Household Cash versus Debt
Yesterday, DF asked about the negative savings rate. I noted the RM column I wrote last June (Ignore Statistical Oddities at Your Peril) in response. Like all unsustainable things, they will continue until they no longer can. This is often for far longer than expected, but not forever (an admittedly large range of time).
Let's look at the nitty gritty: In 2006, the US savings rate was minus 1%. The previous year in which the US "enjoyed" a negative savings rate was, well, the previous year -- 2005. Prior to that loathsome twosome, we have to go wayback to the Great Depression (early 1930s) to find one single negative savings rate year.
As Abelson points out this morning, "the only time ever before that our worthy population had two years in a row of negative savings, as we did in '05 and '06, was in those heartbreak years, 1932 and 1933." He adds:
"The dismal disclosure of just how effectively Jane and John Q. are spending more than they earn has been greeted with the usual serious sophistry from the usual Panglossian pundits. Their contemptuous claim is that benighted worrywarts like ourselves who fret over such inconsequentials as a negative savings rate are just plain silly. And, it grieves us to confess, after carefully mulling their arguments, we do feel, well, just plain silly.
For how could we overlook the fact that savings as officially defined don't include the equity in houses and investment in stocks. And, as we all know, it is decreed that house prices can go only one way -- up. Pay no heed to minor variations in that sacrosanct trend; they probably won't last more than five, six years at the outside."
A fresh take on the subject comes courtesy of MacroMaven's Stephanie Pomboy (via Alan Abelson). Stephanie notes not just the negative national savings rate, but two other relevant data points: The ratio of cash to debt, and how that cash and debt is distributed in the country:
"THE PARADOX OF A LIQUIDITY-FUELED STOCK MARKET in a land rife with illiquid inhabitants is pointed up by the little chart on the right. The one that depicts cash as a percentage of household debt. Which, as is evident at a glance, is shrinking like the proverbial snowball in hell.
That highly graphic graphic comes to us from the excellent Stephanie Pomboy and her irreverent and invariably informative (block those alliterations!) MacroMavens commentary. As she observes, "For all the bragging about the $6 trillion in cash households have sitting on their balance sheets, relative to household debt, this cash cushion is at a record low!"
More disturbing still, Stephanie goes on, is that the households with the cash (and assets) "are not the ones with the debt." Rather, alas, the top 1% of householders hold 30% of the assets and 7% of the debt, while the bottom 50% hold a mere 6% of assets but a burdensome 24% of the debt.
What Stephanie envisions is that just as "the story in 2005-2006 was the cash buildup on corporate balance sheets," the story for 2007-2008 might very conceivably be "a similar increase in saving by households, as they endeavor to repair the damage inflicted by the burst of the housing bubble."
What might this mean? The precise timing is difficult to ascertain -- but if the "great mass of consumers finally takes a deep breath and cuts back on their profligate spending," it would not be a particularly positive event for the economy or corporate earnings. And corporate earnings in Q4, we learn this morning, look like they have finally broken their streak of double digits gains.
As to the stock market, it has been driven by liquidity and momentum, and that can continue for quite a while, regardless of the fundamentals. For those who question whether investing contra-to the fundamentals is the way to go, I suggest Ned Davis' book, Being Right or Making Money.
>
UPDATE February 3, 2006 10:52 am
Lots more charts and graphs here:
We're Swimming In Liquidity, Aren't We?
http://www.safehaven.com/showarticle.cfm?id=6819&pv=1
Source:
Spendthrift Nation
Alan Abelson
Barron's February 5, 2007
UP AND DOWN WALL STREET
http://online.barrons.com/article/SB117046213014796911.html
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Comments
Looks like the "K" cycle don't it!
Posted by: the Duke of Exeter's daughter | Feb 3, 2007 9:14:35 AM
Barry,
On my blog yesterday I noted a short statement concerning the negative savings rate, but additionally posted a website which appears to be offering the consumer yet another way to increase their debt load. Frightening!
Thanks Barry...your site is a daily read for us.
Posted by: StrasserTalk | Feb 3, 2007 10:04:25 AM
Barry:
Great post. I posted a link to this article and also did a post Thursday about the negative savings rate . The Commerce Department is trying to discount it as "no big deal;" but the only reason we are not having more bankruptcies is because the last Congress and President Bush made it harder to file for bankruptcy relief. Otherwise my business would be going like gangbusters.
Posted by: OkieLawyer | Feb 3, 2007 10:16:01 AM
Barry,
I seriously question this negative savings statistic, for one it is calculated using after Tax income. It doesn't take into the account of 401(k) savings. Lot of middle class have their savings in 401(k).
