Market update: 6 26 09 _ Americans are saving more

The Personal Savings Index

Fear is a powerful motivator. It took the fear of a global meltdown, a terrible recession, a potential DEPRESSION, 7 million Americans on unemployment, everything short of a plague of locusts, it took all of this to get the national savings rate above zero percent. The graph below shows the personal savings rate as a percentage of disposable income from 1969 to the present. I inserted a red line on the chart just to point out a bit of the insanity that has taken place in recent years. The savings rate actually went negative a few times since the year 2000. That’s right…NEGATIVE…as in spending more disposable income than you have. For a while it looked like Bloomberg might have to change the name of this from the Personal Savings Index to the “I spend way more than I make Index.”

With a flood of easy credit, home prices rising, equity indices climbing, jobs plentiful, and 10 credit cards in every wallet many people in this country saved nothing. Why should you? Times are good so they’ll always be good right? Right? For the financially illiterate and the dreamers among us it would be a pretty easy story to buy into.

The chart below shows a line that represents the behavior of a large group of people…alternatively it could be viewed as their outlook on risk. You can watch the herd move toward the zero percent savings rate and you can hear them calling out “all is well, allllll is well”. Actually they were probably calling out “this big-screen TV looks awesome…and I didn’t even have to give them any money for it”. A savings rate at zero percent tells us that people think there is no reason to save, that they see no risk (it could also be a good indicator of IQ but that’s a study for someone in another field). The normal reasons to save, like having a cushion against losing one’s job, or an unexpected expense of any sort…those were no longer considered important. People either decided these were low probability events, or that they could just use the credit card as their primary source of liquidity if needed. It was assumed that the credit would always be available, and it would be at the same cheap rate.

In retrospect it seems odd that people would rely on a credit card company to “be there for them” if any big shock ever happened…but that was considered the backup plan for many people. I saw a show on the Discovery Channel one time about the guys that climb these huge communications towers. The scene that comes to mind is where the seasoned tower-climbing veteran is going over the safety gear with the rookie before he climbs a 500 foot tower. He tells him how to stay safe and he reminds him that he alone is responsible for his well being. He tells the kid “nobody loves you more than you do.” It’s a great reminder that ultimately each person is responsible for their own safety...whether it’s climbing a tower or funding your own liquidity needs don’t expect anyone else to help you.

It looks like Discovery must still be showing that episode in re-run because the graph below shows that the average saver in America just realized that nobody loves them more than they do. The savings rate has increased from 0% of disposable income in 2008 to almost 7% as of May 31 2009.

The market

After a big rally in Treasury prices yesterday the market is up a bit again this morning. The yield on the 10-year is in the low 3.50’s and there really isn’t much to report today.

If you have any questions on this material just let me know. Have a great weekend.