metals with which to pave the dirt road leading to my house in upstate New York. Gold is looking pretty sensible at this point.