Tapped Out

commentary from this week’s Sectors and Styles Strategy Report:

I found today’s Wall Street Journal story (“Pinched Consumers Scramble for Cash”) to warrant its most viewed story of the day status. To quote: “As consumers max out their credit lines and banks clamp down on lending, many older and middle-class Americans are resorting to pricey, often-risky alternatives to stay afloat. Some are depleting their retirement accounts, tapping 401(k)s for both loans and hardship withdrawals.”

Without the aid of rising real wages and the positive wealth effects of increasing home values (thereby enabling home equity withdrawals – HEWs), the US consumer, still addicted to maintaining an unsustainable lifestyle, has turned not only to the aforementioned retirement accounts but to higher cost debt, such as revolving credit (most notably credit cards).

One would assume that this consumer behavior has only so far to go before sanity overwhelms the power of denial. This will almost certainly occur the longer weak real wage growth (along with a higher cost living) puts increasing pressure on the household pocket book.

And the longer this process takes, the closer it brings baby boomers to the painful reality that assets that have been counted on to supplement Social Security payments will need to be supplemented themselves. In other words: more savings, less spending.

Investment Strategy Implications

The longer-term investment implications of a transformation of the US economy away from domestic consumption and more toward exports (where domestic consumption will be on the rise) is a secular play that benefits those sectors and industries best positioned to compete in that space. At present, the infrastructure build in emerging markets accrues to Industrials, Tech, Basic Materials, and Energy. However, as emerging economies realize an emerging middle class, the competition for those domestic consumer markets will be hotly contested by all developed market players (US, Europe, Japan) as well as the domestic players within the emerging economies.

For now, the focus remains on the very near term economic and investment climate. In that regard, a summer rally (albeit modest) appears in the cards. However, investors would be wise to not follow the lead of the US consumer and wait until conditions are forced upon them and change occurs. Anticipation of a new global consumer market is best considered sooner rather than later.

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