A lot of the focus of the punditry is when we'll recover - personally I think it's a bit of a moot point. What I'm thinking through is not when , but what the recovery will be in America. I posted many of my thoughts in [ The US Economic "Recovery" ] but essentially a lot of cross currents are forming which should make for a very interesting 5, 10, and indeed 20 years ahead.

Much of the current recovery thesis is based on (a) government spending replacing private enterprise and (b) coaxing Americans back to their old habits. But I'd like to ask what are "old habits?" - most of us in our 20s, 30s and 40s know one reality; our context of history is very different than one who has a longer precedent to view. So let's take a few steps back and I will give you some insight on why I think we're not going to be going back to the binge we've just left for a long time

I'd like to present the graph below which shows the historical saving rate of Americans since the 1960s. (click to enlarge)

As you can see, Americans used to save. They used to act quite near our European and Asian friends

People keep asking when Americans will go back to their old ways, as if saving 0% or 2% is our old ways. Not really - that's our most recent ways. As Uncle Ben Bernanke sits here and destroys American savers (just imagine the 65+ crowd trying to live on these CD interest rates) the master plan is to return Americans to spenders so we can kick the can down the road. But what if Americans do what is best for themselves (save) and not for the "service based economy" (spend like drunken sailors)?

A 10% savings rate? Could it be possible? What would that translate to in real dollars?

We have about a $13 Trillion economy, with about $10 Trillion in private spending. (one could quibble the exact number but it's within a degree of that and $10 T makes for a nice round number). A 10% savings rate very easily translates $1 Trillion in savings. A 8% savings rate translates to $800 Billion . Even a 5% savings rate translates to $500 Billion . All these number exceed the next stimulus plan on an annual basis - which means all the government would do is borrow from our grandchildren, layer more debt on them (that we need to eventually pay) to offset money from our "old economy model" (of the past 6-8 years) as Americans, in self preservation, move to the real "old economy model" (of the past 40 years).

If I am correct, consumer discretionary items will continue to suffer far deeper and longer than the pundits and hedge fund thesis algorithms currently posit. I do not believe these pundits and PhD programmers at hedge funds understand the median wage in America is about $30K (meaning half make less). Many declaring impending recoveries probably make this wage in a month. It is 2 Americas, and the punditry does not live on Main Street. Unfortunately the non punditry portion of 2 Americas need to drive this economy. If I am correct, my bearishness for retailers (non grocery, non essential) will last much longer than those who run up said stocks on "early cycle" thesis - as they will do repeatedly in 2009 (as they have done prematurely multiple times in 2008)

The case against me? Within 6-12 months, companies suddenly decide 6-8% wage increases are the new 3%. Or the US consumer will be back to their overspending ways and the small rebound in savings rate (2% ish ) will retrace back to 0% or negative.

So what has happened since late 2008? The US Savings rate has now surged to nearly 7%. That's remarkable. Granted SOME of this is due to government handouts - so many of our economic reports are now buoyed by borrowing from the future (or China) and throwing it in the system today. So "spending" is pushed upward because government is handing out money like no tomorrow, and so is "saving". That said, I do think the underlying trend of saving is accurate - but the exact number is very debatable.

• Households pushed their savings rate to the highest level in more than 15 years in May as a big boost in incomes from the government's stimulus program was devoted more to bolstering nest eggs than increased spending.
• The higher savings rate is healthy in the long term , economists said. But without vigorous consumer spending, the government may have to do more to revive the econom y, possibly through further tax breaks and spending. ( which we don't have the money to do - more money trees to chop !)
• The Commerce Department said Friday that consumer spending rose 0.3 percent in May, in line with expectations. But incomes jumped 1.4 percent , the biggest gain in a year and easily outpacing the 0.3 percent increase that economists expected. ( we see in our monthly employment report that wage inflation is almost non-existent - so where are the income gains coming from? Government largess ) The income increase reflected temporary factors relating to the $787 billion economic stimulus program that President Barack Obama pushed through Congress in February to fight the recession. That program included one-time payments to people receiving Social Security and other government pension benefits.
• The savings rate, which was hovering near zero in early 2008, surged to 6.9 percent, the highest level since December 1993.

Here is the reality before the "green shoots" crowd screams about rising incomes.

• The stimulus package also featured reductions in payroll tax withholding designed to get people to start spending more money and boost the economy. Those factors helped increase after-tax incomes 1.6 percent in May. However, without the special factors, after-tax incomes would have risen just 0.2 percent .

This increased savings is a great thing for America in the long term. But an awful one in the near term. This one time adjustment to get us back to a normal savings rate is a necessity, and the transition period will be very difficult since so much of our economy is built on consumption. But it shows Americans taking protective action to preserve themselves despite all the incentives from government to get them spending and back into terrible financial straits (if you don't shop, the terrorists have won!)... finally seeing the light. This, I applaud.

So here is the quandary - as I wrote above, if Americans go to a 8% savings rate that is about $800Billion out of our consumption economy. Which is about how much the stimulus plan is. So for a few years if the government wants to keep the economic engine humming its going to have to keep repeating these massive spring stimulus plans. With money we don't have.

1. Spring 2008- Bush $200B
2. Spring 2009 - Obama $800B
3. Spring 2010 - Obama (it's coming folks, trust me - it's an election year and with unemployment over 10% the honeymoon with Obama will be over)
4. Spring 2011 - We're gonna need another one if you Americans insist on acting rationally and saving 8% of your income
5. Spring 2012 - Call the Chinese! We need more money to support this economy based on shopping

You get the picture. This is what happens when you get rid of production and transition to the new wave, finance based - shopping economy. You face a problem when your citizens don't have house ATMs and decide to start balancing their checkbooks.

Thankfully by Spring 2013 the housing market should have bottomed in 2011-2012 and the house ATM will be turned back on. Regulation we put in place now will have been snipped away by the lobbyists and if we are really lucky 0% mortgage teaster rates will return. Then we can start this party all over again. Yippee - "prosperity" will be back.

But my gosh, you folks running into consumer discretionary "early cycle" stocks really need to throw away the old playbook and realize this is a secular change in our history. And with the forces of globalization wracking our system (pressuring wages), while inflation is on the horizon in the decade to come... this is not a 6 month trend. This is a sea change. The US consumer is being forced to act rationale and rebuild his balance sheet. This will take many years - the market has yet to recognize it. This "recovery" is going to be very different than "the playbook". Folks, it is so bad even teenagers are acting responsibly! [ Jul 5, 2008: Bloomberg : Teenagers Skip $50 Jeans in Squeeze of Gas, Job Shortage ]