Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
This Dividend Aristocrat Is Leading the 5G Revolution - 22nd July 19
What the World Doesn’t Need Now is Lower Interest Rates - 22nd July 19
My Biggest 'Fear' For Silver - 22nd July 19
Reasons to Buy Pre-Owned Luxury Car from a Certified Dealer - 22nd July 19
Stock Market Increasing Technical Weakness - 22nd July 19
What Could The Next Gold Rally Look Like? - 22nd July 19
Stock Markets Setting Up For A Volatility Explosion – Are You Ready? - 22nd July 19
Anatomy of an Impulse Move in Gold and Silver Precious Metals - 22nd July 19
What you Really need to Know about the Stock Market - 22nd July 19
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Mortgage Equity Withdrawals Slump- Another Blow to Household Cash Flow

Economics / Credit Crisis 2008 Jun 24, 2008 - 05:11 AM GMT

By: Paul_L_Kasriel

Economics Best Financial Markets Analysis ArticleAs my regular readers know - well, it is difficult to have "regular" readers if I don't write regularly anymore - I make a distinction between the wealth effect and the cash-in-hand effect. If the values of your stock portfolio or your house go up, you are wealthier "on paper," but you do not have any extra cash to spend. But if the value of your house goes up and you increase your borrowing against your housing collateral, then you have more cash in hand to spend.


Similarly, if a corporation buys back its stock from you, you have more cash in hand to spend. In the first quarter, households' active mortgage equity withdrawal (MEW) in relation to personal disposable income fell to 1.1% -- the lowest since the first quarter of 1996 (see Chart 1). (Active MEW can be defined as mortgage equity withdrawal consisting of refinancing and home equity borrowing in contrast to inactive MEW, which consists of turnover.) Active MEW at 1.1% of disposable personal income is a far cry from the 6% it was in the heady days of 2005 and 2006.

Chart 1

But yet another blow to household cash flow in the first quarter was the sharp reduction in the "retirement" of corporate equities. After retiring a record $840 billion at an annual rate in the fourth quarter of last year, corporations retired only $75 billion of shares in the first quarter of this year (see Chart 2). Now, if corporations are retiring equities, by definition, some entity must be selling shares back to the corporations. In recent quarters, the biggest net seller of corporate equities has been U.S. households.

In relation to disposable personal income, households net sales of corporate equities went from a record high 10.3% in the fourth quarter of last year down to only 1.5% in the first quarter of this year (see Chart 3). So, not only was first-quarter household cash flow constrained by much lower MEW, it also was constrained by much lower share buybacks by corporations.

Chart 2

Chart 3


* Direct net sales by households plus net sales by mutual funds,
broker/dealers and ETS.

It almost is a given that MEW will continue to fall as house prices, and, thus, home equity continue to fall. But what about corporate buybacks? They are unlikely to surge again soon for two reasons. Firstly, corporate profit growth, a source of funding for share buybacks, will remain puny throughout 2008, save for energy company profits. Secondly, in recent quarters, as profit growth slowed, nonfinancial corporations picked up their borrowing, in excess of their capital spending, presumably to fund share buybacks (see Chart 4). But with borrowing costs up for the less credit-worthy corporations (see Chart 5) and with financial institutions tightening their lending terms, borrowing to fund share buybacks is likely to be less feasible. In short, retailers had better not count on strong sales once those tax rebate checks have been spent because household cash flow is diminishing at a rapid rate.

Chart 4

Chart 5

By Paul L. Kasriel
The Northern Trust Company
Economic Research Department - Daily Global Commentary

Copyright © 2007 Paul Kasriel
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

Paul L. Kasriel Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules