Graph 3, is pretty scary, continuing to follow Japan’s trend from the 80’s has some scary implications for renewed growth and deflation. I have read alot of analysts out there point to savings rate at 8% which was more or less the avg. until 1980. I’m not about the claim I can predict what the savings rate will revert back to, but I think its obvious it will continue to climb. That is what worries me about this recent rally, its predicated on growth returning at a pace that we have seen in the past. I truely believe that the American consumer has gone through a fundamental shift in savings/consumption habits. I do not think we will return to the highly leveraged/consumption crazy 00’s. Unfortunately, I think valuations at these levels are factoring in normal consumption patterns and a moderate savings rate.
Read the SF Fed paper on Household De-leverging
I think a reasonable conclusion from this is that the tremendous growth in GDP seen in the US over the 80s, 90s and 00s was somewhat of an illusion. Consumption grew at a faster rate than income, fueling an outsized growth engine. However, it is clear that cannot be sustainable over the long term. The idea of “normal” GDP growth is somewhere in the 3-5% range? I think it may be time to readjust that mindset. Can the US grow over a long term period of time (say over 5 + years) in that range? Deficit/debt fueled growth is not a long term solution. So lets say we adjust to a “new normal” of 1-2.9%? Are current valuations factoring that in? I don’t think so.