Cookies on the Investment International website
We use cookies to ensure that we give you the best experience on our website. If you continue without changing your settings, we'll assume that you are happy to receive all cookies on this website. However, if you would like to, you can change your cookie settings at any time.
Continue

New to Investment International?

Welcome, and thank you for visiting our website.

Investment International is the leading publication for investors interested in the world of international investment.

Our aim is to give you intelligent commentary on the most important financial stories, and help you to profit from them. If you've enjoyed what you've read so far why not sign up for our FREE investment alert.

Every week the Investment International team sends out a hard-hitting newsletter packed with news and analysis of the top stories this week plus the best investment opportunities on the market. We always look at the bigger picture like the Eurozone Crisis, and explain how this will affect YOUR investments.


Ask me later
No thanks

American Fund Markets & Personal Spending PDF Print E-mail
Wednesday, 03 December 2008 12:24


American Fund Markets

So far, of course, it’s been the US economic downturn which has been getting all the attention. Wall Street saw a brief and hesitant revival in mid-April which had the markets looking for bargains, but there was still a consensus that the economy itself won’t bottom out until at least the middle of the year.

Profits are falling across the board, and the news on the US employment front has been almost universally bad in the last four months - which makes it all the more worrying that consumption in the States is still strong and savings are weak.

American Fund Markets & Personal Spending

Why so? Because it suggests that Americans have yet to understand the need to reduce their personal spending in the light of their more difficult circumstances. We have no real alternative but to conclude that the level of private borrowing must be rising to perhaps dangerous levels, and the risk must be that, if rising levels of inflation should ever push up the bank rate, the masses will respond by pulling out their stock market investments.

Indeed, there’s evidence that this is already happening. During March, US private investors withdrew $20bn from equity-based mutual funds, according to fund tracker Trim Tabs - the first time since September 1998 that such a thing has happened, and the biggest cash outflow in real terms since the stock market crisis of 1987. Not, you might think, a very promising basis for the tentative revival of this spring. But is it just a US affair?

American Fund Markets & US Consumers

Up to a point, yes. US consumers don’t buy very many foreign stocks at the best of times, and a large part of their mutual fund investments are made within the context of their pension fund arrangements - which are a lot less vulnerable to short-term withdrawals than other sectors of the market. But the mutuals themselves are a different matter.

For the last year (or until March, at any rate), American funds have been buying large volumes of European stocks, especially tech stocks, which aren’t as overvalued in Europe as they seem to have become in America. If they pull out, what happens to Europe?

And so to the unexpected strength of the dollar vis-a-vis the euro. The financial markets haven’t missed the fact that the Fed’s decision to raise US bank rates slightly since Christmas (two rises, one modest fall) stands in stark contrast to the falls that have been happening in London and Brussels.

American Fund Markets Regarding Dept Problems

To some extent this divergence in bank rate policy is justified, given that America has a debt problem that Europe doesn’t, but the overall result has been to strengthen the dollar and deliver a boost to US bonds and equities at the expense of anything denominated in either euros or sterling.

We said a moment ago that Europe doesn’t have America’s debt problem, and we ought to explain what we mean. US consumers now have the lowest net savings rate of any developed country in the world - less than 3 per cent, or minus 3 per cent if you exclude pension savings.

American Fund Markets & Accumulated Borrowing

Instead, they borrow. The volume of accumulated borrowing is now running at 110 per cent of household incomes in the States, compared with around 80 per cent in continental Europe and 105 per cent in London. Nobody is under any illusions about what a sharp rise in bank rates would mean for the US.

In theory, Europe ought to be less damaged. In practice, as we’ve seen, it might suffer a sudden evacuation of US funds.

 

   

 

Last Updated on Tuesday, 06 January 2009 14:48
 

Most Read

Latest Guides

New Build UK Student Investment
New Build UK Student Investment
Download

UK Airport Car Park Investment
UK Airport Car Park Investment
Download

UK Airport Car Park Investment
Hever Hotel
Download

Holiday Home Rental Guide
Holiday Home Rental
Download

Investing in Buy-to-let
Investing in buy-to-let
Download

Investing in buy-to-let
Investing in buy-to-let
Download

Discover the real power behind your pension
Hever Hotel
Download

Self Invested Personal Pension Guide for UK Expatriates
key
Download

Offshore Banking Guide
Offshore banking Guide 2010-2011
Download
Pension Planning Guide
International Pension Planning Guide 2010-2011
Download
Eurozone Crisis
Eurozone Crisis Report 2010-2011
Download
Tax Guide
International Tax Guide 2010-2011
Download
Follow us on Twitter
Find us on Facebook