The United States used to be a nation of savers. For significant periods of time in the 1970’s and 1980’s we saved more than 10% of our collective income. In the early 1980’s the United States was the greatest creditor nation that the world had ever known.
Beginning in the 1980’s, we became increasingly enamored of spending. Not only did we begin to spend a greater portion of our incomes, we discovered the fun of borrowing to spend even more. The rapid proliferation of credit cards made borrowing easy and, at least initially, painless. In due time, we transitioned from being the largest creditor nation in history to the largest debtor nation ever. Instead of owning our domestic assets plus a portion of assets around the world, we deteriorated to a position in which people in other countries owned not only their assets but a portion of ours as well. In recent years more and more U.S. assets have been transferred to foreign hands.
Less than two years ago, before stocks and real estate plummeted, the people of this country saw no need to save at all. For a brief period of time, we spent more than we earned, resulting in a negative personal savings rate. The sudden decimation of personal net worth in 2008 and 2009, however, brought about a dramatic change of behavior. When the stock and real estate markets imploded, the personal savings rate jumped to about 6%, as people realized that growth in the value of investment portfolios and homes could no longer be relied upon to meet tomorrow’s needs.
The sharp stock market rally since the March 2009 lows has lessened the urgency to save, and the personal savings rate has fallen back to the 3% level. Over the past half century, the stock market has, on average, produced negative returns when savings are as low as they are today.
Clearly what’s needed for the long-term good of our savings-starved populace and for the country as a whole is to build our savings and decrease our reliance on foreign funding. At the same time, ironically our government is doing everything in its power to induce us to spend — cash for clunkers, tax incentives for first-time home buyers, possibly cash for appliances in the fall and who knows what else they might think of. America’s economic fragility and its inability to endure a double-dip recession is forcing the government to promote spending today, while worrying about tomorrow tomorrow. The government has dug itself into a debt hole so deep that it feels compelled to keep on digging. Not only is it digging the debt hole deeper, it’s accelerating the pace of digging. Can you imagine waking up with a hangover from too much drinking and forcing yourself to drink even greater amounts to eliminate the problem? It’s hard to imagine that the eventual outcome would be favorable.
Nor can we know the ultimate outcome of our economic dilemma either. We can’t know whether we will ever find our way out of the debt hole, but it would be foolish not to recognize the potential that our securities markets may behave in far from typical fashion in the years ahead. We strongly urge our readers to abandon a fixed allocation investment strategy. The flexibility to respond to unpredictable economic and market conditions may be a necessity in the decades ahead.
Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to Tom@missiontrust.com or call (520) 529-2900 to speak with one of the Portfolio Coordinators.