The Truth About Personal Savings and Debt Levels

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.

Thursday's Data
Almost unnoticed in Thursday'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 yesterday'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.

Conclusion
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.

Comments

[brynaw:]

I agree that the Fed should NOT be looking at rate cuts anytime soon, but for very different reasons. I do not see our negative-for-the-first... savings rate or the extreme speculative housing malinvestment of the past several years as a good thing.

Refinancing to lock in a lower fixed-rate mortgage rate is a good thing. Refinancing to cash-out or getting a 'teaser' low-rate on a neg-am/option-ARM right now, while gambling that perpetually rising house prices will bail you out before-the-reset, is NOT a good thing.

As the Dot.com crash taught us, there IS such a thing as too much leverage and too little diversification in one's portfolio. There is also a critical difference between prodcutive debt and consumptive debt. Mr. Market is just starting to teach Mr. Howmuchamonth that valuable lesson right now. And it looks like class is in session for at least the next few years.

2007 Jun 08 03:11 PM

[brynaw:]

Oh, and a couple more points:

--It is virtually impossible to get a positive cash-flow on any house bought in the last 5 years using a conventional (non neg-am) mortgage, especially along the bubble coasts. Unless, of course, you put 50% or more down. Even then, you would still get a very poor return on capital vs. stocks or even bonds.

--Despite the meteoric rise in nominal house prices over the past several years, homeowner equity (which should have sharply risen) instead FELL to its lowest level since they began collecting the data in 1952.

2007 Jun 08 03:17 PM

[brynaw:]

Homeowner equity chart (1952-2007): bp3.blogger.com/_pMscx...

2007 Jun 08 03:19 PM

[Niko:]

You can not eat brick. Ok, so you say a house can appreciate. I have two of them. Yes they did appreciate. The problem is, where do I stay? Because none if them is in the city I work. And assets can go down. Event gold can go down. And up. Cash is king for a reason, and if it regains the throne any time soon, you will find out that those assets are nothing. Banks need money. Period. They are not real estate something, or broke dealer, or whatever. They deal with cash. You may hold all the land in the world and still starve.

Actually ancient Greek had a great story. A king loved gold. And he was cursed that everything he touched turn into gold. He died of hunger. That's exactly the essence of your story.

Diversify, bla bla bla. Want a piece of advice? Work, better yourself, find a good wife, when you are old and tired go to a cheap place, read all the books you couldn't, play with your grand children. Trust me, if you are not rich, doesn't mean you can't be happy. And life doesn't mean a big plasma TV, or a BMW. My grandma' doesn't have any of them, and she has the best life I could wish to myself. She still has a purpose and us.

2007 Jun 08 03:32 PM

[Sonia Mirza:]

lol@ you cannot eat brick.

And with the rest of your comments - perfect. A personal friend of ours (not in the US) is frankly one of the richest (you cannot tell by how he dresses, lives, or what he drives but rather by the way people kiss his @5$). Classic example of someone who has everything but enjoys likely very little of it. What's the point of the 100k+ porsche if it's parked in a garage overseas all year and you might take it out for a drive for a few days/365?

2007 Jun 09 03:55 PM

[Quaker:]

Only a complete idiot would think taking out a huge mortgage and buying a McMansion is a sign of wealth.

A house is an expense. The statistic for the price of an average house is total bunk. There's no such thing as an average house. Housing is a regional asset. You have to be innumerate beyond belief to think that stuffing 75 million houses under a bell curve gives you usable information.

Increasingly, data is being manipulated by university trained mathmaticians that work in government. Most of these guys couldn't get laid in a cat house.

When you move from house that costs $100,000 to one that's $500,000, you don't get $400,000 in value. It still a house. This is why poor Chinese coolies that make $4 an hour own huge pools of American assets. They're not stupid enough to believe government data. All these "wealth" post do is suck up to "consumers" who live to have their childish ego's stroked.

