James Altucher: "The Underlevered American Household"
Lets just look at what's wrong with a few items in Jim Altucher's column yesterday, "The Underlevered American Household."
I may have to address the rest of the erroneous analysis in a full column -- but for now, let's stick with the first chart in the article. Jim believes the following chart is "mostly useless."
>
click for larger graph
Source: BEA
>
We are consuming more than we are earning. I suspect the reason for this is the failure to adapt economically in the post crash environment. Despite Real Income being negative, as a nation, we have not adjusted our consumption habits. Cheap money ala Greenspan has allowed us to party like its 1999. Only its not -- its a post crash world.
The Failure to recognize the significant shift in the wage environment is potentially worrisome, with consumer spending accounting for almost 70% of GDP.
Perhaps a little context might provide some utility. The United States, for the first time since the Great Depression, has a negative personal savings rate. Here's what that looks like graphically:
>
77 year chart, Personal Savings Rate
click for larger graph
Jumbo version of this chart is here
The savings spike during WWII was aberrant -- War Bonds, rationing, the lack of consumer goods (the industrial sector shifted to military production) explain why those five years were the all time savings highs.
And the rest of the time -- why was savings rate so much higher throughout the rest of the century?
Jim dismisses it, claiming this "means that according to the way economists working for the government calculate income and expenditures, we are spending more than we make."
That's a snide dismissal of the data. This is not a seasonally adjusted, hedonically altered, absurdly core focused number. This is a simple series that measures savings, spending and income.
Jim also notes that "capital gains are not included in personal income." But neither was it included during the prior three quarters of a century of data. It is irrelevant to the question of "Are we spending more than we earn?"
>
I cannot so easily dismiss an data which represents an historical anomaly. Indeed, anytime something occurs in a long data series which has been a rarity historically, its worth sitting up and paying notice.
>
UPDATE: June 23, 2006 11:37am
Wow, this is a surprisingly popular post -- both the WSJ and Dealbreaker picked it up:
>
Source:
The Underlevered American Household
James Altucher
RealMoney.com, 6/21/2006 2:30 PM
http://www.thestreet.com/p/_rms/rmoney/marketanalysis/10292988.html
Friday, June 23, 2006 | 06:18 AM | Permalink
| Comments (61)
| TrackBack (1)
add to de.li.cious | 
digg this! | 
add to technorati | 
email this post
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c52a953ef00d83429eb2553ef
Listed below are links to weblogs that reference James Altucher: "The Underlevered American Household":
» The final straw on the economic camels back from Subramanian Rajagopal's Weblog
Via The Big Picture:
For the first time since the Great Depresssion, savings rate is now negative. See below the 77 year chart for Personal Savings Rate.
Consumer spending accounts for 70% GDP. Now go figure how long the party will last. Get ready fo... [Read More]
Tracked on Jun 25, 2006 3:14:55 AM
Comments
I'm mixed and willing to believe either conclusion. What'd be interesting is if there was data to capture what James thinks is missing from the 'savings' and add that back over time to see if there is a net decrease in that number. I'm tempted to believe that since we're comparing apples to apples that the decrease is real. But certainly home and stock ownership are more prevalent now and there is some boost from capital gains. I just don't know how much.
Posted by: noname | Jun 23, 2006 7:40:16 AM
I've done some thinking about this and at first I thought it was a result of the fact that the rate of interest paid on savings is hardly worth the bother. Even with the fed raising rates banks have absolutely no incentive to pay more money to savers because they are making so much lending long on credit cards at 21% or better.
But I think my father's generation (people who actually participated in the festivities of the 30's, early 40's) became savers because they saw that as their only salvation. My generation (war babies) grew up with a hunger for everything and suddenly there was a lot of "everything." Also a lot of easily available credit to buy "everything" with.
Credit eventually takes its toll on everyone in that it makes everything more expensive than it should be. Consequently the "extra money" that our parents put to savings we have used to service debt. If you were to overlay a debt chart on the savings chart I think you will see clearly where the savings went.
Is that a good thing or a bad thing? I don't know. It is just a fact of life in an economy where nothing has any real value and the only thing that matters is interest rates.
Posted by: john | Jun 23, 2006 7:41:58 AM
I have heard it said that the savings rate doesnt include 401k or IRA contributions. Does it include investment which is a form of savings? Is that true and would the numbers be different if it were true?
Posted by: mike | Jun 23, 2006 8:07:45 AM
I'd really love to see the historical trend, broken-down age-range.
As the size of older age-groups grow relative to the overall population, one would expect a drop in the overall rate. So, a second level of detail -- by age-range -- would highlight the nature of the "problem".
Posted by: Software Nerd | Jun 23, 2006 8:18:46 AM
so if we are to believe investment income is subsidizing the consumer, does that imply that bear markets would contribute to an economic slowdown? IE, slow economy > markets down > consumers lose cap gains income subsidy > economy slows even more > etc > etc.
