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The U.S. had morphed from an "income earning culture" to one driven by asset appreciation



March 09, 2009 – Comments (0) | RELATED TICKERS: GROW

I don't know who these guys are, but what they're saying makes a ton of sense to me.  This week's Barron's features three interviews that all share the same theme, the deleveraging of the American consumer and how the U.S. economy will be anemic for years to come. 

The first passage is from an article by Kopin Tan:

Coaxing Americans to spend more also presents both a challenge and a conundrum.  Americans had 20 cents of debt for every dollar of income in 1945, but that figure has since swelled to $1.20.  During this span, "risky assets" like real estate, stock holdings and pension reserves had increased from 1.4 times the annual income to 4.7 times in 2007.  To Jeff Lick, who manages Galt Investments, the U.S. has morphed from an "income earning culture" to one driven by asset appreciation.  And in recent years, that growth "was a self-reinforcing positive feedback loop fueled by very high level consumption."

Now that household wealth has been cut swiftly and severely, a negative feedback loop has begun that could take years to play out.  "The reality is so much of U.S. household consumption and GDP growth over the last five years was stuff we simply didn't need or simply won't miss," Lick says.  He expects Americans to save more, and thinks the outlook for consumption growth is bleak.

I don't know who Jeff Lick (insert joke here) is, but he sure makes a lot of sense.

I don't know much about Felix Zulauf is either, but he must be somewhat famous because he's a member of the Barron's roundtable.  Now being famous certainly does not make one right, but again what Zlauf says in the following excerpt from this week's "Follow-Up" column makes a ton of sense:

The U.S. private sector has begun to delever after running up its debt to 315% of gross domestic product from 190% in the 1990s.  About half the added debt will disappear through bankruptcies, the rest through repayments, he wagers.  By his calculation, "the private sector has to get rid of $8 trillion of debt."

That could take four to five years - a period in which Washington might dramatically boost its own debt.  Only after the private sector heals can the feds start their deleveraging.  "The best case I can see is a 10-year period of economic stagnation, "Zulauf says.  "We are just in year two."

The third article that I am going to reference in this piece is an interview with Charles de Vaulx and Charles de Lardemelle.  Once again, I have no idea who these Frenchies are...but it's what they are saying that is important not who they are.  I don't care if Ronald McDonald is the one who's giving his opinion on the economy...I'll agree with him if what he says is logical and passes my common sense test.

Between the late 1950s and the early 1980s, Americans saved 10% to 14% of their disposable income, related de Vaulx.  That savings rate collapsed during two decades of overconsumption and "a U.S. economy on steroids, a credit bubble in LBOs, autos, commercial real estate, you name it."

The bubble may have burst, but "it will take years for households to repair their balance sheets," he says.  That is bad news for profit margins and return on equity.

What all of these guys are saying just makes too much sense to me for it to not be true.  I strongly believe that the United States is entering an extended period of slow to no growth.  Think about it.  Consumer spending makes up 70% of the economy, yet consumers will not be able to spend at the same rate that they have been.  People are scared and they need to rebuild their personal portfolios after an unprecedented period of wealth destruction.  The Baby Boomers, whose massive spending helped drive growth over the past decade, are not starting to retire...or they at least want to be able to retire some day  Please explain to me where growth is going to come from over the next several years.  Seriously, because I can't think of an answer. 

Without growth, capital gains will be difficult to come by.  What sort of a multiple would you be willing to pay for a company that's not growing and not paying a dividend?  Not much I suspect.  I certainly wouldn't want to pay much for a company like that.  This is why I continue to believe that corporate bonds are the place to be right now.  Lock in a nice juicy yield for the next several years and see how things play out.


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