Posted on 05/02/2009 1:32:20 AM PDT by bruinbirdman
Don't worry that climbing savings rates will hurt GDP. Saving is just what the world needs.
U.S. consumers are saving more and spending less. That's probably a good thing for the nation in the long run. But how can it possibly be good for investors if it means slower economic growth? After all, borrowing money to go shopping drives the economy. Consumer spending currently makes up about 70% of U.S. gross domestic product.
Slower growth will be a good thing for stocks, argues James McCaughan, who heads Principal Financial Group ( PFG - news - people )'s asset management unit. The Cambridge-educated math major sees the U.S. savings rate rocketing up to 9% or 10% from 3.8% at the end of last year. It will stay there, says McCaughan, as the psychological effects of mass layoffs, wounded retirement portfolios and millions of foreclosures reduce households' appetite for risking their salaries in the markets. That, in turn, should reduce economic growth from 2.5% a year over the past 20 years to 2.0%.
So where's the silver lining? A higher savings rate would be more in line with what we used to put away in the bank. A low growth rate will be more sustainable and less volatile as iffy consumer spending shrinks as a portion of GDP and the nation borrow less to fund its lifestyle, says McCaughan, whose clients include thousands of pension funds and 401(k) retirement plans. Iowa-based Principal manages $190 billion in assets, down from $250 billion at the start of the year.
For investors looking years ahead he recommends slowly accumulating a diverse portfolio of stocks. Where? In the U.S., for starters, since he thinks it will rebound quicker than other countries as the federal government pours stimulus into markets of all kinds. By contrast, he thinks
(Excerpt) Read more at forbes.com ...
It also means that when we need to buy something, we almost certainly can. The market, though slower, will be predictable and reliable.
yitbos
The US and therefore the world economy has been based on consumer spending for many years. What I have never seen is an explanation of how such an economy can be truly sound.
It seems unbalanced to me, but I don't know enough economic theory to explain why.
Read the Wealth of Nations.
I would not worry too much since Obama is moving us to a Socialist State where the government will take it before you can save it or spend it.
Socialism works until the money runs out (Margret Thacher).
Indeed and it has gotten 5% more valuable in just the past two weeks due to the collapsing velocity of money.
So it's good that individuals have stopped borrowing to consume, but it's also good that the government is going to do it for us instead? Has this guy heard of mal-investment? What will govt borrowing and spending to buy all sorts of stupid windmill crap accomplish in the long run? What will it do to commodity (and production) prices for things the economy actually needs? We should consider ourselves lucky if the govt spending is merely used to dig holes and fill them back in.
You are correct in that a consumption / retail based society cannot economically prosper when running $300 billion / mo trade deficits.
Our own goobermint succumbed to corporate wishes and foreign blackmail to promote 'free trade'. Though trade is good, there is no such thing as free trade as the US manufacturing worker cannot compete against workers in India and Asia whom monthly incomes average $150-$200.
Until the US consumer wakes up and reduces spending to focus as best as possible on American made, we as a nation, will continue the slide into economic poverty.
At this time, we have approximately 206,000 empty rail freight cars cars siting idle on spurs. Connected, those would stretch from New York City to Salt LAke City...get the picture?
With that pile of money called ‘savings’ growing as it is now, how long do you think it will be before the government sinks its claws into it?
Oh, there were plenty around here who tried. It seems they don't come around very much anymore.
In Nevada, state revenue is off about 30%, back to the level of 2005. The Governor swore to veto any tax increases and budgeted a cut of 11% for teachers K-12 and a 35+% cut in university spending.
The state legislature likes teachers and is counting on $250+ million from the socialists in Washington.
There's your stimulous. The Obammunist is bailing out the teachers' unions in the states.
yitbos
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