First Level Capital Flow Analysis of Flow of Funds Accounts First Level of Capital Flow Analysis : continued

Explaining Flow of Funds Accounts

The First Level of Analysis

In this example, by examining the principal applications of funds in the 'Last Quarter Summary' pop-up window, we can see how Households were using the net proceeds from the sale of equities.


The principal net Application of Funds were $932.8 billion in consumer durables, $578.0 billion in residential real estate, and $518.2 billion in savings deposits.

This data refers to Q4 2004, a period in which the trend in equity prices was upwards. Therefore, we do not classify Households as 'motivated sellers'.

Some other sectors must be driving the price.

Households were contributing to the rise in equity prices through their purchases of mutual funds, but, because of their emphasis on net sales of directly-held equities with investment of proceeds in consumer durables, residential real estate, and savings deposit, we might conclude that enthusiasm for the stock market was not compelling for U.S. investors in Q4 2004.

The switch from directly-held equities to mutual funds ( essentially, diversified portfolios of securities), savings deposits, and tangibles (real estate and consumer durables) suggests a conservative mind set.

From the 'Last Quarter Summary' pop-up for Households, we also note that the other principal source of funds was home mortgages. Clearly, in Q4 2004 U.S. individual investors were focused more on their homes and residential real estate than on the stock market.


Before proceeding, check your progress:


In Q4 2004, Households were not motivated sellers of equities because:
Choice 1 Equity prices were not falling.
Choice 2 Households were buying equities.
Choice 3 Investors had lost confidence.
Choice 4 Stocks were under-valued.
In Q4 2004, the primary net sources of funds for U.S. Households were:
Choice 1 Home mortgages and the sale of equities.
Choice 2 Home sales and bank deposits.
Choice 3 Salaries and wages.
Choice 4 Tax refunds and credit cards.
In Q4 2004, Households sold equity and bought mutual funds. This might indicate:
Choice 1 Greater appetite for risk.
Choice 2 Risk avoidance through diversification.
Choice 3 Inside information about mutual funds.
Choice 4 An increased marginal propensity to save.

Investment Tutorial: Capital Flow Analysis  How to Interpret Flow of Funds Accounts : continued >

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