U.S. Personal Savings Rate

U.S. Personal Savings Rate

The Trader's U E-Letter: Issue # 182

Wednesday, April 5, 2006

U.S. Personal Savings Rate: Americans Can't Save - What Opportunities Does This Provide Investors?

by D.R. Barton, Jr., Chairman, Trader's U

What happens when you spend more than you make? There are typically three responses when outflows exceed inflows:

  • "We have a problem. We need to spend less until we can earn more."
  • "That was a one-time event. We'll pay for it out of savings or take out a loan to ride out the storm and get back to normal next month."
  • "Problem? What problem? We're nowhere near the credit card limit! Besides, the value of our house is still going up"

In April of last year, Americans, as a whole, spent more than they made for the first time since the Great Depression. And to top that off, Americans have continued to spend more than they make for the past 10 months! The U.S. Personal Savings Rate has not been positive for the U.S. since March of 2005.

The world is not coming to an end, but it seems like we're getting close, according to some economists and analysts. Others try to sugarcoat the negative savings rate with diverting discussions about "measurement of wealth." Let's take at look at both of these points of view to see which makes more sense. Then we'll see what trading and investing opportunities might arise from Americans' over-spending ways.

Paper Wealth vs. Cash Flow and Other Convenient Rationalizations

Each month, the Federal Reserve publishes the "Personal Savings Rate." When it first went negative last year, there was a debate about the significance of the number. On one side, there was the group who insisted that the end of the world was coming. Americans had stopped saving!

On the other side of the argument were those who insisted that the savings rate didn't matter because it wasn't an appropriate measure of wealth. This contingent points out that the Personal Savings Rate number doesn't include the worth of one's house or any investment gains. Fair enough. They claim that since real estate prices have been rising, personal wealth has gone up despite the plunge in savings.

But this is called the "Personal Savings Rate," not the "Personal Wealth Meter"

Business owners know that cash flow is the blood of a business. The Personal Savings Rate measures what percentage of a family's income is left over after spending. And to repeat - this number has not been positive for 10 months and hasn't been negative since the Great Depression!

If nothing else, this is a disturbing trend. But there are deeper ramifications.

What Happens When We Stop Saving

Americans are clearly overspending. What happens next?

At some point in time, the housing market will slow, if not crash. Consumers will no longer feel that they can always spend more than they make. Borrowing will slow (because there will be less home equity to borrow from), and so will spending. Where can traders and investors look for an advantage given this "negative savings" trend? Here are a few thoughts:

  • The banking sector: Take a look at some of the big banks, like Wells Fargo (NYSE: WFC) and Bank of America (NYSE: BAC). You'll see a nice rise over the past couple of months and over the last year. Business is good. But not if people stop borrowing against their homes and through consumer credit channels.
  • The retail sector: Non-essentials, like electronics, will slow when folks finally realize that they don't have a blank check from ever-increasing home prices. Best Buy (NYSE: BBY) and Circuit City (NYSE: CC) have had a wonderful 12 months with consumers spending their earnings and their paper real estate profits.
  • Homebuilders: They've already taken a hit, but there is a bigger fall that is most likely pending.

A perfect storm could be brewing - we could see the Fed raise interest rates high enough to choke off monetary flow and combine that with a real estate bursting bubble (or at least deflation) and a stock market selloff.

A more likely scenario is a Fed that will keep the money flowing by printing more. (This has other ramifications, of course.) Keep in mind that economic data usually takes a while to "trickle down" into market pricing, so be patient. Because we can't keep spending more than we make forever

Great trading,

D.R.

Today's Trader's U Tips & Tricks

  • We've looked at the U.S. Personal Savings rateand how American consumers have taken personal deficit spending to scary levels. While ramifications on a national scale may be slow in developing, individual markets are likely to react in the coming months. See Trader's U #154: How Traders Can Win When the Personal Savings Rate Drops, for two items that may be of special note for traders and investors.
  • American consumers are not the only ones overspending The U.S. government's been emptying its pockets, as well. And with serious ramifications. Check out Investment U # 523, The Decline of the Dollar: Four Torpedoes Headed Straight For the U.S. Dollar Take Cover and Profit, and find out why right now it's smart to take a look outside of the dollar to protect your portfolio.

The Chart of the Week

The Chart of the Week: Cisco

Cisco (Nasdaq: CSCO) has traded up to a significant resistance level (whole number of $22) and is near a two-year high. In addition, momentum is falling as we see in the MACD indicator at the bottom of the chart. CSCO, the darling of the 2000 bubble, is at a real decision point. If it can close below $21.25, look for it to fall down to $20 and even toward the February gap.

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