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Why The Wealth Effect Won't Support The US 'Recovery'

Tyler Durden's picture




 

We, like Morgan Stanley's Greg Peters, are skeptical of the Fed's apparent belief that wealth effects can support a struggling recovery. Recent gains are small versus the wealth lost in recent years. More importantly, wealth only matters when it lowers saving. It seems that weak income growth through the recovery has depressed saving – stopped saving rising to fully reflect wealth destruction – which implies wealth increases now will not trigger a typical growth-boosting drop in saving. With poor fundamentals seemingly trumping central bank policy - as macro data and bellwether stock warnings highlight the downside risks of complacency. But, the housing recovery, we hear you cry? Not this time - given weak income growth; and as far as feeling wealthy, the 'right' savings rate to achieve that dream remains well beyond most in anything but the absolute riskiest assets - and implicitly lowers consumption.

 

Via Morgan Stanley; Wealth: Where Is They Sting?

 

Unconventional monetary policy seems, in part, aimed at boosting asset prices. Importantly, US house prices are now rising (Exhibit 1). For sure, the wealth gains so far are small compared to the losses: the value of household assets peaked at 783% of income in March 2007, fell to 607% in March 2009, and is now at 640%.

 

But changes often matter, so it may be that wealth effects will now provide support for growth. Note, however, that rising wealth affects growth only if it lowers saving.

That happened through the credit super-cycle: rising wealth went hand-in-hand with falling household saving (Exhibit 2, where wealth is inverted: the line goes down as wealth goes up). In rough terms, wealth rising by 50 percent of income saw the saving rate fall by 2% of income – suggesting that consumers increased spending by 4¢ for every $1 rise in wealth.

As an aside, this was the most important way that the credit super-cycle boosted profits: rising credit funded higher asset prices, which lowered saving, which (by definition) meant that household spending increased faster than household income. Because consumer spending boosts corporate revenue, while labor is the corporate sector’s largest cost, all else equal a fall in household saving lifts corporate margins and profits.

 

Why won’t rising house prices now boost growth (and profits) as wealth effects did through the credit super-cycle? The short answer is that weak income growth has limited a saving rise through the deleveraging phase. The payback is that the (moderate) rise in wealth now won’t provide the usual boost.

This raises an obvious question: what’s the ‘right’ saving rate? If the principal reason households save is to fund retirement, the ‘right’ level of saving depends on only three variables: how many assets are required for retirement, current assets, and expected asset returns. Exhibit 3 shows the sensitivity of the required saving rate to changes in expected returns and starting point wealth. (In this example, the aim is to retire in 20 years with assets worth seven times income.)

 

 

Note two points (via Citi charts):

First, the required saving rate rises if return expectations fall. Ironically, if unconventional monetary policy reduces returns expectations (as, surely, it has for many common saving vehicles) then it will tend to lift the saving rate.

 

 

 

Second, wealth effects are larger when return expectations are lower (because the return on additional saving is low, a given change in current wealth produces a larger offsetting change the saving rate).

 

 

So HY CCC bonds then - all-in with 20% of your salary for next 25 years!

 

Exhibit 3 is very simple, but the numbers seem plausible with US experience: household wealth (net of debt) was around 450% of income in the 1970s/early 1980s, and saving around 9%, implying that real return expectations were a defensible 3%. By the peak of the credit boom, wealth was at 650% of income. The household saving rate was under 2%, consistent with a moderate rise in return expectations. Net wealth now is under 550% of income; if return expectations have fallen then saving should be 6-8% of income. The current saving rate (4%) is defensible only if return expectations are unchanged from the bull market period.

This seems unlikely. The more likely reason why saving has not risen is that income has been constrained. If this analysis is correct, then the payback will be that rising wealth may lower ‘desired’ saving, but not affect actual saving. Assuming no change in return expectations, it would require wealth to increase by around 100 percent of income to push the desired saving rate below the current actual saving rate – that is, for wealth effects to actually work.

In other words, this time rising wealth won’t have the sting it did in the last cycle.

Source: Morgan Stanley and Citi

 

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Thu, 09/27/2012 - 19:23 | 2837093 RSloane
RSloane's picture

I don't believe for a minute that the Fed's plan had anything to do with 'wishing' for a wealth effect to impact the entire economy. I don't think they actually give a damn about anyone except bankers.

Thu, 09/27/2012 - 19:29 | 2837108 knukles
knukles's picture

Thar be no wealth effect when so many houses are so far below cost, 401(k)s have become 001(k)s jobs are hard to get and if there don't pay shit.... midst a liquidity trap imposed by credibility and lawlessness traps.

Gee Superman, don't Lois's tits look grand?  Sure great the refs are back tonite.
Shut the fuck up, Jimmy

Thu, 09/27/2012 - 19:33 | 2837119 Meesohaawnee
Meesohaawnee's picture

Bravo! dead on. I never bought into QEfinity is about job creation. They always put cute little worlds like "stimulus" and "job creation" to pass it by the sheep disguised as robbing and looting. Most of all, do you really think the fed wanted it reported 2 weeks ago on the 5 oclock news that the fed "Announced another round of bank bailouts paid for by the taxpayers" doubt it.

