Fiddling The Bubble Facts——The Fed’s New Q Ratios Don’t Compute

Yesterday was the quarterly release of the Financial Accounts of the United States (Z1), formerly titled as the Flow of Funds, which means we get updates on the asset bubbles through Q1. That starts with equity valuations, with the components to Tobin’s Q being revised all over the place. The Q ratio is made up of the total value of equity liabilities, nonfinancial (as a proxy for stock prices and values), divided by estimated net worth of nonfinancial corporations.

That makes intuitive sense as rising values in stocks if supported by rising net worth would tend to argue in favor of a fundamental advance opposed to something more artificial. When equity values far outstrip net worth, the vision of an asset bubble is much stronger.

The Federal Reserve has not been able to sit still upon its estimates for these components, however. Revisions are a constant source of clouding comparisons, but they seem to have taken heightened sensitivity really in the past year or so. In the first part, corporate net worth, the Fed keeps upping the estimate not just in trend but also in revision.

The latest adjustment in June 2015 is rather astounding, amounting to a $331 billion boost to net worth in Q4 2014 alone. What calls into question its veracity is the timing, noted easily on the chart above – the quarter immediately following QE4. In other words, are we noting an actual increase and upward revision in corporate fortunes due to actual and sustainable advancements in their economic placement and function, or is this a baseline assumption of monetarists charitably refiguring their own work?

That may be partially answered by what comes next, the revisions in the numerator of the Q ratio. While net worth has been moved to a much higher trend, corporate equities have been somehow been

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