Rejoice - Consumer Spending Up!!

Oh joy, oh joy, consumers are going back to their spending ways. Now some might say this is a good thing. Obviously the market said this today. I, on the other hand, think it is in the medium to long term a very bad thing. I read a very good piece today from RGE Monitor (Nouriel Roubini's blog, which has a number of well educated and versed authors. I highly recommend going there and signing up. It is a free, and very informative. They send you a great email or two each day.) on the imbalances in part attributed to the so-called Brent Woods 2 system. At base, certain export countries - Asia, Middle East and the like - have been funding the U.S. and certain European countries to enable us to buy more products than we can afford. RGE puts a lot of nice economic terminology around it but at the base, these countries for years have funded our debt spending to buy their stuff - oil, consumer products, and the like. We have been spending more than we make buying this stuff, in part due to a housing bubble and in part due to easy and low rate lending (partially made possible by our trading partners). So the problem in large part has been Americans spending too much, and the market now celebrates that we are gradually returning to those unsustainable ways. I am not liking this.

I have written on numerous occasions on what I call the new reality. Over the past few years we have lived in a ferry-tale world. We have been spending more than we make and that has been tied to easy credit and an ever-expanding household piggy-bank (otherwise known as housing prices). We have had one heck of a good run. But it has been a run with a false premise. We could not afford it and now, with debt built up and housing prices down 15-50% across the board, we do not have the collateral to support it. Even if we briefly start spending again, this will disappear - it must - it has not choice. We have to live within our means and, to properly recover, must live well enough within our means to pay down debt. Think about it - the baby-boom generation just lost 30-50% of their retirements and most probably did not have enough saved anyway. Do you really think these people are about to go on a sustained spending spree? No, they need to save every cent the can (I am) to restart their retirements. And these for the most part are people still at the peak of their earnings.

We need to consume less and the countries that sold to us need to focus on domestic consumption, which they need to support through domestic stimulus, versus supporting exports to debt-laden Americans. We are like recovering crack addicts and the government wants to give us more drugs to fix our pain. Eventually, we need to get off the drugs. We need to go straight, as in without a debt addiction. Time to get real and the sooner the better with our own economy and the world economy. The new reality is upon us. The countries exporting to us need to understand this as much as we do. It is a new and necessary dynamic. You might call it the new reality.

I will be the first to admit that my predictions on us not yet being to a true bottom might be wrong. Yet, more importantly, even if we have seen a bottom, I do not see us escaping it any time soon. To me the bottom is the new reality. It is where we would be - should be - absent the last couple of bubbles. With job losses and real estate prices still dropping, I can still see us hitting a new bottom, but there is a real prospect that the massive government spending will support a false bottom and even provide a false and significant bounce. I simply suggest you study the long term fundamentals before getting all excited. If you want to play the short term possibility of a stimulus bounce, go for it at your own risk. It might happen. Nonetheless, I suggest the reality will keep us close to the range we are in for the medium range at a minimum.

Disclosures: None.