1) The U.S. consumer has changed for good:
U.S. consumer shopping habits have changed on a semi-permanent basis. Yes, the government can step in time and again to distort human nature and try to reverse the rising trend in the personal savings rate, but left to their own devices, households are in a thrifty state. This came through loud and clear in the latest Deloitte survey, which showed that more than 25% of the 10,878 consumers polled say they have permanently altered their shopping patterns in view of the asset and credit collapse this cycle. And what did Wal-Mart Treasurer Charles Holley have to say yesterday in the aftermath of its earnings report? (Wal-Mart’s sales were a puny +2.4% YoY off a depressed YoY basis, profits were underpinned by improved productivity and inventory management.) Here its (can you handle the truth?): “The shopper has reset how he is spending money and that has affected retail in demand”.
Moreover, getting frugal also means getting small — and in this new era, a most amazing thing is happening. Not only are consumers downsizing their auto purchases, but the size of the homes that are now being built is shrinking — see the front page of today’s Wall Street Journal for evidence (Builders Downsize The Dream Home). Pure and simple — the days of impressing your friends with the winding staircase are gone.
2) The Fed is on hold until 2011!!!
The reason — there is a wave of mortgage refinancings coming in the housing market for one, and not only that, but in the commercial space, there are 2.7 trillion of debt coming due through 2011 and another 1.5 trillion of leveraged loans (see page 24 of Thursday’s FT). In other words, the default rate is going to rise even further and the Fed tightening policy would only aggravate that situation. In other words, the Fed is simply immobile for at least the next two years.
3) Deflation is still the name of the game:
There is no doubt that the government is massively reflating and there is little doubt that after socializing the private sector debt morass, the Fed is going to monetize the blow-up in the public sector balance sheet. But reflation will not turn into outright inflation until both the savings rate and unemployment rate both peak out and roll over on a sustained basis. The article on page A7 of [Friday’s] WSJ, in case you missed it, is a must-must read (Returning Workers Face Steep Pay Cuts). There can be no inflation if wages (not to mention rents and credit) are deflating.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.