This Just In


Pepper . . . and Salt
WSJ, February 1, 2007      

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  1. david foster commented on Feb 2

    Off-topic: Barry, I’d be interested in your thoughts on the personal savings rate, which has been much in the news lately, and whether this metric is particularly meaningful given the exclusion of capital gains, etc.

  2. Barry Ritholtz commented on Feb 2

    Unchanged from last summer:

    Ignore Statistical Oddities at Your Peril
    By Barry Ritholtz, 6/26/2006 2:56 PM EDT

    James Altucher wrote a thought-provoking column last week, The Underlevered American Household.

    While I am sympatico with several of the points he raises, I vehemently disagree with his take on the relative unimportance of a negative personal savings rate in the U.S. I also believe his views on the net household assets of Americans are oversimplified. These issues are far more complex than was suggested by his column, and I’d like to address them.

    Rare Data Events Are Worth Examining
    The significance of a negative savings rate is due, in part, to its rarity: It has only occurred twice in the past 100 years. Combine that with the shifting distribution of assets across consumer households, and you have a pair of issues worth exploring.

    Together, these have potentially significant ramifications for investors. In particular, they may greatly affect several stock sectors, and are especially worrisome for quite a few specific companies.

    Let’s start with the negative personal savings rate.

    The five-year chart Altucher used reveals that the U.S. personal savings rate slipped into negative territory in 2005. But he was too quick to dismiss this event as “useless,” citing the structure of the number. Because of the extremely unusual occurrence of a negative savings rate over the past century, it deserves a closer look.

    As the longer-term chart below shows, the U.S. has a negative savings rate for the first time since the 1929 crash and Great Depression.

    Personal Savings Rate
    Keep an eye on what the data says, not how it’s constituted.
    Click here for larger image.
    Source: BEA, Ritholtz Research & Analytics

    (Please note that capital gains are not included in personal income at any point on the chart above. Their absence from the last five years of the chart above is not relevant to the overall issue of the negative savings rate.)

    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 ways 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.

    Altucher notes that people who sold their homes and put the money into other assets don’t get credit for the capital gains. But I know of only one person who actually did this: Mark Kiesel, a senior member of PIMCO’s investment strategy and portfolio management group. He sold his home (over his wife’s objection) and moved into a rental unit. Other than Kiesel — who pulled this stunt to make an economic point — not a lot of people I know of fall into this category.

    Third, consider the assets on the other side of the balance sheet from these debts. As we learned after the 1990s, assets can and will fluctuate in price. The “wealth effect” made us more comfortable borrowing and spending. After all, our portfolios had done nothing but go up the prior years, right? In 2000, we learned that stock prices — the basis for running up debt — don’t just go up.

    Click here for larger image.
    Source: Michael Panzner, Collins Stewart

    Now we see history repeating. Only this time, it’s the appreciation in home prices that is justifying the increased debt load. What would happen if that asset class experienced a sudden deceleration? Finally, I want to address a pet data peeve of mine: The mean vs. the median. It’s a common analytical foible I see misreported all the time.

    Altucher notes that “Americans have more money then ever,” and he is technically correct. As a nation, we are richer than ever. Of course, in most succeeding years we are usually richer than the year before, but let’s put that issue on hold.

    The problem with declaring us richer than ever is the way that wealth is distributed. Consider the following scenario. You and a buddy are having a beer in a bar, and in walks Bill Gates. The mean net worth of everyone in the bar is now $20 billion. To calculate the mean, simply divide the total aggregate of the group by the number of units in that group.

    The median, however, is considerably lower. Remember, we are considering the question of whether the average American household is underlevered. Understanding their financial condition is crucial.

    Let’s get specific: According to a recent analysis by the nonpartisan Congressional Budget Office, the top 1% of all households received 57.5% of all gains from capital gains, dividends, interest and rents in 2003. That’s up from 38.7% in 1991. And a recent study found that over 40% of total wages is going to the top decile of workers. This is “their biggest share of the nation’s pie in at least 65 years.” (Check out this chart from The New York Times.

    Consider the math on that: 1% of the country garnered well over half of all that nonwage income. (Incidentally, if you are in the top 1% of all earners in 2003, your wages/income ranged from $237,000 to several billion dollars.)

    So while it is technically true that “Americans have more money than ever,” it is far more accurate to say that “some Americans have more money than ever.” It is most accurate to say most of the public has even less money proportionately than they did 15 years ago. This is due to a combination of shifting wealth distribution and the unprecedented run-up in debt over the past five years.

    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%.

    It is easy to look at total assets held by American families — or the total cash on the balance sheets of corporate America — and assume that all is well. The reality beneath that generalization reveals that things are not nearly as rosy as the aggregate data appear.

  3. lurker commented on Feb 2

    BArry- great job. But what was going on globally during both of those periods? Let’s not be isolationist in our analysis.
    Are there parallels to Iraq and China from the 30s??? Are we where England was then? I don’t know but the smart folks who post here will, I hope.

  4. Philippe commented on Feb 3

    There is an excellent paper written by Mr Brian Taylor giving a good synopsis of the crash of 1929.
    In essence when taking a sample of four markets at the time
    Market bottom Market top variation
    France APRIL 1922 FEB 1929 +417%
    Germany NOV 1922 JUNE 1928 +1088 %
    UK OCT 1921 SEPT 1929 +73.2%
    USA AUG 1921 SEPT 1929 394%

    One may observe that they made their top and down at different dates except UK and USA; they all fell by an average 80% and only recovered in the 50ies.
    The trigger for these declines;
    excessive pricing
    Hyperinflation Inflation or deflation
    Economic decline where political instability is never far.
    Today on a comparative 7 YEARS the French stock index is at roughly + 250% only half of the variation of the 19920/1929 and I assume without going through data mining that the correlation among European markets must show the same variation.
    BUT what is the most striking in these wealth build up is the lack of income in proportion to the capital gain (the pattern is less net revenue and more asset price income)


  5. lurker commented on Feb 3

    another parallel that is striking is the imbalance of wealth distribution. CEOs are the new Robber barons and this may be a sign of further future instability–political and economic. Greed ain’t good.

  6. lurker commented on Feb 3

    on the same topic as the great cartoon—Are newspapers buggywhips??????? with blogs as the automobile?

    Check out the long-term chart of SVN (the lone 52-week low on the NYSE yesterday) and notice how the stock market has been discounting the future of newspapers. Other newspaper stocks have not done well either. Discuss?????

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