Rise in US savings may hurt economy
An increase in the US personal savings could trigger a double dip recession, while a decrease may lead to a boom in the economy and equity markets at the same time as causing inflation.
That is according to LOM's investment policy committee, which released its latest report yesterday, and reckons that the American consumers' propensity to save will prove significant in predicting equity, bond, currency and commodity price movements over the next four to six months.
It believes that focusing on the US consumer will be vital to the future of the global economy, with personal consumption making up more than 70 percent of America's gross domestic product (GDP) and the US accounting for almost 25 percent of the world's GDP.
As a result of that and other analysis, the committee's strategic asset allocations have remained unchanged, but it expects to update its recommendations based on a further insight into US consumer behaviour.
The committee lowered its equity allocation by five percent to 45 percent, while it views short-term and floating rate bonds as the most attractive fixed income investments which will relatively outperform longer-term fixed rate bonds in a rising rate environment.
It is also confident about corporate credit and believes that the risks involved with it no longer outweighs the rewards, at the same time as leaving its target bond allocation unaltered at 25 percent, with a continued focus on short-term maturities.
The Committee said the US personal savings rate had gone from almost zero percent to 4.2 percent in the past 18 months and if that rate holds firm at four to five percent, America would generate around $450 billion to $550 billion a year in savings, having implications for the need to export dollars or the risk of a reduction in foreign bank dollar holdings.
It added there was a widely held belief that there is a strong danger that even a small change in the fundamentals to improve the dollar's prospects could have a dramatic impact on its price, however, it would take a significant further degradation in the dollar's prospects to have another big sell off.