Long road from here to normality for stocks: James Saft

-- James Saft is a Reuters columnist. The opinions expressed are his own --

By James Saft

LONDON (Reuters) - Looking for the foundations for the next bull market in U.S. stocks? Wait until you see consumers who save much more, have a lighter debt load and can actually sell their houses. In other words, bring a book: it may be a bit of a wait.

Even after its recent rally, the S&P 500 is down about 12 percent this year and is at levels seen in both 2001 and 1999, leaving many investors sitting on paltry gains or losses for the past decade.

On top of that the United States is arguably in recession, a state of affairs that won't be helped by the rapid deterioration of economies in Europe, Britain and Japan.

Fair enough, you say, but a heck of a lot less useful than telling us when we might expect an improvement.

David Rosenberg, the U.S. economist at Merrill Lynch in New York, has three conditions he is looking for before he becomes more bullish on U.S. stocks: a rise in the savings rate to about 8 percent, a fall in the number of houses on the market to about 8 months of supply and a big drop in the amount debt payments sap from American household budgets.

The good news: all three happening would only represent a return to historic norms.

The bad news: we are a long way away from historic norms.

Interconnected bubbles, first in stocks and then in housing, convinced Americans they were richer then they were, and could borrow and spend freely but needn't save much.

This belief was fundamental not just to the bubble in housing, but in underwriting huge swathes of the economy. The travel industry, the service industry, even the number and size of cars Americans bought all benefited from the collapse in savings and the concurrent rise in debt.

It is hard to see the funding side of the spree contract without these suffering too.

On the Commerce Department measure personal savings were 2.5 percent in June, up from tiny levels below 1 percent or even negative seen in recent years, but far beneath the 8 or 10 percent common since World War 2.

"What is the normalized pre-bubble savings rate? You don't have to dial back to the Jurassic period, just the late 80s or 90s," Rosenberg said. "Before we became addicted to asset bubbles the savings rate was roughly 8 percent."

A tripling in the savings rate from here implies a lot less consumption, and a huge hit to corporate profitability. Housing too needs to stabilize, a process that is being slowed by the credit crunch. Right now there are about 10 months worth of supply of existing homes for sale, down from 11 months recently but still very high historically.

As long as housing is falling, bank balance sheets will continue to suffer and the self-reinforcing credit crunch merry-go-round will continue.