Anchored Under Water
TSF - June 26, 2009

I recently spoke with a senior member of Congress who feels the American consumer needs to gust wind in the sails of the economy. He insisted the Americans with jobs should be spending more: “We want people to save 10% [he may have meant to say 5%], but they don’t need to save more. Why aren’t people spending money?”

I’ll get to that answer in a minute, but first the Americans who are out of work deserve a mention. More than 9.4% of Americans are out of work, and there are others who aren’t reporting. Some unofficial estimates put the unemployment rate as high as 15%. Perhaps more banks should have held onto their TARP money, because we have been using both hook and crook to prop up our mortgage loan numbers. Now the credit card charge-offs are kicking in. Forbes points out that credit charge offs are at record highs of 10.4% ("New Highs for Credit Card Charge-Offs,” Forbes, June 24, 2009). The charge-offs are right on schedule as beleaguered consumers walk away from credit card debt with the highest interest rate charges (see Transcript: Janet Tavakoli, Forbes, April 27, 2009), and these are the charge-offs that will have the largest impact on banks’ profit margins.

What about the rest of Americans? They can often get good deals in our (temporarily) deflationary environment, and since we are anticipating high inflation to come, one might think this would be a good time to buy. Yet, the average consumer is not spending nearly enough to stimulate the economy, and many appear to be saving more than ever. Even consumers that are free of fear for their economic futures are anchored to their past notion of their former net worth.

The economy is still deleveraging a high average consumer debt load. This creates continued downward pressure on the housing market. Even fiscally responsible Americans have already seen the values of their homes decline, the value of their pensions deteriorate, and the value of their personal investment portfolios plummet. Portfolios are under water compared to past higher values anchored in the minds of investors. The negative wealth effect has had a huge psychological impact (see Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street).

Those with jobs are trying to save their way back to their former notion of a higher net worth. The old number is stuck in their minds like a barnacle. We have a long wait before American consumers again say “Anchors Aweigh!”


Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct professor of derivatives at the University of Chicago's Graduate School of Business. She is the author of: Credit Derivatives & Synthetic Structures (John Wiley & Sons, 1998, 2001), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, 2008), and
Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street (John Wiley & Sons January 2009)


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