A Case Against Investment Agnosticism

[haha]

Hah. I thought that might get your attention

Here it is. If an economy absolutely needs something to happen for it to survive, that thing will happen.

I propose that the US economy absolutely needs our domestic savings to increase. Our federal government is committed to running deficits, the corporate sector is at best neutral. This means the consumer will have to achieve a positive savings rate.

He/she doesn't want to. There are too many nice things to buy. So how will she be forced to save?

So far we collectively have actually been able to fund consuption greater than our incomes, by tapping rising asset values- bonds, equities and now homes. You can be 45 years old today, and not know anything but bull markets in almost all classes commonly invested in by ordinary people. (There was one heck of a violent bear in the NASDAQ, but is was short and didn't seem to have much lasting psychologial effect.)

So what John and Jane Q. Public need is a compelling reason to start saving. Asset values must stagnate or decline, meaningfully, and at least giving the appearance of permanently.

It will then dawn on people that they are running out of time to prepare for retirement, and capital gains are not going to bail them out. Which means like it or not (and they won't!) they will have to increase saving, at least collectively. Not to ER, but just to R.

This should stop and then reverse the bull market in equities. In fact, it has probably already happened and we we just haven't figured it out yet.

Homes should slow down or stop their appreciation, and probably in some places decline. Homes ae peculiar though, so I am not very confident here.

Past results are no guarantee of the future, and anyway my past results as a prognosticator stink. So pay no attention to this rant!

Mikey

 

[Cut-Throat]

It will then dawn on people that they are running out of time to prepare for retirement, and capital gains are not going to bail them out. Which means like it or not (and they won't!) they will have to increase saving, at least collectively. Not to ER, but just to R.

I don't think they'll increase their saving. Mostly because of the small returns.

Most will get so discouraged, that they won't try. I have heard this attitude before. It goes like this. 'I'll never have enough to retire, so I'll have to work until I die " - "so why should I contribute to my 401K. It has actually lost money in the market"

If the dollar loses more ground and we have inflation, it will fuel this attitude even more. Spend it today and pay it back with cheaper dollars. More  Debt.

 

[John Galt]

I don't think they'll increase their saving. Mostly because of the small returns.

Most will get so discouraged, that they won't try. I have heard this attitude before. It goes like this. 'I'll never have enough to retire, so I'll have to work until I die " - "so why should I contribute to my 401K. It has actually lost money in the market"

If the dollar loses more ground and we have inflation, it will fuel this attitude even more. Spend it today and pay it back with cheaper dollars. More  Debt.

Yeah, I agree with this mostly, especially about "I'll have to work until I die". I'm not sure that someone
who really feels that way is a deep enough thinker to
consider "inflation - cheaper dollars" etc etc.

JG

 

[wabmester]

Greenspan's policy is to punish savers by offering a negative real yield to anyone who dares to save money. His plan is to reflate the bubble, and so far he's pulling it off. Enjoy it for the next few years, and then SELL!

 

[John Galt]

I'm not convinced that is Greenspan's "policy".
His wife is kind of cute though

JG

 

[brewer12345]

I propose that the US economy absolutely needs our domestic savings to increase. Our federal government is committed to running deficits, the corporate sector is at best neutral. This means the consumer will have to achieve a positive savings rate.

I can see a hole in your argument straight out. The corporate sector is actually the primary source of savings these days. Cap ex is at a 40+ year low, and the vast majority of corporate borrowing is to refi old debt or for M&A, not to fund actual expansion. Check out the cash piling up on corporate balance sheets.

If you see the corporate sector finally starting to plow cash into PP&E, that is when you see real rates in positive territory and consumers starting to save more.

 

[soupcxan]

I don't follow you here...you're saying that when consumers realize they need to save more, the stock market will drop? I would think that more savings = more demand for equities = higher prices.

Or are you saying that as consumers save more, they will purchase less frivolous crap which will depress corporate profits, and in turn make stocks less attractive?

It will then dawn on people that they are running out of time to prepare for retirement, and capital gains are not going to bail them out. Which means like it or not (and they won't!) they will have to increase saving, at least collectively. Not to ER, but just to R.

