By Robert Folsom
The major stock indexes closed lower on Friday (Jan. 7), and on the week overall.
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The savings rate has fallen below zero (again), but that's not the problem. Instead, it's that people still seem to think that they can save money the easy way -- namely by watching their assets appreciate. The bad old way was to save from one's income, which demands delayed gratification.
But who wants to be bothered with that?
(Yes, I know that "asset appreciation" is the prerequisite of successful investing. Yet people who believe assets appreciate simply because they wish it to be so should simply go ahead and start wishing.)
The Financial Times this week ran a column by Stephen Roach of Morgan Stanley, who spelled out why assumptions of "easy asset appreciation" are the root folly of the stock market and real estate bubbles. He also offered a forecast of sorts, best summed up by this sentence:
"It is going to be a very painful process to break the addiction to asset-led behavior."
By way of contrast, there's no "painful process" ahead that I can infer from Fed Chairman Bernanke's latest remarks, which included: "The Federal Reserve is not currently forecasting a recession. We are forecasting slow growth."
As for why Stephen Roach is forecasting a recession, he can speak for himself:
As home prices move into a protracted period of decline, consumers will finally recognise the perils of bubble-distorted saving strategies. Financially battered households will respond by rebuilding income-based saving balances. That means the consumption share of gross domestic product will fall and the US economy will most likely tumble into recession.
Mind you, the key word in the quote above is "protracted" -- home prices already declined some six percent in the 20 major metropolitan areas of the U.S. in 2007. In other words, millions of people are not simply failing to see the appreciation they expected; in fact, their asset prices are in decline.
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