Ignore Statistical Oddities at Your Peril

Any time an unusual event repeats, it behooves us to consider the similarities and differences. Because Altucher laid out how the two eras are different, I want to concentrate on a few disturbing parallels. We are not in an identical period to 1932-33, but the similarities should not be blithely dismissed.

To begin with, each period of a negative savings rate came on the heels of a major market crash. From 2000 to 2003, the Nasdaq lost 78% of its value. That is roughly equivalent to the loss the Dow Jones Industrial Average suffered following the 1929 crash over a similar period. To me, that is the most significant factor tying the two periods together.

Second, each period followed an era of consumptive excess. In the first instance, it was the "Roaring '20s," in the second, the "Dot-Com '90s." In both cases, the population continued its high-spending ways long after the flush ways of the prior good times had ended.

I suspect the reason for this is psychological. We are creatures of habit, and when we became accustomed to a certain lifestyle, it is difficult to downshift. We grow used to our lattes, navigation systems and iPods. Our sense of self-worth too often gets tied up in these material objects. It's not easy to tighten our belts suddenly or go without, especially after a period of conveniences and luxury.

Alas, these traits have led to a failure to adapt economically in the post-crash environment. Despite real income being negative, many families have yet to adjust their consumption. Cheap money a la Alan Greenspan has allowed us to party like it's 1999. Only it is no longer the '90s -- it is once again a post-crash world.

Hence, we have a negative savings rate. This failure to recognize a significant shift in the economic environment is worrisome. Consumer spending accounts for nearly 70% of GDP. If the U.S. consumer suddenly finds himself out of cash and/or out of credit, the economy will be in a heap-o-trouble.

Altucher notes that people who sold their homes and put the money into other assets don't get credit for the capital gains. But I know of only one person who actually did this: Mark Kiesel, a senior member of PIMCO's investment strategy and portfolio management group. He sold his home (over his wife's objection) and moved into a rental unit. Other than Kiesel -- who pulled this stunt to make an economic point -- not a lot of people I know of fall into this category.

Third, consider the assets on the other side of the balance sheet from these debts. As we learned after the 1990s, assets can and will fluctuate in price. The "wealth effect" made us more comfortable borrowing and spending. After all, our portfolios had done nothing but go up the prior years, right? In 2000, we learned that stock prices -- the basis for running up debt -- don't just go up.

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Source: Michael Panzner, Collins Stewart

Now we see history repeating. Only this time, it's the appreciation in home prices that is justifying the increased debt load. What would happen if that asset class experienced a sudden deceleration?

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Barry Ritholtz is the chief market strategist for Ritholtz Research, an independent institutional research firm, specializing in the analysis of macroeconomic trends and the capital markets. The firm's variant perspectives are applied to the fixed income, equity and commodity markets, both domestically and internationally. Other areas of research coverage also include consumer, real estate, geopolitics, technology and digital media. Ritholtz is also president of Ritholtz Capital Partners (RCP), a New York based hedge fund. RCP is driven by the analysis performed by Ritholtz Research. Ritholtz appreciates your feedback; click here to send him an email.