What America's savings binge means for your investments
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Associate Editor
David Stevenson Jul 22, 2009
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It's payback time. Americans are now repaying their debts for the first time since at least 1952.
This is a massive turning point. Not just for the US, but also for Britain.
Why? Because it means a huge change in Western spending – or rather saving – habits. And that'll have a major impact on the economy – and on the shares you should now be holding...
Americans' days of borrowing are over
US households have been on a borrowing binge since the days of Harry S Truman in the White House 57 years ago. Over that time, their debts have risen more than 3½ times faster than their incomes. The savings ratio, i.e. the proportion of household income stashed away, plunged from 15% at the end of the 1980s to zero by the middle of 2007.
At the time, who could blame them? When houses were shooting up in price, why worry about running up extra borrowings? The chances were that your net worth would still be higher by the year end, even if you did take out another loan. And why bother saving when the stock market was doing the job very well for you? Between 1982 and 2007 the Dow Jones Industrial Average shot up by a staggering 14 times. You didn't have to be Warren Buffett to make a decent return.
But those days are well and truly over. US household wealth has evaporated over the last 18 months, tumbling more than $11 trillion in 2008 alone. Despite its recent rally, the stock market is still down by more than a third from its peak, while home prices keep falling.
To make matters worse, take home pay is dropping while the dole queues are at their longest in 26 years. That's bad news when personal indebtedness still stands at 128% of the average American family's after-tax income.
Everything's changing - saving is now good
So it's no surprise that everything is now changing around. In short, debt is now bad and savings are good.
US personal debt was growing at double-digit rates three years ago, but is now actually falling – it's a process called 'de-leveraging'. And 2009's first quarter saw US household and non-financial company debt shrink by 0.7%, the first time this has happened since records started in 1952, as Jan Hatzius at Goldman Sachs tells Bloomberg. "We've never seen a pullback like this. We're seeing an adjustment, it's very painful and there's a lot of collateral damage".
Homeowners will be staying put, cars will be driven for another year or two and there will be more 'staycations' – holidays at home, says Ravi Dahr of Yale's Centre for Consumer Insights.
At the same time, as this chart shows…
The US savings rate has started recovering - right back up to 6.9%. John Mauldin of Millennium Wave Advisors reckons it could climb to 9%. And the other side of this particular coin is that then, "consumer spending will fall by 9%". As consumption makes up 70% of the economy, this reinforces the view that the economy is set for a very long spell in the doldrums.
But there's an even bigger shift underway here. Thrift is coming back into fashion. Professor Edward Kerscher of Global Wealth Management calls it "a behaviour inflection point. Consumers aren't just being frugal, they're being thrifty".
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The UK is in the same boat as the US
How does this affect the UK? Well, we're in pretty much the same boat. Virtually all the same trends that are developing over there will be happening over here too. For example, the latest Bank of England figures showed that annualised growth in bank lending to private individuals has slowed to below 0.5% from 8% a year ago.
Meanwhile Britain's consumers will also be forced to begin repaying the debts they've stacked up for ages. In fact they'll probably find life even tougher than their US counterparts. UK household debt as a proportion of net income is over 170%. Thrift will no longer be an option, it will become a necessity.
In other words, we're heading for a long period when our economy also does nothing – at best. As Invesco Perpetual's Neil Woodford, one of the UK's top performing fund managers, says, the economic data might stop getting worse, but that doesn't mean things are actually getting better. He's forecasting no recovery in Britain for the next three to four years.
Where your stock market money should be invested
So where should you have your stock market money invested?
We believe it should be in two main areas. 'Defensives', like utilities, tobacco and telecoms and pharmaceuticals, which don't need economic growth to make their profits; and 'thrift stocks', which will cash in on the new trend of paying down debt and saving more.
We've discussed both in recent copies of the magazine (if you're not already a subscriber, claim your first three issues free here). For our full range of recommendations, read our pieces Seven safe stocks that will last longer than the rally and How to profit as consumers tighten the purse strings.
But here's one idea to be going along with today. Woodford is another to point out the excellent value that's now to be found in sectors such as pharmaceuticals. And although swine flu is very bad news for many people, one company which we recommended a month ago is set to do well from the virus. GlaxoSmithKline (LSE: GSK) which makes antivirals like Relenza which can treat the flu strain, is due to report second quarter results at midday today. On a current year p/e of 10x with a yield of 5.3%, this is one very cheap-looking share.
Our recommended article for today
China's growth has been phenomenal, and investors have been piling in. But the figures might be too good to be true, says Merryn Somerset Webb. So be careful where you put your money.
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