Thu, 09/27/2012 - 19:39 | 2837132 Dr. Engali
Dr. Engali's picture

You're right on. The fed's primary function is to protect the banks, fund the government deficit with low rates while making us pay for it through inflation. Any "benefits" to the economy are strictly ancillary.

Thu, 09/27/2012 - 20:30 | 2837244 Curt W
Curt W's picture

I think uncle Ben's hidden agenda is to devalue the dollar so low that American made products look inexpensive to overseas customers.

He is trying to steal manufacturing back from china, but instead of paying us very low wages he just devalues the dollar vs other currencies. 

 It will look like we get a decent wage, but try buying something from overseas and the price will be out of this world.  (oil)

Unfortunately, all the countries are racing to devalue their currency.

And we are going to wind up just getting screwed.

Thu, 09/27/2012 - 21:58 | 2837425 grunk
grunk's picture

I understand that this is almost a "pissing into a hurricane" rhetorical question, but doesn't the Bernank see that we get the scam?

Thu, 09/27/2012 - 22:37 | 2837488 MiltonFriedmans...
MiltonFriedmansNightmare's picture

*We* may get it, but millions upon millions who will be tuned into presidential debates and casting votes in a meaningless election this November clearly don't. *We* are a fringe minority.

Thu, 09/27/2012 - 23:42 | 2837603 old naughty
old naughty's picture

Fringe minority; fringe dwellers; fringe...

Anything fringe is out-of-this world.

We are afraid of beaches because so many 'heads' still bury there.

Fri, 09/28/2012 - 02:49 | 2837809 SilverDosed
SilverDosed's picture

What percentage of Americans know what a reverse-repo is, or even a credit default swap? > .01% maybe? Of those who know what half these new "synthetic trading instruments and mechanisms" are, what percentage actually know how they work? Most of the traders I know on Wall Street and in Chicagoland dont have a clue and will freely admit it.

Thu, 09/27/2012 - 19:23 | 2837095 Clintonmrs
Clintonmrs's picture

my friend's mother makes $82 every hour on the computer. She has been out of work for five months but last month her paycheck was $15988 just working on the computer for a few hours. Go to this web site and read more http://zapit.nu/cashHedge

Thu, 09/27/2012 - 19:34 | 2837122 Meesohaawnee
Meesohaawnee's picture

why dont you get a real job. and blowin fleecman dont count

Thu, 09/27/2012 - 19:38 | 2837127 knukles
knukles's picture

Don't try the site.... probably corrupted with viruses, trojans, worms and other sundry unpleasant crap.

sorta like a character reference for the grade school principal applicant and musing out loud that best check his record to see if he's a child molester

Thu, 09/27/2012 - 19:41 | 2837137 Bobbyrib
Bobbyrib's picture

I'll be the first one to admit I hate captcha's, but if ZH were to be able to bring back captcha's that actually work I would be for it.

Thu, 09/27/2012 - 19:50 | 2837161 RSBriggs
RSBriggs's picture

Actually, YOUR mom makes more than that per hour.  At least given what I had to pay for 10 minutes with her.

Thu, 09/27/2012 - 19:52 | 2837167 cdude
cdude's picture

.NU domain is the top-level domain of the Polynesian island of Niue .

'nuff said

Thu, 09/27/2012 - 19:57 | 2837177 Dr. Engali
Dr. Engali's picture

I made that much in my last trade.

Thu, 09/27/2012 - 23:16 | 2837557 optimator
optimator's picture

Your friends Mom must be a midget to do it on top of a computer.  Isn't she the one that went to the bank with a few hundred bucks in quarters?  The teller said, "Did you hoard all these coins", to which she answered, "No, my sister helped me".

Thu, 09/27/2012 - 19:59 | 2837112 kevinearick
kevinearick's picture

the middle classes are net borrowers, the entitlements are cash negative, and the demographic cliff is here. can ben put in a bottom? no.

so, china throws its monetary weight in after japan, blah,blah,blah, making the black hole bigger.

do you really think turning the american dream into a 24hr teller machine and giving homes to immigrants was an accident?

Thu, 09/27/2012 - 19:32 | 2837115 Bobbyrib
Bobbyrib's picture

As a person of modest means I have always hated Andrew Mellon, but when you're right, you're right:"liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."

Basically allow malinvestment to fail, rather than prop it up (which does not seem to be working).

Thu, 09/27/2012 - 19:39 | 2837130 Yen Cross
Yen Cross's picture

 The village has too many Chiefs. Time to bring back the " GUILLOTINE" /

Thu, 09/27/2012 - 23:12 | 2837547 optimator
optimator's picture

Little benny built a guillotine

   And on it slew his cousin Gene.

Said Mother running with a mop

   These messy games have got to stop

Thu, 09/27/2012 - 19:40 | 2837135 Jason T
Jason T's picture

the fed has destroyed the puritan values of thrift and hard work.  Get those Ben bucks and spend them as fast as you can either on  physical assets like gold and silvre or enjoy that $4 cup of coffee at Starbucks.