This should stop and then reverse the bull market in equities. In fact, it has probably already happened and we we just haven't figured it out yet.

 

[Michael]

I propose that the US economy absolutely needs our domestic savings to increase.

Some people think increased savings would cause a depression. They want people to spend to keep the economy going. Banks don't need deposits any more in order to lend money out, they simply borrow it from the fed at super low interest rates. They only bother with deposits from people who are willing to get ripped off by inflation by depositing money at interest rates even lower than the fed lends at. Except for the occasional promotional offer from banks trying to expand.

 

[Bridget]

Wow - what a divergence of opinions here---and I consider this a fairly well educated group wrt economics and finances. For me, I look it as noone can look after my interests better than I - so, I try to minimize my expenses and save, save, save. It's my time that I'm gaining back - unfrittered or somebody else claiming it for themselves. Worst case scenario, it isn't for my eternity, however, it could still make available some amount of unaccounted *my time*. Plus, I've found that when doors close, other windows open and having an unfettered mind and time to wait for and review the different openings allows me to make a better decision.

Sorry if it sounds convoluted---Bridget aka Deserat

 

[ESRBob]

Whatever I learned about Macroeconomics 25 years ago all seems to have been turned upside down by postmodern economics, but I do still believe in the following:

overall savings in the economy can come from any quarter -- not just consumers collectively being virtuous. Savings can be corporations retaining earnings, too, or perhaps investment funds represent a source of savings? (Or does savings have to come from this year's GNP by definition?)

What I know is that there is a vast amount of capital out there -- talking to my private equity and wall street buddies, their worry is that there is so much capital floating around, deals are impossible to get done at reasonable terms. They worry that something will happen that will wipe out masses of this capital to bring things back into balance.

From where I sit, all that capital, liquid and raring to go, provides the function of savings in the economy. Whether consumers save or not will make a huge difference in their personal lives, but may not mean much to the economy overall.

There was also something Keynes called the Paradox of Thrift which some of you may remember: if everyone saves, it is bad for the economy, GNP drops, and nobody gets any further ahead. Savings works at your micro (household) level, but doesn't work at the level of a whole national or global economy. Remind you of quantum physics?

ESRBob

 

[haha]

Whatever I learned about Macroeconomics 25 years ago all seems to have been turned upside down by postmodern economics, but I do still believe in the following:
overall savings in the economy can come from any quarter -- not just consumers collectively being virtuous.  Savings can be corporations retaining earnings, too, or perhaps investment funds represent a source of savings? (Or does savings have to come from this year's GNP by definition?)

 
What I remember, from even longer ago so even less secure, is that on a national acounts level, Savings=GDP-consumer spending-investment. Investment includes both housing and net business capital spending. So it would be seen as an annual sum, but also accumulated savings could be shown over time as a balance sheet item.

What I know is that there is a vast amount of capital out there -- talking to my private equity and wall street buddies, their worry is that there is so much capital floating around, deals are impossible to get done at reasonable terms.  They worry that something will happen that will wipe out masses of this capital to bring things back into balance.
From where I sit, all that capital, liquid and raring to go, provides the function of savings in the economy.

By definition, I don't think liquidity is identical to savings. Liquidity can be manufactured by central bankers, but savings is real and is a function of the real economy.

Whether consumers save or not will make a huge difference in their personal lives, but may not mean much to the economy overall.
There was also something Keynes called the Paradox of Thrift which some of you may remember:  if everyone saves, it is bad for the economy, GNP drops, and nobody gets any further ahead.  Savings works at your micro (household) level, but doesn't work at the level of a whole national or global economy.  Remind you of quantum physics?ESRBob

Is this part of Keynes thinking regarding the "liquidity trap"? Something particularly relevant to the world of the 1930s, and more recently or even presently, to Japan. It appears that saving like many things is best done in moderation!

Mikey

 

[Michael]

What I know is that there is a vast amount of capital out there... their worry is that there is so much capital floating around, deals are impossible to get done at reasonable terms.

You have only to look at the unprecedented low yield on the S&P to confirm that.