Posted by: 23 | Jun 23, 2006 8:45:27 AM
"capital gains are not included in personal income." But neither was it included during the prior three quarters of a century of data"...however, lots of money that 30 years ago would have been in savings accounts (with the interest presumably included in personal income) is now in stocks, with most of the total return occurring in the form of capital gains.
I don't think this by any means explains the whole trend, but it might be part of it.
Posted by: david foster | Jun 23, 2006 8:46:10 AM
Even though I would not conceive of doing it, a large number of Americans use their homes as ATMs. As the chart on this site showed on the 21st, the Mortgage Equity Extraction has been massive the last 5 yrs. - enough it seems to keep our economy out of recession. Some say Greenspan was wrong to lower rates as he did which supercharged home prices - but what choice did he have?
Posted by: Steve C | Jun 23, 2006 8:51:01 AM
Not including 401Ks in the savings rate adds a wrinkle, but if you view the 401K as the replacement for the pension than many people used to have, the comparison of today's rate with earlier periods may still be valid.
Posted by: royce | Jun 23, 2006 8:53:54 AM
consumption and debt have increased as the level of home equity has increased the last 10 years... it's the exact reason that homeowners re-mortgage for MEW's and use that for consumption..... as real estate values fall , I would imagine that consumption will fall and savings rate levels will rise some
Posted by: jj | Jun 23, 2006 8:53:54 AM
This is a hot debate. And, frankly, one that has supporters on each side. The statistics are inconclusive IMO. On the negative side, everyone believes Americans are endless spenders not capable of balancing their checkbook . On the positive side, people quote America's wealth, which regardless of how you slice it, is massive.
There are so many ways to manipulate this statistic. One is the fact that stocks and as I recall bonds are not included whether in a 401K or not. The other is there will be a time when America's savings rate will likely turn negative and stay negative forever. The number of people over 65 since 1980 has exploded. I'm too lazy to look up the statistics but I've seen them before. So, if there are 4x the number of people over 65 today versus 25 years ago and, let's say, 6x 40 years ago, those people are going to likely be on the "not saving" side of the equation the way this is calculated. But, who has all of the wealth? People who are over 55 and have worked a life time to create it.
It's worth noting but if anyone would actually bother to do some research and give us some real facts, it might be determined to be irrelevant.
Posted by: B | Jun 23, 2006 9:10:36 AM
In the 1930's assets were plummeting. Today they are rising.
The FED has successfully avoided a depression after the NASDAQ bubble unlike the 1930’s .
While there will be problems (there are always problems) the future is good and comparisons to the great depression are unwarranted fear mongering.
Posted by: KL2005 | Jun 23, 2006 9:16:53 AM
The point about pensions is a critical one. If it's true that defined-benefit pensions are not included in savings, and that stock/bond investments (whether in 401Ks or outside them) aren't either, then:
1)Two of the biggest repositories of true savings are missing from the data
2)The trendline is probably worse than it looks, because traditional pensions probably represented a larger dollar amount than do their 401-K replacements.
Posted by: david foster | Jun 23, 2006 9:21:02 AM
401s are included in the data. the savings rate is the difference between total income and total personal consumption. so if you put part of your income into a 401 rather then buying a new car or something it is
included.
the meme that 401s are excluded is completely false.
The point that capital gains are not included does distort the data, but it is minor. When
people realize some of their capital gains by selling the assets it becomes income that can be spent. so the spending is counted, but the income is not.
This is becomming an issue because we are now starting to see a significant number of retirees using their past capital gains to finance consumption. But as far as I can tell adjusting for this might make the savings rate plus one percent rather then minus one percent.
It would not change the long term trend in the chart.
Posted by: spencer | Jun 23, 2006 9:37:59 AM
I caught a very interesting interview with Dan Morehead of Pantera (I believe he's one of Julian Robertson's tiger cubs) on Bloomberg TV a few weeks ago in which the negative savings rate was discussed. One thing he mentioned that I had never heard cited before is that the spending habits of the uber-wealthy skew the statistic. As an example, he pointed to Larry Ellison, who for years has spent many multiples of what he has earned in "compensation".
Examples I can think of are Richard Kinder of Kinder Morgan, who pays himself a salary of $0 per year. And Warren Buffett earns $100,000 (but my impression is he is a very frugal man so he may not spend much more than that!!)
Posted by: S | Jun 23, 2006 9:45:34 AM
"The point that capital gains are not included does distort the data, but it is minor. When people realize some of their capital gains by selling the assets it becomes income that can be spent. so the spending is counted, but the income is not."
The confusion between savings and capital gains is stunning it its persistence. Capital gains ARE NOT savings. In order for John to realize his capital gains he has to sell the assets to Sam. Sam buys John's assets with his (Sam's) savings. Aggregate change in "savings": 0. Zero. Nil. One man's gain is the other's loss. It's called "equilibrium": for every seller there's a buyer.
