Sunday, February 18, 2018

Ready for a 50% Loss of Your Wealth?

On January 26 2018, the US reported that 4th quarter real GDP grew at a 2.6% rate -- a rate that was disappointing relative to expectations. It was disappointing because there was a real surge of post-disaster spending after the two hurricanes and massive wildfires during the fourth quarter. In fact, some people were asking "is that all we get??"

It was even worse than that. The savings rate fell from 3.3% to 2.6%. If it had stayed the same, real "personal consumption expenditures" would have been just 0.8% (annualized) instead of 3.8% and GDP would have been 0.6% instead of 2.6%.  So, after all the disaster spending we "only" got 2.6% GDP growth.  The underlying economic growth rate is actually closer to 0.6% since that disaster spending was a "one off."

The savings rates of America plunged due to an unprecedented surge in credit card expenditures during the last quarter of 2017. It's really quite stunning (and unsustainable):

An Unsustainable Surge of Credit Card Expenditures--Unlikely to be Repeated in Coming Quarters
But the US consumer has been in distress for a long time. For the bottom 90%, wages are not keeping up with rising healthcare costs, rising rents, food and other rising costs.  To "make ends meet," they have been using debt to sustain their standard of living. It just keeps getting worse and worse:

Graph from Real Investment Advice
Another view of the rising debt and the financial gap that consumers have been facing and using debt to fill it:

Graph from Lance Roberts at Real Investment Advice

US consumers are already in record debt and they went on a spending spree at the end of 2017. They had to -- they aren't making ends meet in their personal finances and haven't been doing so for a long time.  US consumers are tapped-out.  The US real personal savings rate dropped to an extremely low 2.6%.  US consumers are 70% of the total economy.  See below:

That 2.6% personal savings rate is about as low as it goes. Note that rate was also reached in 2008, just before the great financial crisis in 2008 (savings rate was 2.3% then).  An extremely low savings rate that signals a recession.  

So, I'm warning you now that, despite all the narratives in the lying media and from lying economists, we're not in a "boom" or an "overheating" economy. The truth is that we're much closer to recession than boom. And because of all the corporate, personal and government debts that have built-up since the last recession, the next recession will be bad or worse.  In fact, you can expect a 50% loss (or more) of your net worth!

Each time the US savings rate drops to current levels, it signals an economic top and subsequent recession. The past two recessions have been accompanied by large losses of net worth.  The 2009 recession saw about a 30% decline in household net worth (includes stocks, bonds, real estate, etc).  It's likely to happen once again, but worse. As of today , household wealth as a percent disposible income is over 700%. Just extrapolating trends, a trip back to 450% to 500% or a 36% decline in household worth or more can be expected.

The Last Time That the Savings Rate Reached Current Levels, Household Wealth declined by 30%. We're Facing the Same or Worse Prospects in February 2018
Graph from Econimica blog


1 comment:

Aubrey Enoch said...

Thanks for the info. I'm a wore out hillbilly carpenter and I don't get this "economics" stuff too well. I just see a world gone crazy. I do believe in numbers as a way to tell this story so thanks again. Keep up the good work. The truth balances out infinite lies.