Similar statistic, Credit card loans as % of household income, I don't trust this either because you can get a loan from credit cards at a much cheaper rate(1.99 to 3.99 for life) using balence tranfers. These loans are much cheaper than credit union/banks for Autos and mortagage loans. Heck, I can even do a carry trade, taking loan from credit card and put it in Fedility Money market.
What I would like to see is % of credit card loans where rate is grater than (Prime + few points).
Posted by: Sri | Feb 3, 2007 11:12:35 AM
1) Where can I get a 1.99% to 3.99% credit card rate for life? Sign me up -- I'll transfer my secured 6% mortgage over
2) As we have noted before, the average family has a small portion of money in their 401ks/IRAs;
lOn average, their homes -- and in a few cases their cars -- are worth much more . . .
Posted by: Barry Ritholtz | Feb 3, 2007 11:21:23 AM
"but if the "great mass of consumers finally takes a deep breath and cuts back on their profligate spending"
I've been hearing this "but if" from the first moment I started to follow the business news. The more interesting question is, why do Americans never stop spending?
Posted by: drsqueeze.com | Feb 3, 2007 11:23:16 AM
Yo Barr,
On point as always...Just a source note....The update info was grabbed(stolen) from the Friday wrap up on Financial Sense Online and was done by Brian Pretti...
http://www.financialsense.com/Market/wrapup.htm...
Holla
Posted by: SINGER | Feb 3, 2007 11:35:15 AM
Barry,
If you want here is atleat one card where you can get 2.99% for the life for Balance transfer, max $50,0000.
http://www.advanta.com
Posted by: Sri | Feb 3, 2007 12:03:40 PM
I just checked the http://www.advanta.com site and the posted rate was 7.5%
Posted by: Sailorman | Feb 3, 2007 12:26:00 PM
Most CC co's have "life of loan" low interest transfers Barry.
A few are pretty low, .99% and up. Credit limit may vary.
The latest ones I've seen are from Discover, Washington Mutual and Citibank.
I like the idea of moving secured debt to unsecured.....very good indeed.
Posted by: Craig | Feb 3, 2007 12:27:44 PM
Sailorman,
Call Advanta and ask them for balence transfer card. They have different cards. Right now they are advertising different plan on the website. If you call them, they will take your application.
Posted by: Sri | Feb 3, 2007 12:57:23 PM
I think we're all waiting for the sum of our personal debts to be bundled in one big universal non-recourse loan, just like the original mortgage loans offered in California and the loans our CEO's basically get from their companies. And btw, did Bernanke tell Japan, China, et al that our foreign debts are all non-recourse? That's the only way it makes any sense.
Posted by: Teddy | Feb 3, 2007 12:58:35 PM
As I look around at my co leading edge Boomer cohort I see a lot of spending that is not discretionary. Medical expenses lead.
The Boomers I know are facing personal medical expenses and family medical expenses. Babies that would have died as infants are now surviving and requiring care into their adult years. The infirm parents of Boomers are living longer and dieing longer. These aren't bad things but, all of that care is expensive and can't be turned off. That is draining many Boomers.
Posted by: Fred | Feb 3, 2007 1:38:03 PM
SN -- what is the source of your claim that savings does not include 401s?
I keep running into this comment and it is completely wrong.
Moreover, it is not calculated using after tax income. I suggest you go to BEA and find out what you are talking about.
Posted by: spencer | Feb 3, 2007 1:53:01 PM
http://www.opinionjournal.com/weekend/hottopic/?id=110009619
Would like your opinion in light of this article, Barry
~~~
BR: I no longer pay attention to the WSJ Op-Eds. On way far far too many occasions, I have caught them playing fast and loose with facts, engaging in rhetorical sleights of hand, and generally being "weasly." They seem to have little regard for "The Truth."
Additionally, it is a waste of time debating the intellectually dishonest.
I know many WSJ reporters personally -- the paper is widely thought of as one of the best in the World -- and many (but not all) are embarrassed to be associated with the Op-Ed page.
Posted by: Nova Law | Feb 3, 2007 2:07:26 PM
Nova Law:
I read it. The writer wants to count illiquid assets as "income." The equity that is being built to your retirement or house is not "income." You cannot spend your house, and if you take the money out of your 401K, you will probably pay a penalty. If you take out a loan on your house, you are incurring more debt, which is reducing the value of your assets.
I get the distinct impression that the writer wants to confuse "income" with "wealth." As many financial planners will tell you, there are many people in the country who are high-income earners, but who are not wealthy.
Another problem with the writer's analysis is that those house values may very well be overinflated due to a manic market or even fraud (or a combination of the two).
The value of your 401K may very well be getting eaten away by the effects of inflation.
Does this help?
