Sunday, May 10, 2009

NYT: Shift to Savings May Be Downturn's Lasting Impact

This piece from the New York Times reinforces my thesis on spending v saving. The American consumer still wants to spend and return to old behavior. However, he/she won't be able to. To survive in the coming era he will be/she will be "forced" so save. Although the government is doing everything in their power to not have this happen with our easy money policies that grow in furor with each iteration. I outlined in this piece what happens if we simply return to our old ways [Dec 29, 2008: What Happens if America Returns to a Historical Savings Rate?] - people incorrectly believe that by returning to normal we'd return to 1-4% savings rate. No, that is not our historical long term normal - that is simply the easy money normal we now believe has been long lasting. We used to be a savings culture, before we focused so much of our economy on "shopping" and all its related activities.

In the 1960s, Americans typically saved in the 7.5% to 10% range. A bit below where Germany has been the past 15 years.
In the 1970s, Americans typically saved in the 8.0% to 12% range. A bit below where France has been the past 15 years.

Then something changed in the mid 1980s - call it culture, call it entitlement, call it lack of financial literacy - call it what you may. The reasons are immaterial for our purposes - we just care about the raw numbers. After being over 8% for just about all of the 1960s and 1970s, the savings rate has never hit that level since 1987.

Between 1987 and 1993, Americans typically saved in the 6% to 8% range.
Between 1994 and 2000, Americans typically saved in the 4% to 6% range.

So essentially if we go back to the a national 8% savings rate, we'd lop off anywhere from $800B to $1 Trillion from our $13-$14T economy. Which would require the same government intervention (i.e. stimulus) we just passed, about $800B... each and every year. Or we could have a more rational economy. Nah... let us stay at 1-2% savings rates and paper printing to make up the difference....

Right now the stock market disagrees with my thesis and this story, as we're heading back to good ole days of spending based on which stocks are surging and the valuations they are now receiving. Again, I will stress I don't believe people will save willingly - we are now conditioned to this "I deserve everything" lifestyle... I believe they will have no choice. [May 2, 2009: WSJ - Debit Card Use Overtakes Credit] My way is actually much more healthy for the long term of the country but would cause a 1x wave of pain. We can't handle pain - that's how you lose elections, so the government is here to "save the day" and stop market forces from adjusting back to historical trends.

Again, many of my views are based on this new normal - at SOME point the world must demand higher rates for us to spend as drunken sailors and this game of low interest rates to create false demand ends. Maybe 5 years, maybe 15... I don't know. Eventually the market will win out.

Via New York Times
  • The economic downturn is forcing a return to a culture of thrift that many economists say could last well beyond the inevitable recovery. This is not because Americans have suddenly become more financially virtuous or have learned the error of their free-spending ways. Instead, these experts say, Americans may have no choice but to continue pinching pennies.
  • This shift back to thrift may seem to be a healthy change for a consumer class known for spending more than it earns, but there is a downside: American businesses have become so dependent on consumer spending that any pullback sends ripples through the economy.
  • In the last year, the savings rate — the percentage of after-tax income that people do not spend — has risen to above 4 percent, from virtually zero. (note: I disagree with this number - but let's go with it for purposes of the story) This happens in nearly every recession, and the effect is usually fleeting. Once the economy recovers, Americans revert to more spending and less saving. Over the last 30 years, the savings rate has fluctuated from over 14 percent in the 1970s to negative 2.7 percent in 2005, meaning Americans were spending more than they made.
  • This time is expected to be different, because the forces that enabled and even egged on consumers to save less and spend more — easy credit and skyrocketing asset values — could be permanently altered by the financial crisis that spun the economy into recession. (note, we had what was called a shadow banking system - where the risks were created and spun off throughout the globe. That was a huge parallel system sitting alongside our normal financial industry. Now that shadow banking system has been pummeled; in it's place we've introduced the Federal Reserve, with the taxpayer as the ultimate bearer of the risks)
The shadow banking system consists of non-bank financial institutions that, like banks, borrow short, and in liquid forms, and lend or invest long in less liquid assets. The system includes SIVs, conduits, money funds, monolines, investment banks, hedge funds and other non-bank financial institutions. (and now the Federal Reserve) These institutions are subject to market risk, credit risk and especially liquidity risk, since their liabilities are short-term while their assets are more long term and illiquid.

  • Sustained increases in household saving would cause a difficult period of restructuring for the American economy, which has become increasingly driven by consumer spending. Such spending makes up about 70 percent of the nation’s gross domestic product.
Shop shop - til you drop. Shop shop - never stop. -Def Leppard
  • Add the decline in consumer spending to the planned expiration of government stimulus spending, and a painful readjustment in demand for goods and services could occur, economists say. The effect would be felt here and abroad, as many developing economies also depend on America’s big-spending ways. (wait, government spending fixed all these problems - see overseas stock markets. Decoupling was exposed as a fraud spring 2008, but it's back baby... it's back.)
  • If Americans cut back, as they almost have to do, what will replace that source of demand?” asked William G. Gale, director of the economic studies program at the Brookings Institution, a liberal-centrist policy research group. “The easy answer is the Chinese consumer,” he said, but unlike their more prodigal American counterparts, the Chinese save about a quarter of what they earn. “We may cut back faster than they expand into that space, so there might be a lull.” (it all comes back to the Chinese, all the world's hopes are based on their government spending and then like magic a populace that has historically saved massive amounts of their income.... will turn American-like. Yep... the pundits said so, so must happen. It's such a cool and easy to explain thesis, you can almost see the stock jocks falling over themselves into this one.)
What's one way the government can help us shop again? Oh, I don't know - maybe help prop the stock market up... umm, sorry, did I say prop? That word has multiple meanings...
  • Consumers have lost a huge chunk of their net worth, in the housing bust and the stock market, and to resuscitate their retirement accounts or children’s college funds they will have to channel more of their paychecks toward saving — unless those asset markets soar again. [Feb 4, 2009: Americans Lost $10.2 Trillion in 2008]
This next reason I had to LAUGH at after we exposed what the FHA is now doing last week
  • Forms of easy credit that were once prevalent, like mortgages with no down payments, also may not return, either because the government regulates them out of existence or because banks dare not venture back into such risky lending. That means if Americans want to buy a house, they will have to save more and borrow less.
Share a laugh with me as you read what I highlighted above and then see these stories - nope dear writer, American have no need to save more or borrow less to buy a home; the government is working overtime to make sure the same policies we had mid decade are back [May 8: Minyanville - Subprime Lending is Back with a Vengeance] [May 6: WSJ - FHA Loans: The Next Housing Bust]
  • “People are realizing they can’t accumulate everything they want anymore, and they’ll have to prioritize more,” he said. “That may be hard for a lot of brands — figuring out not only how to get considered by consumers, but put at the top of their list.”
Thankfully in the stock market, mutual fund managers know the playbook - buy consumer discretionary ahead of the rebound - don't read Gallup polls. We're going right back to 2005-2006 per the stock action. Shop shop - til you drop. Shop shop - never stop.
  • A recent Gallup poll found that most Americans who have recently increased their savings believe their budget adjustments represent a “new, normal pattern for years ahead.”
Again, in the long run a savings rate would actually be quite a nice thing for the country... but since we don't want to take the 1x time hit, we'll avoid that.
  • Despite the immediate jolt to the economy, more personal saving would be a positive step in the long run, analysts say. More saving leads to more investment, which promotes economic growth, which leads to better living standards.
Enjoy the paper printing prosperity - it's less SPOOKY.

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