The Truth about Savings

One of the most misunderstood data reports is that on personal savings and debt levels.  Various pundits bemoan the low level of savings and the high level of debt.  None seem to recognize or report that the data do not include growth in assets.  If, for example, one trades up to a more expensive home, taking on more debt, this looks very bad on the debt front, even if net worth is unchanged or higher.

At "A Dash" we have tried to point out this problem.  Readers are urged to use a little common sense.  The average person, at death, has a home as the greatest asset.  Very wealthy people often are big real estate and stock investors.   Many have wisely locked in low long-term rates (a move that looks especially good right now) and enjoy dividends, rent flows, and capital appreciation.

Today’s Data

Almost unnoticed in today’s data was the Fed’s Flow of Funds report, but it was highlighted by David Malpass, Chief Economist for Bear Stearns.  Regular readers know that we have often cited Malpass as having had the best read on economic trends for several  years, including economic strength and the probability of higher interest rates.

Here are a few of the highlights from today’s Malpass commentary (which you can get regularly if you have a trading account with Bear.)

  • Household net worth grew by $587 billion in the first quarter.
  • Real consumption grew by 4.4% despite a reduction in mortgage equity withdrawals.
  • The four-quarter savings rate, judged on a change in net worth basis, is 30% of disposable income!  Please think about this!  Those looking for a consumption decline should ponder this fact.
  • US households have $29.1 trillion in net financial assets, more than the rest of the world combined.
  • Household liquid assets (deposits and financial assets like mutual funds and credit market holdings) rose to a record level of $21 trillion.

Malpass concludes that this shows consumer resilience and continued economic strength.  He is also looking for another interest rate increase by the Fed, possibly as soon as September, with another increase possible in 2007.


When one reads a pundit or economist talking about savings, but not discussing assets, it is time to apply the "sniff test."  Such commentators are missing the biggest part of the story, and have probably missed the multi-year rally in stocks.

The interest rate increases are more problematic in the intermediate term, as we have noted in past articles.  While we continue to see a valuation advantage for stocks, many market participants continue to believe that they are smarter than the Fed.  They think they see economic weakness and the need for rate cuts.

While stocks should move higher, it will be the classic method of scaling the wall of worry.

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  • Shrek June 8, 2007  

    At what level do interest rates make you readjust the valuation disparity in stocks?

  • Jeff Miller June 8, 2007  

    Good question, Shrek.
    As a regular reader, you know that we use the interest rate comparison as a good starting point. Those just joining the discussion now might want to go back and look at the series on the Fed Model (just enter it in the site search window).
    We check out the valuation gap on a regular basis. The most recent S&P forward earnings yield is about 6.4%, slightly lower than our last report. The S&P has gone up, but so have earnings forecasts. Even with the ten-year note trading at 5.12%, the gap is still 26%.
    The 6.4% earnings yield has gotten quite a bit of mention from those following the behavior of private equity funds.
    Thanks again for bringing this up.

  • will rahal June 10, 2007  

    Some economists believe that consumption is based on “permanent” income.
    The spending that has taken place during the last 20 years, convinces me that, wealth(from real estate or stock market) is also a major factor.
    I took consumption and divided it by income and got some intersting results. For the first time in four decades the non-durable/wage index climbed to a new level indicating a drop in discretionary spending.

  • Jeff Miller June 10, 2007  

    Very interesting, Will. There was discussion as long as thirty years ago about trying to make taxation a better reflection of permanent income.
    Readers should go to your site (click on Will’s name) to check out the charts.

  • Cal June 11, 2007  

    These numbers quoted by Malpass are interesting, but ultimately not helpful if the context is not known.
    The $587B increase in Q1 is a 2% growth on net assets, not bad assuming these figures are related, however, the question is how this growth is spread amongst the populace.
    As Galbraith noted, a nation of middle income earners vs. a nation with the same wealth divided amongst only a few will show significant differences in spending patterns.
    If the rich are just getting richer but the typical consumer is feeling both poorer AND spending less, I would posit that the American economy is going to be in big trouble.
    Wall of worry is a good talkback term, but the real question is how the long term falling dollar trend will affect inflation. Rising bond yields would be only one effect.
    All punditry aside, ultimately I suspect we are in a market stage where fiscal realities will trump sentiment.

  • Bill a.k.a. NO DooDahs June 11, 2007  

    Reality never trumps sentiment. Never. It may eventually CHANGE sentiment, but sentiment backed by money is the only thing that moves markets.
    It can work both ways, ya know. A positive reality may have to wait years before sentiment shifts …

  • RB June 11, 2007  

    What I have not understood is this — how can wealth of one person translate into liquid money for another if there isn’t the corresponding liquid money available under conventional savings measures. It appears that can only be the case if said money comes from abroad.

  • Bill a.k.a. NO DooDahs June 11, 2007  

    First, we shouldn’t confuse money and wealth. Voluntarily exchanging money for goods and services increases wealth, because all parties to the transaction see the situation to their betterment. A purely monetary transaction analysis misses this point.
    Second, look at the role of central banks and the fractional reserve system.