Small Investor Chronicles
Posted by: Alex Khenkin | Jun 23, 2006 9:50:24 AM
Capital gains in the stock market?? Huh????
There've been no net capital gains in the stock market since about 1998. Any gains on amounts invested in the valley of mid-'02 thru mid-'03 are more than offset by the losses on the inflows of the peak bubble years.
Barry made one of the essential points about capital gains -- that they've always been there -- and spencer just above makes another.
It is deeply disturbing that people who can't (or won't) understand these basic realities are able to pose as authorities on finance.
Posted by: jm | Jun 23, 2006 9:55:51 AM
Stock and bond ownership including 401(k) investment isn't taken into consideration, because they are not savings. The savings rate is a current measure of a household's ability to pay current expenses. Whether it is borrowing against the home, the 401(k), or realizing capital gains, the person still has more current expenses than current income. A rational person will not continue converting assets into money, either through sale or debt, to subsidize a current income deficit. Eventually, they will reduce consumption.
Posted by: M.Z. Forrest | Jun 23, 2006 9:58:42 AM
Here's what the Fed has to say about the personal savings rate and how some of it is an efficient reallocation of resources:
http://www.frbsf.org/publications/economics/letter/2002/el2002-09.html
Posted by: RB | Jun 23, 2006 10:02:55 AM
I am amazed by how skeptical people are about this terrible savings rate!!! Don't you see the spending frenzy going on around you?
1. Defined benefit plans are not what they used to be. Many are unfunded and the best thing that could happen to keep corporate America's pensions off the government's back is for rates to head higher in order to shrink liabilities.
2. More than 50% of America's boomers have less than 50K saved up for retirement. I can bet my bottom dollar that more than a couple of cash strapped boomers will be selling their homes at the same time to get some equity. Who's going to be buying their houses? Gen-X? We're much less than them and many without a penny! Go look at the US population pyramid, it's the first time since the 30s that the group filling the shoes is smaller than that of the leading group!
If this chart can't convince you, I don't know what will!
Posted by: D. | Jun 23, 2006 10:07:35 AM
this chart is similar to the debate about how you value a company .... on Assets or Income .... that's why there are income statements and balance sheets ......Buffett looks at Balance Sheets , he couldn't care less on Income.......would someone tell us what the average Balance sheets is in the US / individual ... I think that would be very constructive to this debate
Posted by: ffm | Jun 23, 2006 10:26:14 AM
I don't see a spending frenzy around me. That is, other than those who have no meaning in their life and, thus, become compulsive spenders to feed their the pit of emptiness. Who do you hang around with?
Could the POSSIBLE fact that 50% of some segment of the population having less than $50,000 be based only on the conclusion they are spend crazy? Or could it be that income and wealth disparity are greater than any time in modern history thus making it nearly impossible for many to save? You ever work at Wal-mart? Care to tell me how to save making $8 an hour? But, we are told those working in retail in that wage segment are teenagers. Ever see a teenager working at Wal-mart? No. I see the wage group you say only have $50,000 saved.
If savings rates are that low for a large percentage of the populaton, I'd be more inclined to believe it is because after health care, school, food, rent, insurance, taxes, staples, autos, gasoline, etc, etc, etc, they don't have alot left in their pocket. So, are Americans totally careless as you'd have us believe? If so, that statistically means you are indicting your family, friends, associates, etc for all being stupid. I know very few people like that. JMHO.
Posted by: B | Jun 23, 2006 10:30:54 AM
Since compensation is skewed so much to the high end, it would be interesting to see what the savings rate is for, say, a 90% or 95% trimmed distribution. My guess is that the savings rate at the high end is higher, not lower, than it is in the middle. Warren Buffet is an anomaly.
Posted by: Sestina | Jun 23, 2006 10:51:07 AM
"Defined benefit plans are not what they used to be. Many are unfunded and the best thing that could happen to keep corporate America's pensions off the government's back is for rates to head higher in order to shrink liabilities."
Seems rather odd. So, do you know how the government debt is financed? Since the late 90s, short term. On average, federal debt has a maturity of five years or less. By keeping its debt short-term, the government has been able to realize a decline net interest payments. This will lead to even higher deficits as rising rates slow down the economy, shrink government tax revenues, and increase its expenses. The U.S. government has a short term ARM just like the consumer.
So, in addition to all of the other reasons why higher rates would kill the consumer, housing, etc we'd want to raise rates to help pensions?
Posted by: Andy | Jun 23, 2006 10:53:41 AM
Alex Khenkin nailed it. Capital gains are NOT, I repeat NOT savings because it requires someone else to take his savings out of the bank or for money to be created out of thin air to pay for this cashing in of capital gains. This concept also includes houses which are an asset and NOT savings.
Posted by: alan | Jun 23, 2006 10:58:34 AM
According to the Fed, 65% of the savings is contributed by the top quintile. And despite that, if we have negative savings, it seems to imply poor savings indeed and not just an income disparity.
Posted by: RB | Jun 23, 2006 10:58:42 AM
