"The market has predicted nine of the last five recession...", but the U.S. economy just keeps rolling along, "because in the other four Washington D.C. mended its ways". It makes one wonder. The scuttlebutt on the street is: if the Federal Reserve holds off on its tightening cycle and the administration finds a way to settle the trade disputes they have been working on, there is another leg up for the market. With that in mind, it seems like it may be a good time to dig down into the financial guts of the economy and take a crack at figuring out why things are so good. As I have mentioned on several occasions a good place to look for this information is the Z1 (Financial Accounts of the United States) published by the Federal Reserve each quarter. It shows that if we ignore the temporary down draft in the stock market over the fourth quarter the nation ended 2018 nearly 6% wealthier then it was in 2017! As the Fed accounts for it, the nation's wealth amounts to something on the order of $95-100 trillion stacked against net claims by the rest of the world of a measly $6 trillion. The U.S. Treasuries debt doesn't seem all that worrisome when measured against the nation's "enumerated" economic value. If one could just cash in the rise in the stock market since December they could pay off US foreign debts. A good balance sheet is the hallmark of a well-run business and that could be why the economy keeps rolling along.

Imagine the incorporated states of America with the branding mark "made in the U.S.A." Donald Trump CEO, Mitch McConnell COO, Nancy Pelosi Chairman, and Jerome Powell CFO. This is a lose analogy so bear with me. The head of a company must consider the needs of three constituent groups forming a triad of competing wants: customers, employees, and shareholders. Continuing with the analogy it appears relatively easy to identify who the U.S. customer is, anyone who buys its products. Also, it is relatively easy to identify who the shareholders are, anyone holding U.S. denominated assets under the auspices of U.S. law. If you have a buck in your pocket, you're a shareholder! That doesn't make you an employee(if you haven't guessed yet those folks work for the government), but you do get a vote in the sense that you can sell your shares if you don't like the way the company is run. U.S. citizens are employees, shareholders, and customers. Based on one's financial status, a U.S. citizen is a weighted mix of all three. One could probably write a thesis using this analogy, but I just want to pair off a few bullet points of how the conflicts between each of these groups plays out in the economy. Depending on which type of governmental structure your country operates under the triad structure can graphically be illustrated as a triangle rotated to look like a pyramid, a funnel, or a flag with the more favorably treated parties at the top. Imagine that socialism is a pyramid and has the customer on top, a pure dictatorship has the employees on top, and pure democracy the share holders. The U.S. operates with a structure resembling a broad funnel with shareholders and customers above the employees. Now let's consider in the most extreme case how these three parties interact: the customer wants the highest quality product at the lowest possible price, the shareholders want the control to generate the highest possible profit to obtain the highest possible share price, and the employee's want the power to provide the highest possible salary (power ~salary) for the least amount of work.

The CEO's job is to weigh the needs and wants of all three of these parties, how they factor into his business model, and hire individuals that will run the company in such a way that it thrives over time. The surest measure of how a CEO is doing that job is the stock price of the company, in this case the buying power of U.S.A. dollars and the value of its publicly traded debt and equity. So, let's talk about that. Many companies dilute their shares over time by issuing stock in small amounts as compensation to their employees. This dilution can be recognized as inflation. Part of the CFO's job is to make sure that this dilution is out matched by the growth of the company's earnings per share, or with stock buy backs. The U.S. Treasury continues to issue more debt, and the Federal Reserve has ceased to purchase it, luckily public companies have taken up the slack and bought in nearly $1.1 trillion of their own stock in 2018, and net supply of U.S. financial assets has not outstripped aggregate demand. A noted economist once observed inflation is caused by too much money chasing too few goods. Restated, inflation is caused by the uncertainty in the buying power of the financial unit a consumer has at hand to exchange for goods in the future. Uncertainty produces worry and worry generates haste. Someone who is uncertain in the value of their financial medium of exchange (stocks, bonds, or cash) will hastily unburden themselves of it for others. Low inflation leads to high stock prices, and high inflation causes the market to "tank." Often enough when a CEO has a lot of confidence in his company, he will accept just one dollar of salary for his efforts because he is a large shareholder. That CEO measures his actions by how well his stock value holds up in the near term, and he recognizes his compensation as the rise in the company's stock value over the long term. A CEO with this mindset will tend to be very shareholder and customer friendly and will tend to favor organizations where the employees think like owners and are non-union based.

People "SELL!" stock for many reasons but they "BUY!" stock for only one. The world is buying U.S. dollars because they think the value is going up. The dollar, dollar denominated debt, and the U.S. stock market continue to go higher because, like the current CEO of "made in the U.S.A.", the world thinks it has a promising future. The U.S. stock market has had a good run since Christmas, and demand is strong. While I would pound the table with a pullback of 5-7%, the Vanguard Large Cap index ETF (ticker: VV) is still priced fairly at $136 a share or better. Enjoy your spring!