Posted by: OkieLawyer | Feb 3, 2007 2:33:22 PM
As debt goes parabolic vs. income,i.e., as the ratio moves towards infinity, that's either bankruptcy or non-recourse loans. As prices of assets, food, shelter, services, etc explode up vs. minimal productivity gains, that's either inflation or inflation excluding inflation.
Posted by: Teddy | Feb 3, 2007 2:34:06 PM
the comment i would make about the low interest credit card "for life" is that it is probably bs. i know cc companies can change the rate on you for whatever reason they find necessary. read the fine print. they,the credit card company, don't have to let you keep that low balance transfer rate. they can change it whenever they want. i know one of the stipulations is if your credit score dips a couple of points one month. which happens all the time for most people. if you try to play that game you will lose, guaranteed. the words "good deal" and credit card should never be used in the same sentence. "2.99% for the life of the balance transer". only until they decide to change the rules to life of the balance transfer meant 1 year.
Posted by: Michael | Feb 3, 2007 2:46:51 PM
BR asked Where can I get a 1.99% to 3.99% credit card rate for life? Sign me up -- I'll transfer my secured 6% mortgage over.
I had received a few of these around the same time ARM's were at their 3 3/4% lows around 2003-2004 or so.
But, I doubt also that any bank is giving away these offers now. In fact, I still have a 4% citibank card for life, and they have tried to buy me out - offering 10% bonus for paying off my balance and reducing my credit line by any amount paid. I guess they don't like my balance of 4% for life anymore!
I wish my balance transfer line was as large as my mortgage at that time!
Posted by: Michael C. | Feb 3, 2007 3:15:54 PM
Just checked in on Advanta: 2.99% on balance transfers up to $49,750 for the life of the balance.
New charges are 9.99% (Prime plus 1.74%)
If you have a large balance, thats a good deal.
Their other plan is 0% for 15 months, then 7.99% fixed, with 5% cash back on certain purchases (the rest were 1%)
800-780-3945
Posted by: Barry Ritholtz | Feb 3, 2007 3:16:47 PM
The "ones with the debt" will eventually default after a long period of making minimum payments, and then start over from zero without an intervening period of retrenchment....i.e. consumers will not change and become savers.
When the defaults roll in, the losses will pop up in the MBS
and financials (i.e. Mutual Funds, 401k captive or otherwise) of those who "are not the ones holding debt". If the losses can be spread out enough and simply reduce the other gains, it'll just keep on going like this for decades. The debtors will keep consuming, while those who "are not the ones with debt" will continue under-consuming and eating the losses as part
of the cost of their gains.
This is why one should never wait around for consumers to halt consumption...it simply won't happen.
The changes are always instigated by the savers, who may
pull up stakes if they perceive more risk of losses than of gains. Whenever they stop providing the savings to those with the consumptive habits, the music stops. Sometimes abruptly.
Posted by: RP | Feb 3, 2007 4:06:58 PM
Everytime the negative savings rate is mentioned the perma-bulls come out full force with "they don't include 401K savings"
Well, they didn't include 401k savings 2 years ago, nor did they 5 years ago and probably not 10 years ago! Maybe the -1% does not represent the true savings rate but in my book, the hige drop in savings rate over a decade means a lot.
Especially when one considers that 50% of employees cash out their 401k when they leave their jobs... Isn't it in America that the workforce is the most mobile?
So what's next to stimulate the economy? Thousands quickly spending their retirement savings with the coming layoffs
Posted by: D. | Feb 3, 2007 4:46:02 PM
"I get the distinct impression that the writer wants to confuse "income" with "wealth." As many financial planners will tell you, there are many people in the country who are high-income earners, but who are not wealthy."
OkieLawyer, sign me as PghLawyer, and yeah, that's exactly what this writer has attempted.
I suppose it's an attempt to define a new economic reality, but the common law definition, now codified in most states under the "Uniform Principal and Income Act", continues to differentiate capital gains (principal) from income, and wisely so. The common law has always recognized the fleeting nature of capital gains that can turn to losses, putting imprudent trustees on the hook for personal liability.
So, sure America, go ahead and spend a "gain" that may or may not be there tomorrow. Fiduciary trustees have been sued over this approach for centuries.
Posted by: winjr | Feb 3, 2007 5:06:59 PM
The personal savings rate is negative - not the national savings rate. This obscures the strength of corporate savings and investment.
Posted by: JKH | Feb 3, 2007 6:37:09 PM
JKH, the current account deficit is the truest measure of national savings, and it is accelerating at a 25% rate NEGATIVELY AND HAS BEEN FOR YEARS.
Posted by: Teddy | Feb 3, 2007 6:51:29 PM
