Free Fall

Wednesday, March 04, 2009

Just as we started the week with snow falling furiously, stocks also took another free fall and ended Monday at their worst level (DOW 6,760 & S&P 700) in 12 years – since 1997.  Since Oct 2007, stocks have lost more than 50% of their value and close to 20% just this year.  This translates into approximately $2 trillion of American’s retirement wealth that has been destroyed due to the precipitous fall in the stock market.  Last week, a Financial Times article really resonated with me:  “what started as a financial crisis became an economic crisis and is now an unemployment crisis.” 

Consumer spending, which is the lifeblood of the economy and a catalyst in helping pull us out of other recessions, has virtually come to a halt.  The savings rate, which was negative for so many years, is now 5% of disposable income, the highest it has been in 14 years.  I believe it is a good thing that Americans are saving more but right now it’s just adding to the downward spiral in the economy.  This is a major shift from the negative savings rate the US had for many years where households spent more than they earned through generous credit.  Americans got used to easy credit and they developed an “insatiable” appetite for spending.  After nearly 25 years of spending more than they earned through easy credit, consumer spending has come to a screeching halt.  This new found frugality hurts the bottom line for business which isn’t good for the employment picture either.

Unemployment is now at 7.6% and there appears no end it site to this growing demographic.  With rising unemployment, there can be no reversal in the housing market or in business forecasts or in consumer spending.  This is a negative feedback cycle and I am not sure what or how we can stop it. 

From all that I have read, it seems like the first thing we need to do is to fix the banking sector, get rid of the toxic assts and restart lending.  But even if we “unclog” the banking sector, will the consumer have any demand for credit? I am not so sure as I really believe what I read in PIMCO’s most recent report - here.  Consumers are not only repairing their own balance sheets but are fearful of losing their job, of losing the retirement account, of not being able to pay the mortgage if they do buy a house.  Consumers, including myself are hunkered down.