Client Portals

When News Lets You Down, Go To The Primary Sources5 min read

Feb 19, 2020 - Max Osbon ( 7 mins to read)

We live in the Age of Data. There’s an endless stream of data points on every topic, especially in the field of economics. The media and politicians regularly serve up numbers that support their point of view. If you feel it’s hard to trust these data-driven arguments, you’re right. When data is cherry-picked, omitted, conflated or obscured, any conclusions must be treated skeptically. That’s why we go straight to the primary sources. The raw numbers. John Osbon instilled this habit in me at an early age. He learned it as an undergrad at the University of Chicago, where data is king and original sources are sacred. Today we’ll be talking about the FRED database, a free public database administered by the Federal Reserve Bank of St. Louis. Most people, investors included, never explore it. We do regularly. Here’s what we look for.

What is the St Louis FRED website? (Federal Reserve Economic Data)

We trust the news to tell us when something is important, however, financial news seems to publish a disproportionate amount of fear-based content related to market highs and debt levels. We’ll be focusing on debt crisis-related datasets in this article. Debt levels are good measures to watch. No one likes to owe money. When debt measures get out of control, normal recessions turn into Great Recessions (08/09) and Great Depressions (1920’s). We look at government, corporate and household debt to better understand this picture today. Fortunately for everyone who is interested, the data is freely and readily available via FRED. I recommend saving yourself the anxiety by skipping the newspapers and going directly to these primary sources.

Government Debt – Total Debt to GDP:

Debt is generally positive because it fuels growth and spreads the cost of financing complex projects over time so that we can accomplish more as a society, sooner rather than later. Higher debt levels should coincide with higher growth. That’s the tradeoff. Therefore, measuring total public debt on its own is highly misleading. Before the newspapers get a chance to spike our collective cortisol levels with news about record-high levels of debt, remember to check out the full picture: Total Debt to GDP (below).

You can see the two components here: Total Public Debt and Real GDP and the ratio in the chart below.

Money Supply:

Scarcity is a vital component of what makes something valuable. With scarcity in mind, it’s easy to understand why printing money would lead to inflation. Hanging in our office we have a handful of Zimbabwean dollars that I picked up on a visit to Victoria Falls. The largest denomination bill is a $100 Trillion Zimbabwe note. I bought it for about $20 as a souvenir but it’s actually worth about $5 in notional value. The chart below shows the total US money supply. How much has the Fed been “printing” to fuel our system? The US dollar is the world’s reserve currency. We must maintain its scarcity to protect other nations’ trust in our economic future. Just like the case with debt, adding to the money supply fuels growth. Economists like to pair this figure with the “Velocity of Money” chart in order to measure the impact of newly minted capital.

The last measure I’d like to include on the government side is the Fed Balance Sheet. The Fed Balance Sheet was an integral tool in the effective management of the debt crisis in 2008/09. I won’t post the full chart here, but you can find it here: Fed Balance Sheet.

Corporate Debt and Profitability:

Reliable corporate debt metrics are more difficult to find. Tracking corporate debt requires a nuanced understanding of how corporations game the system to their advantage. Unlike government and household metrics, corporations have a strong incentive to manipulate their debt and income reporting. Better numbers means better stock prices. Below are two charts that are somewhat helpful in understanding how corporate debt and profitability have changed.



Household Debt:

I’d guess that the average person thinks the total mortgage debt (below) is much higher than it actually is. While mortgages are relatively flat, the prices of homes have increased significantly, adding considerable wealth back into homeowner pockets. Mortgage rates have also fallen significantly since ’08.

Household Debt to GDP: 

The health of the US consumer is vital to the performance of the US economy. This shows that the economy has been growing without consumers taking on significantly more debt. We know there are pockets of consumer debt concern, like student loans and subprime car loans. Those segments represent a small piece of the much larger pie. Overall, this is a positive trend for the financial health of our consumers.

Households are spending less than 10% of their disposable income on interest expenses. That leaves more money available for spending and saving elsewhere.

Measured skepticism is a useful filter when reading any government statistics like these. It’s important to remember the adage, “Once a measure becomes a target, it ceases to be a good measure” (Goodhart’s Law). I didn’t include inflation and unemployment metrics in this article. They may be beyond their useful lifespan at this point since they are touted by the Fed as important targets and the sourcing of the data is a bit suspicious.

This is a data-heavy article. Unless you follow markets closely and regularly, this may be too much information to be useful to you. If you have one takeaway, please remember that the primary sources listed above paint a healthier economic picture than the average headline would lead you to believe. Please let us know if you have any questions or would like to discuss these metrics in further detail. As always, we welcome the conversation.

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