Why is Nobody Else Looking at the World from 20,000 Feet and Focusing on the Prospective Spending Ability of the U.S. Consumer?

If nobody sees things the way you do, convention says you no doubt are wrong in your views.

As I have said in a number of Posts on this Blog, in mid-2005 I concluded U.S. home owners were borrowing against their houses to maintain or improve their near term ‘standard of living’. I further concluded that this had to end when house prices stopped going up, which I had no doubt they would. I believed as early as mid-2005 the result would be reduced U.S. Consumer Spending and a slow-down in the growth of developing economies dependent on the U.S. Consumer to keep buying. I did not foresee the U.S. Sub-prime mortgage issues that came to light in mid-2007.

Superimposing my own values on the U.S. consumer, my assumption was that when they could no longer draw further spending money from their houses they would recognize in priority order that their first need was food, their second was shelter (i.e. housing), their third was to provide for their children’s education, their fourth was to ensure adequate retirement funding, and their fifth (if they had any money left over after providing for the first four) was discretionary goods. The way the sub-prime issues have escalated, and assuming the U.S. Government statistics on monthly U.S. net trade deficits are accurate, I am now concluding:

• U.S. Consumers on balance must rank immediate gratification much higher than I would have thought. Given continuing U.S. net monthly trade deficits of just under $60 billion that seemingly may be the case. Watch the monthly U.S. net monthly trade deficit figure closely. It strikes me that when it drops significantly that will be a ‘several month delayed’ strong sign that the U.S. Consumer has significantly reduced spending. I say ‘several months delayed’ because it ought to take a few months for Walmart and others to cut back on their inventory purchases and for that to work its way through the ‘consumer system’; and,

• U.S. Consumers, who are estimated to account for approximately 70% of U.S. GDP, may be even more unlikely (read ‘unable’) to spend going forward than I have been thinking.

We are only 2 months away from November 4, the date the next President of the United States will be elected. Presumably this is a period incumbent Republicans want no bad economic or other bad news to surface. Contemplate that in light of what has been reported only in the past few days, including in the case of Fannie and Freddie at 11:00 a.m. EST this morning:

• on Friday the U.S. Labour Department reported a loss of 84,000 jobs in August, further reported that the U.S. had lost 550,000 jobs in 2008 to August 31, and said that the unemployment rate had risen to 6.1% - a five year high;

• on Friday the U.S. Mortgage Bankers Association said that over 4 million, or 9%, of U.S. homeowners with a mortgage were either behind in their payments or in foreclosure at the end of June. Presumably these numbers have worsened by August 31;

• on Friday Silver State Bank of Nevada was shut down, the 11th failure this year of a federally insured bank; and,

• today, Sunday, the U.S. Government announced it was seizing control of Fannie Mae and Freddie Mac, which together own or guarantee almost 50% of the U.S.’s $12 trillion mortgage market. Federal Reserve Chairman Ben Bernanke is reported to have said he fully supports this, and that ‘these necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets’. (see September 7 Marketwatch article by Greg Morcroft & Greg Robb).

This evening (Sunday, September 7) early indications were that the U.S. stock markets were going to respond favourably on Monday, September 8 to the Fannie and Freddie conservatorship, with at least some commentators believing the U.S. Government move will ‘stabilize the mortgage market’ and ‘help clear the way for the housing market to recover’ which will ‘filter through to the rest of the market’ (see September 7 Marketwatch article by Madlen Read). I have trouble with these ‘instant’ predictions, and if they prove correct think them short-term at best. Simply put, in my view if the U.S. Consumer ‘runs out of spending gas’ (pun intended) in the context of discretionary goods and services I can’t see how that can auger well for near term U.S. and world economic stability and stability generally, let alone a near-term U.S. housing price and general economic recovery.

When Alan Greenspan resigned as Fed Chairman and Ben Bernanke was appointed I told my friends Bernanke’s appointment reminded me of the game of ‘musical chairs’ where Bernanke was the last man standing. On a personal level I feel rather sorry for him. He is an inheritor of what I see as possibly insurmountable U.S. economic problems, not the creator of them.

So please tell me why I am wrong about the current status of U.S. Consumers and their importance on the current world stage!

The views expressed in this Post are those of the author. They are offered to readers for information and general guidance only. They are neither intended to, nor should be taken to, constitute economic or investment advice. See Legal Disclaimer.

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