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August 3, 2007 |
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16-years ago the U.S. economy was in a consumer led recession. Since then U.S. consumers have flocked to equity orientated investments, homeownership has dramatically increased, and innovative consumer debt instruments have been created/offered by financial institutions. The world’s largest economy has not seen a consumer led recession since. Along with a developing bear market in financial stocks, another ominous trend is the break-down in the broader marketplace. For example, the S&P 500 on an equally weighted basis is now trading below its 200-DMA, and many of the ‘defensive’ issues that previously rallied during market sell offs have been trending flat. Fear not, or so we are told, because the S&P 500 bounced. Can The U.S. Consumer Withstand An Asset Price Pause? While the depth of the correction is in question, it is nonetheless understood that the U.S. housing market will remain challenged for some time. Against this backdrop the unspoken danger for the consumer is that stocks do not rise to the forefront and help compensate for the drop in housing wealth. Unfortunately, with wealth effect formulas an unreliable forecasting tool and the borrow-ability of stocks* unknown, the above analysis lacks the type of statistical relationship that wages/spending provided many years ago. Quite frankly, we have know way of knowing how ‘confident’ the consumer will be if $2 trillion in housing wealth disappears and only $1 trillion in equity wealth appears, nor can we predict exactingly how consumer spending would be impacted by say a $2 trillion increase in housing/equity wealth that coincides with a spike in interest rates and/or a plunge in the dollar. * Borrow-ability of stocks?: when will the U.S. consumer finally be able to quickly tap some of the equity in their equities? What we do know, is that not only have the models changed significantly during the last 16-years, but so have perceptions: the consumer has gone from being someone who spends/saves a paycheck to someone who feels good or bad about their 'financial situation' and borrows/spends accordingly. It took a great deal of time for economists to accept that the U.S. consumer can perpetually increase their spending beyond wage gains, and it will undoubtedly take time for them to acknowledge that the accumulation of debt and extraction of asset-price-bubble wealth are not always recurring events. In short, with financial and consumer discretionary stocks two of the weakest sectors today and the U.S. housing market just starting to go bust, there is ample reason to call for a consumer led slowdown the likes of which has not been seen in 16-years. So few economists are making such a call because 'the consumer will keep spending' has been one of the few catch-phrases to predate and outlast Rubin's 'strong dollar...' mantra. When forecasting tomorrow what happened yesterday counts, even if the math has grown weak after 16-years… |
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