Investors Letter: The Roaring Teens?
"...After months of penny-pinching amid the recession, new figures — showing an improving job market, rising factory output and increased retail sales — suggest that consumers are no longer restricting their budgets to necessities like food and medicine. They are starting to buy clothes, jewelry and even cars again.
The mood has gone from panicked to cautious, and now, as Mark Zandi, chief economist for Moody’s Economy.com put it, some consumers are “almost a bit giddy.”"
Welcome to...the Roaring Teens? More than a few investors I've spoken to recently think that because consumption appears to be skyrocketing upwards again, all's well that end's well. And on the basis of that conclusion, they're ready to pump capital back into the same old industrial era assets and businesses.
Would that it were so. A slightly deeper logic suggests a very different conclusion.
Consumption is what broke the global economy. What's going to fix it - and what are likely to be tomorrow's most significant returns - differ radically.
What's happening is this. From the consumer's perspective, disposable income has risen sharply.
Now, that's a striking graph - note how sharply it peaks, and the sudden inflection points. They suggest a combination of drivers at work. First, that Geithner's bag of tricks "worked", at least in the near term, and for the consumer. Second, that the mortgage default are, if anything, understating impact. Third, that the impact of rate resets and other kinds of contractual contingencies was more severe than we thought.
So where's that cash going? Unfortunately, not into the right place. Americans should be saving probably around 6% of their incomes, to yield a sustainable current account deficit. But look at the very, very end of this graph.
What do you see? The savings rate is nosediving, hard. Far from 6%, it's closer to 3% - half what it should be.
It's as if Americans believe the crisis never happened, that it was all a fiction - and that tomorrow can be just like the day before yesterday.
Of course, it can't. Needless to say, American consumption is (still) being financed by China essentially buying dollars. But today, China's got to invest, instead, in more productive assets than low-yield loans to Uncle Sam. And it's got to free room for domestic consumption.
Both will happen by letting the renminbi adjust (and, of course, the stage is being set for exactly that). Whether this month, next month, or next year - doesn't matter. When it does, America's grateful return to yesterday's consumption path will be revealed as an illusion, and develeraging will have no choice but to begin in earnest.
Deep recovery for the global economy depends on the American consumer becoming the American saver, investor, and builder. That, in turn, depends on a new generation of businesses, that lay the foundations for tomorrow's industries, sectors, and markets. Those businesses - Constructive Capitalists - are what fuel meaningful investment in people, communities, and society, not just naked consumption by them.
Betting on a return to yesterday - as many consumers are essentially doing - is a poor choice to make. A better idea is betting on a more constructive tomorrow.