Americans are firmly back into their old ways, saving virtually nothing and spending the rest. A recent piece from The Economist documents the short-coming of America’s financial planning.
In short, we’re asset rich and cash poor.
The American savings rate dipped to 2.6% in February 2013, down from 3.5% the year before. Meanwhile, American reliance on financial assets for net worth is skyrocketing. Surging real estate prices and stock valuations put American net worth back on track to pre-recession levels.
Bernanke’s asset and debt bubble
Say what you want about the merits of quantitative easing, but it’s doing exactly what Bernanke had hoped, igniting a fire underneath asset valuations as the cost of capital plummets.
As any arm chair financier knows, a lower cost of capital results in higher asset values. As credit flows freely once again, borrowers find it possible to leverage their financial worth to buy new homes, cars, durable goods, and other major purchases that they couldn’t afford without financing.
Inexpensive credit has allowed the American consumer to spend freely once again. Thanks to lower interest rates, Bernanke and his fellow central bankers are engaging in a policy to free up cash flow for American consumers. Household debt servicing as a percentage of disposable income fell to 15.48% in the fourth quarter of 2012, the lowest level since the first quarter of 1981.
While households find debt as a percentage of their income more affordable than at any time in the past two decades, the savings rate isn’t falling in line with historical figures.
Americans saved an average of 9.6% of their income in the first quarter of 1981 when debt servicing was as cheap as a percentage of income as it is right now, according to data from the Federal Reserve.
Today, American households are saving less than 3% of their income, despite the fact that Americans as a whole are finding their debt servicing costs near a historical low.
Jobless recovery is over
A jobless recovery, one where asset prices and consumer spending can increase without job growth, is over. Americans are tapped out; incapable of saving much less than the 2.6% of their income they saved in February.
For corporate earnings to continue growing, American wages will have to grow, too. So far, American wage growth has been stagnant as new job creation is growing fastest in the low-paying service and hospitality industries.
So how should one play the death of the jobless recovery? Consider raising cash, or fleeing to safer corners of the market. Here are three ideas on how to balance your portfolio in line with economic realities: