Savings Rate Reflects Depression

Good day… The dollar increased ever so slightly yesterday after the data released failed to give investors a clear picture of which way the economy is heading. Personal income and spending both increased slightly, coming in right where they were expected. The PCE inflation data, which was also released yesterday, showed that inflation has moderated (but readers know just how much faith we put in the government’s inflation data!).

The weekly jobs data came in pretty much where they were expected, again showing a slowing economy. Following the jobs data, we saw December pending home sales surprise the market increasing by 4.9% after decreasing 0.3% in November. And to end a pretty big day of data, the ISM manufacturing index fell to 49.3, the lowest since April 2003. Readings of less than 50 signal contraction.

As I said earlier, the data was all over the board; but in general, it reinforces the Fed’s earlier decisions to stay on the sideline as far as interest rate cuts/increases. For right now, the economy seems to be slowing and inflation seems to be moderating. Today we will get the monthly jobs data for January along with December factory orders, U. of Michigan confidence, and vehicle sales for January. While the jobs data and confidence data will likely come in right where they are expected, I think we could see a surprise on the downside for the factory orders and vehicle sales data after yesterday’s poor ISM number. The surveys are calling for December factory orders to rise 1.9% from last months 0.9% increase. I don’t think we will see such a big increase, which would be negative for the U.S. dollar.

Before leaving for home last night, Chuck sent me a story regarding a piece of data released in the United States yesterday. Consumer spending in the United States rose in December by the most in five months, but the problem is that incomes didn’t keep pace. This continues a trend that we have been pointing out over the last few years: U.S. consumers continue to borrow and spend at a record pace! The result? The U.S. savings rate has fallen to a 74 year low. The last time the savings rate was this low, was in 1933 during the Great Depression.

Here is an excerpt from the story Chuck sent me: “The Commerce Department reported Thursday that the savings rate for all of 2006 was a negative 1%, meaning that not only did people spend all the money they earned but they also dipped into savings or increased borrowing to finance purchases. The 2006 figure was lower than a negative 0.4% in 2005 and was the poorest showing since a negative 1.5% savings rate in 1933 during the Depression.”

The savings rate has been negative for an entire year only four times in history – in 2005 and 2006 and in 1933 and 1932. However, the reasons for the decline in the savings rate were vastly different during the two periods.

During the Great Depression, when one-fourth of the labor force was without a job, people dipped into savings in an effort to meet the basic necessities of shelter and clothing.

Economists have put forward various reasons to explain the current lack of savings. These range from a feeling on the part of some people that they do not need to save because of the run-up in their investments such as homes and stock portfolios to an effort by many middle-class wage earners to maintain their current lifestyles even though their wage gains have been depressed by the effects of global competition.

Whatever the reason for the low savings, economists warn that it the phenomenon exists at a particularly bad time with 78 million baby boomers approaching retirement age. Instead of building up savings to use during retirement, baby boomers are continuing to spend all their earnings.”

You would think a story like this would have been picked up by the major news networks and we would be getting inundated with experts warning people to reign in their spending and explaining the risks of over-extending themselves. But just like the massive deficits that we are accumulating on a federal level, no one seems to care about our personal deficits. Businesses want consumers to ‘keep spending’ and are willing to extend credit to just about anyone who can fog a mirror. While the borrow and spend is great for the economy in the short run, eventually consumers are going to have to pay up or declare bankruptcy. This lack of savings will eventually be reflected in a slower U.S. economy and a loss in the value of the U.S. dollar.

We are not alone in our calls for a weakening dollar. BNP Paribas SA, Deutsche Bank AG, and Standard Chartered PLC are sticking to forecasts that the dollar will weaken versus the euro by March 31. The have held their view even after the U.S. currency strengthened during the month of January. Deutsche Bank, Germany’s biggest bank, predicts a dollar decline to $1.33 to the euro by the end of March. BNP, the biggest French bank, says the dollar will fall to $1.35. Standard Chartered predicts the dollar will drop to a record $1.38. These banks all share our view that the dollar is in a multiyear downtrend.

In yesterday’s currency roundup, Chuck pointed out that the Indian rupee continues to slowly appreciate versus the U.S. dollar. Foreign direct investment will continue to protect the rupee’s gains. Demand for the rupee will prevent the country’s current-account deficit from widening. Many are predicting the rupee will reach 44 per dollar by the end of March and 43 by year-end. India’s currency is among the top-ten performers in the world so far this year. The rupee will also benefit from India’s credit rating upgrade this week from S&P who raised the ratings to BBB-, the lowest investment grade, on January 30. Gains in the rupee were curtailed at 1.8% last year as the government limited debt investment by foreigners, so we could see further government action if the rupee appreciates too rapidly.

Currencies today: A$ .7739, kiwi .6786, C$ .8450, euro 1.3025, sterling 1.9684, Swiss .8048, ISK 68.39, rand 7.167, krone 6.2414, SEK 6.956, forint 196.26, zloty 2.9977, koruna 21.65, yen 121.04, baht 35.25, sing 1.5358, HKD 7.8065, INR 44.11, China 7.7575, pesos 10.977, dollar index 84.70, Silver $13.675, and Gold… $657.65

That’s it for today… Chuck shook up our products group yesterday with his announcement that we will be bringing back the Gold MarketSafe CD. After a quick meeting, Chuck came back to the desk excited by how quickly they were able to get everything in place. We should be able to give investors the details on this latest offering sometime next week. I hope everyone has a great time watching the Super Bowl. The game should be a good one this year, and may even upstage the commercials!! No predictions on a winner, I like both teams, so I’ll be happy either way. Have a great weekend!!!

Chuck Butler — February 02, 2007

The Daily Reckoning