From Barron's:
THE FOLKS AT DEUTSCHE BANK had some recent interesting comments on the market and the economy. Their enthusiasm for equities remains restrained. They espy the "real value level" for the market at perhaps 100 points lower on the S&P 500, which was then around 820 (and closed last week above 848). At, say, 720 or thereabouts, and assuming $49 a share in earnings, they reckon the market might begin to be attractive, thanks to a 14.7 times multiple, a notch below its long-term average P/E of 15.5. You could quarrel with both the earnings estimate and the inflationary impact of the bubble years on that 15.5 number -- but why quibble?
Deutsche Bank points out that since the S&P 500 is down well over 700 points from its peak, "another 100 could be just another leak from the pipes of the U.S. economy." But then, it wonders -- and not so idly -- "How many leaks make a flood?"
It more or less answers the question with the observation that just as the last drop of water breaks a dam, so another 100 points might break this struggling economy. That's because of "the high dependency of the real economy on financial markets." And it describes this dependence as "circularity."
This is the way, explains Deutsche Bank, circularity works: The more the market falls, the more the economy suffers, as greater and greater pain is inflicted on corporations via underfunded pension funds absorbing precious cash flow, on consumers via rising unemployment, and on both via restricted access to credit. And it declares, "Circularity means that a stable financial market is the prerequisite to an economic recovery, not the other way around."
So, the authors of the commentary logically conclude that, absent a rising stock market, there's not very much hope for an economic recovery.
We're not entirely sold on the argument, although we obviously find it intriguing. What we're particularly reluctant to embrace is the idea that a stable market is the essential forerunner of an economic rebound. Our feeling is, sometimes yes, sometimes no.
Circularity is a neat way to describe the interdependence of the economy and the market, but harking back to our youthful and ultimately ill-fated flirtation with chemistry, we think of the relationship as a "reversible reaction." Each side of the equation is equal in importance, and the influence flows back and forth continually between them.
But our demur manifestly does not extend to Deutsche Bank's conclusion. Which politely, even diffidently, suggests not to hold your breath waiting for either boom or bull market.
Consumer Retort
Some Americans see spending as a form of saving
WE LEARNED THURSDAY that the number of households filing for bankruptcy rose 5.7% last year, "break[ing] historic records" according to one news report. Indeed, a record 1.51 million households filed in 2002 -- 5.7% more than in '01.
Now, 1.51 million sounds like a lot of households. But there are 105.6 million households in the U.S. So last year the share of that 105.6 million filing for bankruptcy rose by just 0.08%, bringing the total share to 1.43%.
Let's talk, then, about the other 98.57% of households that didn't file for bankruptcy in 2002.
In the first installment of How Stands the Consumer?, I focused mainly on the burden of debt-servicing, which clearly isn't excessive ("Consumer Debt?"1 Feb. 17). In this second installment, I'll be dealing with the recent rebound in the savings rate, which has been cited as evidence that consumers are "hunkering down," as one analyst put it. Or, put another way, they're finally facing up to the need to borrow less, save more, and of course, spend less.
After all, aren't bankruptcy filings at a record high?
The personal-savings rate jumped from a low of 2.3% in calendar year 2001 to 3.9% in '02; as of fourth quarter '02, it stood at 4.3%. But as we'll soon see, the rebound is nothing more than a normal reaction to the change in two key factors that help determine the rate of saving: stock values and capital-gains taxes, both of which fell in '02.
Yet we seem to be witnessing a less-than-normal reaction; based on past patterns, the impact of those two variables should have boosted the savings rate even more.
Be assured the Bureau of Economic Analysis defines "saving" pretty much the way most of us do: that portion of after-tax income that isn't spent on goods and services (with a few complications we can safely ignore). While the funds often get stowed in bank certificates of deposit (CDs), much is invested in stocks and bonds.
Now, if you've never heard money managers and economists decry the decline in the rate of savings you've missed a surreal experience. Take any of them aside and ask for the key measure of anyone's financial status apart from income, and they're almost sure to answer net worth.
Net worth merits nary a whisper, however, when saving is the issue. So they cite figures like the 8.7% rate of savings in '92, yet they pat the consumer on the back for the recent climb to 4.3% in fourth quarter '02, while venturing to predict a further reversion to those halcyon days of 8.7%.
But the real question is not how much folks saved, but how well they invested.
The total dollar amount of household net worth was 2.9 times greater in 2002 than in '92. Figures assembled by economists Dean Maki and Michael Palumbo show that in every quintile of the income distribution, net worth was higher in 2000 than in '92.
The crash in stock values since then mainly hurt the topmost of the five rungs (from the 81st percentile on up), since the bottom four rungs own very little in the way of equities.
In a 2001 Federal Reserve Board paper (which "originated from an idea of Alan Greenspan's"), Maki and Palumbo show that nearly all the decline in the savings rate from '92 to 2000 was accounted for by the top quintile! In the bottom three rungs, savings rose over this period, while in the fourth rung the decline was relatively small.
So the folks that own stock have been the real players in this drama. And as equity prices soared, their saving declined. Why not save less when you're getting such a huge bang for the bucks you do save? And contrariwise, the bear market of 2002 would have induced them to save more.
We call that the "wealth effect." But notice that far from being delusory, it's a flexible reaction to the ups and downs of wealth.
Jason Benderly of the Vail, Colo.-based Benderly Economics adds another thread to the story. The equity-related boom in the payment of capital gains taxes reduced the after-tax income of equity investors -- who were still rich enough to keep spending as they pleased.
But capital-gains payments plummeted in 2002, the gap widened, and saving increased.
These two powerful factors were only partially offset by another thread in Benderly's story: the persistent boom in the purchase of new and existing homes, which motivates folks to spend their saving on goods and services related to their purchase. They think of this as a form of saving, but it isn't counted as such.
So the wealth effect and the capital-gains effect is lifting the rate of saving, while at the same time the housing effect is pushing it down a notch. The net effect: The savings rate is rising, mainly because the wealthiest fifth is saving more, all according to script.
Is this a harbinger of cutbacks in consumer spending?
Well, what do you think? |
