The Disappearing Savings?
Considerable debate has surrounded the US savings rate. In a recent story on Forbes (www.forbes.com) they noted that not only did consumer spending rise at a "rapid pace" in December, far "outpacing" income growth, it helped push the "savings rate for the year down to lowest level since the Great Depression". (Forbes - Savings rate at lowest level since 1933, January 30, 2006). The story noted that the savings rate for all of 2005 was pushed into negative territory at a minus 0.5%. They noted that it was lowest annual savings rate since a decline of 1.5% in 1933.
Numerous pundits, including this one, have noted the declining savings rate for some time against the back drop of rising debt a trend that is not sustainable and will eventually lead to considerable problems. But there are some who have argued that the reported savings rate understates the real picture that instead of a nation of spendthrifts savings have been growing in terms of savings/deposits, money market mutual funds and net worth. That being the case then the doom and gloom of the bears is grossly overstated as the US consumer contrary to being up over his head in debt has never been so wealthy.
In looking at the numbers there is an argument to be made. Like any statistics the savings numbers are not always what they appear. It is of course more what they have left out then anything else. US Personal Savings = Personal Disposable Income - Personal Expenditures. Same holds for Canada. Seems simple enough.
But like a lot of statistics issued these numbers are not actually a tally of each and every household in America (nor Canada). Left out of the equation is capital gains income but it captures capital gains taxes in the expenditures; while payments of contributions for pensions to employees are in personal income the pensions paid to retirees are not; interest payments on mortgages are based on "owner occupied non-farm dwellings space rent" which bases the interest payments on what people might pay to rent their home not on the reality of mortgage payments themselves; and finally the expenditure side is based on surveys and estimates as opposed to hard data. One study we saw indicated that this may mean upwards of $800 billion to $1 trillion added to personal disposable income and therefore the savings rate is closer to 8%-10% then the current zero (or negative) reported.
Certainly if one just looks at the growth in such straight forward items that are the most liquid such as Time and Savings Deposits on the Federal Reserve Board's statistics of "Flow of Funds" we can see that there is $4.7 trillion for the Household Sector in the 3 rd quarter 2005. There is a further $0.9 trillion in Money Market Mutual Funds for the Household Sector. Since 1995 that growth is around 113% for savings deposits and 86% in Money Market Mutual Funds. But since 2001 the growth is only about 42% in Savings Deposits and Money Market Mutual Funds have actually fallen by almost 20%.
Elsewhere again according to the Flow of Funds statistics the household sector holds an additional $12.3 trillion in paper that includes Treasury securities, Agency paper, commercial paper, corporate bonds, mortgage securities, equities and mutual funds. There is an additional $10.3 trillion in pension fund reserves. Unlike the funds held in the most liquid accounts these funds are far more subject to market fluctuations. In total the balance sheet of the US households shows roughly $58.5 trillion in assets when one adds in a rough value of real estate holdings.
On the other side of the equation is the debt. It looks like there is a lot of it. Consumer Credit debt totals roughly $2.2 trillion up some 90% since 1995 but only 17% since 2001 despite all the concern over consumer credit growth. Mortgages of course make up the largest component of debt and that stands around $8.2 trillion up 148% since 1995 and 57% since 2001. Certainly the growth in debt has been faster since 2001 then the growth in liquid deposits. This may be contributing somewhat to the perception that savings have turned negative which after all is just an incremental number not one that says what might be actually there.
IN total US Households are showing financial assets of roughly $28 trillion against around $11 trillion in debt. So who says there are no savings? Of course saying that is also somewhat misleading because in a financial crisis of the assets one can possibly only count on the $5.6 trillion in savings and money market mutual funds. The rest would be largely inaccessible and indeed it would be subject to falling prices in the event of a financial crisis. So the risk is not so much that the US consumer doesn't have savings it is that their assets are subject to a huge markdown in a financial crisis.
Of potential bigger concern is that the distribution of these assets is largely concentrated in a small proportion of society. The old 20:80 rule holds here as well with roughly 20% of the population owning 80% of the assets and net worth. Roughly 25% of the population of holds only debts against little or no assets while the remaining 55% of the population struggles to meet their mortgage payments, pay down their consumer debt while trying to save something. In a time of a serious financial crisis 20% of the population will take a serious hit if their assets fall but they will survive and can make it through. It is the remaining 80% that is the most vulnerable and will be the most visible in terms of struggling to make it through. We doubt that the numbers would be much different here in Canada.
While it may be wrong to say that there are no savings and evidence might support the savings rate is actually higher than currently reported it is the skewed nature of the savings and debt that is of concern. While the bears love to point to the huge mountain of debt being accumulated by governments, corporations and households that does have to be measured against the asset side of the equation and on paper at least the problem appears to be more than manageable.
