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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: TimF who wrote (82947)	8/14/2000 1:39:15 PM
From: pater tenebrarum	Respond to of 132070

Tim, there's a reason why stock market investments are not counted as savings. after all the value of stock market investments is determined by only the last trade - it is ephemeral. if if only 5% of the capital invested in the market were to be withdrawn, the market would crash and the value of all remaining investments be accordingly impaired.(the 5% figure is somewhat arbitrary, but studies have shown 3% did it in '87). the argument that money in the stock market represents savings is thus flawed. btw, it is normal for the savings rate to go down during economic expansions, and rise during contractions.however, the current situation is unusual, as the savings rate has plunged below zero, while at the same time household debt as a percentage of disposable income is at a record high. should the assets on the other side of the balance sheet (mainly home equity and stocks) become less valuable, households will be particularly ill-prepared to deal with the situation, as their leverage would soar even higher. when the big bull market of the sixties ended, a roughly similar, if less extreme situation existed - most nest eggs were in stocks. in the '73 - '74 bear market the situation reversed - households left the market and the savings rate soared (not clearly visible on the LT chart, as in terms of today's money it was but a blip). the point being that market peaks of significance always coincide with very low savings rates, widespread participation of households in the stock market and record consumer confidence. note, this doesn't mean that we're at a trough/peak in these indicators right NOW...they could conceivable get more extreme (i.e. savings rate still lower, stock market even higher). but the reversal when it comes will likely be of a secular nature. hb