Market Update: It's the 80's again

This morning we got another round of economic data whose best comparison resides in the early 1980’s. GDP (which measures the value of all goods and services produced inside our borders) declined at a 6.20% annualized pace on a Quarter over Quarter basis. The Bloomberg Survey estimate for GDP was a decline of 5.4% so the actual number was a fair bit worse than expected.

I’m aware that at this point some people are becoming afraid to open these market updates because of all the bad news, and I can’t blame you for that. It seems as if the only way to avoid the bad news lately is to turn off my computer and cell phone.

Today’s good news is that it’s Friday. Many of us will have two days away from the office that we can use to recuperate. I was just telling the guys here in the office that to get a break from the stress I might go fishing over in Arkansas…just drive up into the mountains, find a trout stream…throw my laptop and cell phone into it…and then go somewhere else to fish.

It shouldn’t be a huge surprise that consumer spending would slow down when you have over 600,000 people a week losing their jobs…and slow down it did. This is another bit of news whose most comparable print occurred in the early 1980’s. I actually hesitate to call this “bad” news. It certainly is bad from a GDP standpoint, but from a big picture perspective people that are spending more than they make NEED to slow down. They NEED to quit borrowing and living paycheck to paycheck. They NEED to pay down debt and fix their balance sheets. While this number is expected and is widely called “bad news” it’s actually something that if left alone will fix itself.

The chart below shows the long term trend in the Personal Savings Rate (1959 to year end 2008) along with the 6 month, 5 year, and 10 year moving averages. If you go back to the early 1980’s you’ll see that the Personal Savings Rate at the time was running around 10%. When hard times and recessions came people had savings that they could fall back on to make it through the storm.

Fast forward to 2008…the Personal Savings rate is almost zero. There are a myriad of causes for this, most of which are beyond the scope of this write-up. The important part is the exposure. It doesn’t matter why you’re not saving money, what matters is your exposure to unexpected events due to your lack of savings. The guy in 1980 might have been able to live off his savings for 6 months or so until he was able to find gainful employment. Nowadays people have been relying on credit cards and home equity lines for NORMAL purchases as well as for emergencies. When the recession hits they get in trouble very quickly because they have no savings and they can’t access their “normal” liquidity sources because credit card companies are raising rates and cutting lines, and they can’t get any more money out of their house because it’s value has fallen and their home equity line has been frozen. This has become a harsh reality for a lot of people. Relying on other peoples savings for emergencies is not a solid plan.

The graph below points out that people aren’t stupid all of the time. As the drumbeat of bad news turned into an avalanche of bad news toward the end of 2008 the trend of spending everything you make changed very quickly to one of hurry up and save. In a period of just a few months we went from saving virtually zero percent on average to saving almost 4.00%. The Personal Savings Rate popped up quickly to get above the 6 month, 5 year, and 10 year trailing averages. What this tells me is that people are smart enough to change their habits…it might take a depression to do it but change they will.

So in closing here is the good news. The stream in the picture below is out there…you have two days to find it…and it’s loaded with trout. If you find my cell phone or laptop while you’re there I’d appreciate them back.