Thu, 09/27/2012 - 19:43 | 2837146 Bobbyrib
Bobbyrib's picture

The $4 cup of Starbucks is a bad idea. People should be savings as much as possible right now. The economic downturn is starting to get worse.

Thu, 09/27/2012 - 20:15 | 2837218 Curt W
Curt W's picture

If you save that $4 everyday for a month you would think it adds up to $120

But next year it may only buy a $100 worth of stuff due to inflation,

if you hold it long term, it could become toilet paper.

Thu, 09/27/2012 - 23:20 | 2837571 optimator
optimator's picture

Bennie B. says it's a good idea to buy even two cups at four bucks, he knows next year a cup will be eight bucks.

Thu, 09/27/2012 - 21:43 | 2837397 barroter
barroter's picture

Aim that moral at the banks, Wall St.  Long term profit, delaying instant gratification.  The idea of having to wait for good things makes today's business throw a temper tantrum.

Thu, 09/27/2012 - 23:09 | 2837543 optimator
optimator's picture

Made my laugh of the day, "FED in the same sentence as puritan values - thrift, hard work"...funny.

Thu, 09/27/2012 - 19:56 | 2837141 Dr. Engali
Dr. Engali's picture

To have a wealth effect don't people need ....oh I don't know......wealth?

Thu, 09/27/2012 - 19:47 | 2837148 cdude
cdude's picture

Not as bad off as once feared-Effect. Very different than the "Wealth Effect"; mainly because it does not inspire one to be as caviler around expanding their personal debt. 

Thu, 09/27/2012 - 19:50 | 2837164 Snakeeyes
Snakeeyes's picture

House prices on an inflation adjusted basis are back to 1999 levels. So all that wealth from the bubble has vanished.

http://confoundedinterest.wordpress.com/2012/09/27/bad-economic-news-q2-gdp-slumps-to-1-3-durable-goods-orders-crash-13-2/

Thu, 09/27/2012 - 20:09 | 2837204 Curt W
Curt W's picture

What good is saving, when one month of inflation wipes out a whole year of interest earnings.

Thu, 09/27/2012 - 20:35 | 2837255 Tombstone
Tombstone's picture

Wrong, wrong, wrong.  I heard it on CNBC as Maria was having an woman-like moment, that housing, the stock market and Benny are all booming at the same time.

Thu, 09/27/2012 - 22:03 | 2837429 grunk
grunk's picture

The Bernank has sewn up a deal with a country with no extradition treaty.

The helicopter lifting off the roof of the Federal Reserve.

Thu, 09/27/2012 - 23:07 | 2837538 optimator
optimator's picture

He won't be taking a chopper off the roof ala Viet Nam flight.  He'll be taking an El Al cargo flight with his heavy personal stuff and it won't be tungston!

Thu, 09/27/2012 - 22:09 | 2837438 rawsienna
rawsienna's picture

As I have posted in the past, if families are "under-saved" they in reality are short, not long stocks. They may own some but not nearly enough to make them want to save less and spend more.  Only people who have "excess" saving benefit from an inflation of stock assets relative to underlying fundamentals . People short savings are worse off because a "unit" of future consumption will buy you less - if current stock prices rise relative to future GDP. 

Fri, 09/28/2012 - 02:01 | 2837719 devo
devo's picture

End the FED; defenestrate the Bernanke

Fri, 09/28/2012 - 02:47 | 2837808 SilverDosed
SilverDosed's picture

What percentage of Americans know what a reverse-repo is, or even a credit default swap? > .01% maybe? Of those who know what half these new "synthetic trading instruments and mechanisms" are, what percentage actually know how they work? Most of the traders I know on Wall Street and in Chicagoland dont have a clue, and most will admit it.

Fri, 09/28/2012 - 08:19 | 2838099 TrumpXVI
TrumpXVI's picture

On Matt Miller's "Bloomberg Rewind" last night his Thursday evening guest, Kenny Polcari said that he doubted there was any "wealth effect".  Polcari's point was that any wealth effect only affected his retirement accounts which are not available for leveraging consumption, at least not in the Polcari household.

I thought it was a good point, being, that now isn't ten years ago.  Maybe ten years ago people in their late thirties and early forties might use their home's rising value as an ATM machine, but now, ten years later, after two stock market crashes and all the Booomers now closer to retirement, the name of the game is capital preservation.  

If the Brenank thinks he can motivate Boomers to leverage up, I think he's ignoring demographics (as other commentators have already pointed out).

But our fiirst poster's point is also totally relevant; The Brenank only cares about the Banksters.  Not to mention that not that many retail investers are still participating in the equity market anymore.

Fri, 09/28/2012 - 09:45 | 2838447 Grand Supercycle
Grand Supercycle's picture

IMPENDING SELL OFF...................

Longs please be careful.

Due to recent central bank intervention and short covering spikes, these daily charts are extremely overextended and significant correction expected very soon:

SPX, DOW, NASDAQ, NZDUSD, GBPUSD, AUDUSD, COPPER, CRUDE, GOLD, SILVER. [USD strength will return]

http://www.zerohedge.com/news/2012-12-24/market-analysis

http://trader618.com

Do NOT follow this link or you will be banned from the site!