2007 Jun 09 08:52 AM

[Marty:]

Mr Miller, I agree that thinking outside the "statistics box" is a good thing. Though I do not necessarily agree with your thesis, I do think other statistics should be looked at the same way. I work as a CPA in the northeast (CT) and I also maintain other businesses that do business across the country. This current downturn, not even labled one yet is very troubling. There are lots of "never saw a stat like this" things going on. First is the savings rate, next is the non-inflation inflation where the price of everything you need to buy goes up 10-15% or more a year but the Govt announces inflation is 3%. Just in my area, electricity went up 70% in one year, heating oil is up 300% over 6 years, gas is up, medical insurance is up 60% over 3 years. The costs are insane. The Govt has a wacky inflation index for sure. Next, I have seen the wholesale liquidation of assets in real estate, stock portfoliios etc, as people struggle to survive. The economy in the last 5-7 years has been fueld by a huge expansion of debt not by income. They say the jobs market is incredibly strong. This is bologna! Parents are faced with sending kids to colleges for a 150k education only to find a 40k job IF THAT! There are tons of lower paid service jobs out there but the manafacturing jobs which had good benefits and other jobs are all but gone. I started my business in 1991 in a recession and things are worse now then then. Another thing going on is parents spending assets down or reverse mortgaging their homes taking assets from the wealth of the next generation. This has kept some people floating.

I have never seen such a BS party as the stats released by this administration. Record deficits, but strong employment and low inflation while the costs of everything soar? I guess that explains the deflating dollar and the soon to be on par Canadian exchange rate.

How about the trickle down! How is that working out? In the past it was a somewhat valid idea. However, with technology and outsourcing the growth in wealth of the affluent has not led to new companies creating US jobs. The old stats were something like 2.3 new workers per small business etc. They just build phony assumptions into stats to make them work.

Nothing makes sense. In our area real estate has fallen over 30% in the last year and 1/2. In other areas of the country full neighborhoods are being foreclosed on. I talk to people all over the country. Florida has been hit by a double problem of higher taxes and problems getting insurance.

In 6 years a complete mess has been developed that will take YEARS to get out of.

The only good thing I see is consistently high energy prices are fueling the growth of alternative energy companies. If the past is any measure of the future though, as the energy companies sense the stall they will back off the pricing , let it fall and put these new companies out of business.

2007 Jun 09 09:28 AM

[Jeff Miller:]

I am delighted to see so many thoughtful comments!

Everyone is correct in noting a difference between the cash flow issues faced by the average person and the net worth of the family. That is exactly the point. Farmers have faced this for many years, often owning land that made them millionaires while the yearly income was minimal.

The Malpass analysis points out a major flaw in the reported savings -- debt is counted and assets are not. Malpass argues that many families refinanced (wisely) to lock in low interest rates. This is like a smart corporate CFO.

As to the five-year analysis of housing, this does not seem correct overall. Maybe in some areas. Certainly not around my town, and many others.

There is always a problem with aggregate data. Some individuals may have problems, while the overall picture is great.

Also please note that the analysis includes other financial assets -- mutual funds, etc. -- that have done well.

In my own client base there are many people who have done well in their real estate investments and have significant wealth. In most cases, they should probably be looking to more diversification.

But the main point is that the often-cited savings data tells only a small and misleading part of the story. If one has wealth, there is always a way to convert it into current dollars.

Thanks again to all for the thoughtful comments.

Jeff

2007 Jun 09 09:50 PM

[censeo:]

Worth, particularly that which is tied into illiquid assets--real estate--is not cash. Paper gains or losses are meaningless. In each case equity can be funneled by refi or line of credit, by margin account. Both add debt against unrealized value. (Ultimately the great depression resulted from a new money/credit paradigm confounded by outmoded methods and controls.) Further, cherry picking your pertinent factors does not necessarily paint an accurate picture. Miller's logic is immature: both cats and pigs have 4 legs; don't mean your pig can climb trees.

2007 Jun 10 05:08 AM