The one shining light in a bleak consumer world:

At a 13-month low, I guess it’s only pretty if you’re NOT in the oil business. And combined with waning demand for plasma TVs, the US will probably be seeing a shrinking trade deficit too.

Same day, different zombies

Consumer Spending in U.S. Rises More Than Forecast!

and..

Consumer Confidence in U.S. Falls to Lowest Level in More Than Two Years?

UPDATE: Not too confusing - once again it’s about energy and food prices.

Michael Milken once said “It isn’t okay to leverage to buy overvalued assets,” and I have been sticking to that adage for a while. Maybe the buying window is about to open, and maybe it is not, but Alan Greenspan has certainly become very chatty about asset price euphoria. I recollect a trader friend of mine saying that houses are trading like bonds, and if you read the article above closely, you’ll see that Greenspan might just think so too.

What’s the catch?

Many surmise that our consumer economy has been driven the last few years by housing wealth. I agree, mostly because all my friends keep refinancing their homes and buying new cars with the cash-outs. Then, in the midst of some new records for housing sales, we get hit with some unexpected twists. A couple of hurricanes, and record energy prices, and now it seems consumers are getting scared. Are these surprises the root cause of the sudden turn, or just the “tipping point” of exhaustion for a horse that has been running way to long?

My first inclination is the latter, but that opinion there really doesn’t matter. It seems regular interest rate hikes will be necessary to keep a gallon of gas below six bucks, and a two-by-four under $10 - the ten-year treasury yield won’t stay tame much longer because some of these rising prices are beyond natural control. And all those interest-only loans and HELOCs start maturing right around the corner. If you didn’t catch the omission above, Milken also said that leveraging assets was worse when the cost of capital reached double digits. If you take a look at the amortization schedule of a 5-year IO mortgage after maturity, you’ll now get the point.

If there is indeed a tumble in asset prices, those that are liquid will likely see some great buying opportunities, even if it is at someone else’s expense.

“Chance favors the prepared mind.” - Louis Pasteur

I was recently involved in a somewhat petty, but nonetheless interesting and evolving debate. While out with a friend for an afternoon of lunch and gadget browsing, we decided to run into BestBuy. An hour later, after perusing big screen plasmas and stereo systems the size of lunch boxes, my companion decided to buy a new alarm clock. You know, one of those GE models with the big buttons on the top, and the huge red LED dsplay.

Well first I asked why they needed that? The reply was that the old one just didn’t work quite right after the last storm. It seems not so recent electrical activity had knocked out the power, and that the clock had not awakened the owner as it should. I soon uncovered that despite these instruments being battery powered (in backup), the owner sometimes failed to change said batteries, so the outage reset the clock time. I then asked why not use your cell phone alarm to wake - it is kept by the bed at night, as the land line is in another room? A Nokia phone is my alarm clock of choice, on the road, and at home. Well, I would just forget to set it. But you have to set the alarm every night anyway, heh? Well, yea, but alarm clock is so much easier. I see.

The user forgets to replace a battery, and blames the device. Another device sits in the quiver, perfectly capable of performing the task, but that is simply not convenient enough. So, we buy an item to replace one which likely works perfectly well. Nevermind the fact that we now leave the old item for the landfill.

Too often, we look at a purchase as solving a problem, a need. We justify that purchase in our heads, back and forth, to buy or not to buy. Most often, we buy. A new “this” to solve “that” problem. I am as guilty as anyone. My latest idea is an Apple notebook to solve a big problem I have….not being able to type this entry while lying in the comfort of my bed. How ridiculous.

Now, many say “Well buying stimulates the economy!” Sure it does. “You sit there denoucing spending, so you must be a socialist, or worse, a communist.” Not so. In fact, I am as capitalist as they come. I invest in private ventures that create new jobs. My retirement account is full of growth stocks. I speculate in the equity, debt and commodities markets, which provides liquidity, albeit small, to those markets. But no, I do not give in to the hype.

What hype, you ask? The hype is that consumer spending accounts for 2/3rds of our economy, and that participation benefits us all, so we must participate. “We must buy products, because that creates jobs! Who cares where the jobs are, your spending helps a lot of people out!” Sounds a little socialist to me. I’d rather buy some distressed corporate bonds, put my faith in management to turn the situation around, and reap the benefits. “But I am not a financial genius”, you say. “I don’t have time to invest.” What you aren’t then, is a thinker, and what you don’t have time for, is thinking.

No, saving and investing is not clipping coupons. It is entirely more difficult to invest, even if just on gut instinct, than to buy a new television and decide that is you contribution to our economy. You certainly will reconsider, when that newfangled electronic gizmo is obsolete or on sale at half price a week later. And that brings me to my final point.

The wealthy in the US invest in financial assets - they provide capital. That capital provides the means for production, and the contribution appreciates in value. The wealthy become wealthier. Meanwhile, the tiers below continue to purchase assets that are not only unncecessary, but often useless. Those assets depreciate in value. In the case of that new TV or laptop computer, obsolete in a few years. Worse yet, that new car, worth 70% of its purchase price the moment it pulls out of the dealer. The rich often (more often than you might think) live modestly, and get richer. The rest of us live frivolously, and get poorer.

Sounds like a zero sum game to me.

Originally posted to the thoughtmarket predecessor site by mg on April 3, 2004 10:05 AM