It has been pointed out that people are now better managers of their assets and liabilities (GaveKal - www.gavekal.com) and that is true but in the event of a seismic financial crisis it is cash flow that counts because the ability to sell assets that are falling in price is extremely difficult. The 25% of the population that already lives at or near the poverty zone could very well be dependent strictly on the largesse of the government. Tens of thousands of people already live in government FEMA camps following the fall out from the impact of hurricanes Katrina and Rita in the Gulf Coast. The 55% of the middle class will struggle to varying degrees. Many of course are the proverbial one pay cheque from financial trouble particularly if one of the working partners loses their job. Bankruptcies have continued at record levels in 2005 and with the change in bankruptcy laws it is now more difficult to declare bankruptcy. This will add thousands to a struggling list even in a good economy.
It is said that roughly 1 in 125 in North America are millionaires. Between Canada and the US that would only make about 2.6 million. There are estimated to be roughly 30,000 who have assets of $30 million or more. This is financial assets and does not include real estate. In total this group only constitutes roughly 1% of the total population. Together that 1% of the population is estimated to control upwards of 33% of the wealth and 5% controls almost 60%. This is the largest concentration of wealth since the late 1920's just prior to the Great Depression. Indeed the concentration level is even higher.
This concentration of wealth is a concern. A small segment of society can survive a financial crisis chastened but for many, probably a majority the potential for financial ruin is real. Debt service ratios remain at record levels. Bankruptcies as noted remain at record levels. Home foreclosures are also at record levels even in a good economy. Unforeseen medical bills are often the tipping point for bankruptcies not overspending on credit cards. Indeed household's vulnerability lies in three key places, medical, housing and education not as so often advertised overspending. Households are now paying a higher percentage of their incomes just to keep the roof over their head. Finally higher education is now starting to slip away from most middle class families without assuming a large debt burden.
We live in a world where the financial institutions put more emphasis on acquiring and offering cheap credit cards then they do in advertising savings. Financial institutions make their money on the spread and lending money for consumer credit cards and even for lines against the credit of homes are very profitable. On the other side banks have access to global markets to raise money at the wholesale level quickly and easily. Financial institutions are not as dependent on the savings of individuals any longer. Indeed as to household savings financial institutions prefer that it is handed to them to manage because of the huge fees they can earn especially in equity funds or any fund that is not money market.
We are deep into the current four year cycle for the stock market. Vulnerabilities are rising. Even some of the more bullish services we follow are noting the rising interest rate environment and the potential for weakness in the economy. There have been more earnings surprises that have missed of late that are beginning to be noted by the market. But these things alone will not tip the economy or the stock market into a serious drop. That requires a shock such as what happened in 1997 with the Asian crisis or 1998 with the Russian Rouble crisis or the events of 9/11. Gold bullion has become a currency for the first time in a long time having broken out against a host of major currencies and not just the US$. The US$ remains very vulnerable to a downside drop the least of which is the threat to Dollar dominancy with the start up of the Iranian Oil Bourse in March that will deal only in Euros.
Political events can also play a role and here the biggest threat is Iran and to a considerable lesser extent the recent election of Hamas in Palestine. All signs continue to point to a potential military conflict with Iran. As we note above the reason will be the alleged weapons of mass destruction but we continue to believe the real reason will be the threat to US$ dominancy by the oil bourse. Rising bullion prices (gold) in all currencies is a sign that a crisis is building. Gold in the $570 range is firmly through its highs throughout the 1980's. All signs are pointed to higher gold prices in the range of $750-$900 over the next several months. We are noting more and more reports even from normally conservative financial institutions recognizing that gold is an important non-correlated asset to hold in portfolios. We are seeing of course a sharp rise in the prices of numerous bullion producers and finally we are noting a slow quiet rise of numerous junior penny mining stocks in the bullion sector.
Consumer spending is showing signs of slowing as interest rates rise and we had the changes in the bankruptcy laws. The desire of the Federal Reserve is probably going to lean towards ease and continue to flood the banking system with funds in order to stave off any crisis. Over the past few months the pace of liquefaction in the financial system has accelerated even as there has been no crisis on the horizon. We wonder that if there is no visible problem then why have they stepped up the liquefaction of the system? If the US$ starts to collapse as we suspect could be the case then the Federal Reserve will have considerably less ability to lower interest rates and therefore flooding the system with funds might be their only alternative. If that were the case then bullion will be very important. Russia and China are buying bullion and we even note that the Bank of England who unloaded hordes of their bullion at the bottom of the market are also quietly trying to buy some back as well.
The US (and Canada) household is vulnerable. While the gross savings are there it is very imbalanced. The savings haven't just disappeared as would appear to be the case with the reporting of the personal savings numbers. They are just held by too few people even if savings are plentiful.