New Real Money Column: Ignore Statistical Oddities at Your Peril

Monday, June 26, 2006 | 03:24 PM

Realmoney_3 I have a new column up at Real Money: Ignore Statistical Oddities at Your Peril

It is essentially a follow up to last week's discussion of the Underleveraged American Family by James Altucher. Its my  attempt to dissect this issue of not enough family debt.

Here is an excerpt from the column:

"Any time an unusual event repeats, it behooves us to consider the similarities and differences. Because Altucher laid out how the two eras are different, I want to concentrate on a few disturbing parallels. We are not in an identical period to 1932-33, but the similarities should not be blithely dismissed.

To begin with, each period of a negative savings rate came on the heels of a major market crash. From 2000 to 2003, the Nasdaq lost 78% of its value. That is roughly equivalent to the loss the Dow Jones Industrial Average suffered following the 1929 crash over a similar period. To me, that is the most significant factor tying the two periods together.

Second, each period followed an era of consumptive excess. In the first instance, it was the "Roaring '20s," in the second, the "Dot-Com '90s." In both cases, the population continued its high-spending ways long after the flush times of the prior good times had ended.

I suspect the reason for this is psychological. We are creatures of habit, and when we became accustomed to a certain lifestyle, it is difficult to downshift. We grow used to our lattes, navigation systems and iPods. Our sense of self-worth too often gets tied up in these material objects. It's not easy to tighten our belts suddenly or go without, especially after a period of conveniences and luxury.

Alas, these traits have led to a failure to adapt economically in the post-crash environment. Despite real income being negative, many families have yet to adjust their consumption. Cheap money a la Alan Greenspan has allowed us to party like it's 1999. Only it is no longer the '90s -- it is once again a post-crash world.

Hence, we have a negative savings rate. This failure to recognize a significant shift in the economic environment is worrisome. Consumer spending accounts for nearly 70% of GDP. If the U.S. consumer suddenly finds himself out of cash and/or out of credit, the economy will be in a heap-o-trouble."

See also this chart courtesty of  Michael Panzner of Collins Stewart:



UPDATE JUNE 28, 2006:  11:29AM

This is not just an individual phenomena, but a corporate one as well:

"Incidentally, a similarly disproportionate distribution of cash exists among public U.S. corporations. Thomas McManus of Banc of America Securities did a fascinating analysis last year of corporate America's cash-rich balance sheets -- estimated to be as high as a trillion dollars. Mr. McManus looked at the S&P 1500 companies (excluding those classified as financials) that are in control of over $900 billion in cash and equivalents. He discovered that most of the stash was concentrated among very few companies. More than 25% of the $900 billion is held by only 10 companies, while 29 more control the next 25%."


Ignore Statistical Oddities at Your Peril
6/26/2006 2:56 PM EDT

Monday, June 26, 2006 | 03:24 PM | Permalink | Comments (28) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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Haven't I seen similar charts comparing GDP with and without housing values or mortgage equity lines of credit?

Posted by: HT | Jun 26, 2006 3:57:26 PM

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