>>>households with the cash....are not the ones with the debt<<<
A snippet from Alan Abelson's weekly Barrons column:
....according to the hard-working civil servants in Washington whose job is to keep tabs on such vital statistics, the citizenry of this great land wound up 2006 with a negative savings rate -- of minus 1%, to be exact. To find anything worse in thriftiness, you have to go back to the early 1930s, during the Great Depression.
As a matter of fact, 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. ......
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.
And, in like vein (but not the one you're tempted to open because of the rapidly depreciating value of your house), stocks are enjoying what in many ways is an even more impressive bull market than that celebrated number that came crashing to earth in 2000 -- forgive us, that was temporarily interrupted in 2000.
Just think of it: The Dow has been setting new all-time highs almost daily and, in the process, has put together a truly fabulous performance. It has gone something like 140 trading days in a row without suffering even a 2% decline, the gaudiest such streak in 47 years. Obviously, the stock market's got all the momentum in the world and, if that weren't enough, it's got liquidity to burn (add mixing metaphors to our sundry and numerous sins).
So why worry?
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."
If so, the effect of a great mass of consumers finally taking a deep breath and cutting back on their profligate spending would be grim news for the economy, corporate earnings and, hard as it may be to believe, the stock market.
THE OTHER CHART ON THE PAGE COMES FROM another astute viewer of the investment scene and also no stranger to this space, Alan Newman, editor of CrossCurrents.
What it shows, among other things, is that the insatiable appetite for credit that has been such a critical element in the various asset bubbles in recent years (housing, private equity, hedge funds, etc., etc.), hugely aided and abetted by the open-spigot policy of the Federal Reserve, has been a powerful reason for the great revival in the stock market.
As Alan notes, the combined debit balances of the Big Board and Nasdaq have reached a record high of $303.29 billion. That tops the previous peak of $299.93 billion, set at the end of March 2000.
Essentially, we view the chart as a profile in extreme speculation. And, as we saw in 2000, that kind of excess is typically the perfect prelude to a fall. Reflecting on the spike in margin debt, Alan asks, "How can anyone in a fiduciary capacity buy into this rally at this juncture?"
Maybe the answer is that, beyond the fact that it's other people's money, fiduciaries typically get paid whether or not they perform. (You can always fire them, but that's usually too late to rescue your precious dollars). Perhaps if they had to make some restitution, in other words cough up moola when their stocks went down instead of up, that might do wonders in concentrating their minds on risk.
THERE WAS A MESS -- AND WE USE THE WORD advisedly -- of economic reports last week, from the preliminary take on fourth-quarter GDP to January employment. Actually, collectively, they were kind of an engaging mess, since they were accommodatingly various enough to permit you to pick and choose and not disturb your preconceptions.
Bulls could take heart, and they raced lickety-split to do so, on the surprisingly strong GDP, which weighed in at a 3.5% annual rate, sparked by a surge (why is that word so familiar?) in consumer spending. On the other hand, the employment report was a downer, with a pretty meager 111,000 jobs added last month (Dresdner Kleinwort hit it on the nose), even though the consensus expected close to 150,000; unemployment ticked up to 4.6%.
What bothered us most about the job numbers was that relatively few industries actually accounted for the bulk of the additions. Overall, we're still of a mind that the surprises this year by the economy, employment and earnings will be on the downside. |
