"Outlier" economic data have policymakers in "all hands on deck "
mode. A collapse in residential construction, weakening home
values, tumbling retail sales and an outright 3.5% decline in the
CPI in recent months are alarming because they are slipping
outside the boundaries of weakness seen in business downturns
over the past 50 years. This is risky business for a US economy
operating with record high debt leverage across most sectors.
Similar situations are playing out to varying degrees across the
globe. A sudden turn to thrift to offset a weak home value, a down
401k and worries over job security make great sense to most on
an individual basis, but policy makers fear the consequences should
the majority of folks get in on the act.
I think the hard reality is that as this massive 80 million strong "baby
boomer" generation matures, the momentum of consumer spending
growth in real terms has slowed and has been boosted by debt
accumulation. As the boomer generation greys, it is going to be
tougher to drive discretionary spending in the US. Were it not for
the current difficult circumstances, I think it would be true to say
that the task of promoting strong consumer spending will only get
tougher over the next decade. Heck, Gen X ,which is following the
boomers into prime spending years is only half its size.
So today the Fed went to ZIRP -- cutting the FFR% to between
0.0 - 0.25%, and promising to inject money into the system more
directly, as the banks have tighter credit policies, inadequate capital
and more substantial loan losses to book. The aim is to force people
to give up their liquidity and step up their spending. Savers are to
suffer and thrift is to be thwarted. On top of this the incoming Obama
admin. is planning massive fiscal stimulus to stabilize a deteriorating
economy. Again, these policy actions are being played out globally.
The fear policymakers share is that failure to act dramatically could
produce an uncontrolled, deflationary economic tailspin with the
end result being substantial economic damage and possible social and
political turmoil. Maybe so, maybe not.
Since consumers have endured very substantial and broadscale
shocks. I think it will be tougher to turn them around this time and
that people with newly revised budgets will resume a higher level
of spending as and when those budgets permit. It is going to take a
little time to rebuild confidence and even a modicum of trust.
Moreover, I am concerned about how well recovery / expansion can
be sustained. Freewheeling commodities markets could surge as
economies recover and again jeopardize confidence and real incomes.
Relatedly, The Fed and the Gov. will face a heavy challenge to manage
policy once inflation pressures resurface.
The message : Tougher to turn the economy...More modest results
whence it turns...Tougher to mange an orderly and durable expansion.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!