From Consumer to Saver

The average American family is in defense mode.  The days of lavish spending are over and the consumer is now demanding lower prices with his actions.  The Administration is trying to keep the wheels on the wagon by ramping up Federal spending to take up some of the slack but it is not working too well.  Leaders are trying to change our psychology by telling us the worst is over but I don’t think it is working.  The American culture has operated on either greed or fear and after a few decades of decadent behavior, fear has replaced greed.  Purchases are being delayed or eliminated.  After everyone’s 401K has become “201K”, the baby boomers are now attempting to hoard what is left of their retirement.

The commercial real estate tsunami is arriving soon.  Luxury hotels have a real problem in getting people to occupy their $850 rooms.  Restaurants that had wait times last year have immediate seating available.  Panera Bread restaurants’ traffic is down based on my unofficial survey whereas Chick-Fil-A restaurants are growing with their value menu at a $5 price point.  Home gardening will continue to flourish while $$-$$$$ restaurants will be offering specials and a new lower priced menu in an attempt to attract patrons.

I have been preaching that “Cash is King” for the last few years.  Those with cash may soon be able to buy assets at a deeply discounted level.  However, one must question if they even need the assets that will become available.  Another theme of mine has been to “simplify”.  With that path comes a reduction in “things” that were bought on emotion and have very little usefulness to the household other than collecting dust.  People are now finding that there is no need for all of that stuff that is simply taking up space.  As people get rid of the surplus, there will be less desire to increase living space.  And the cycle of reduction continues….  The unwinding of the decades of consumption will take some time before new consumption will surface.  People will have to forget about these times before the consumption cycle begins again.  In the meantime, the Administration will continue to create money and credit to entice the people to spend again.

Obama is taking this opportunity to push through an energy policy that will surely push energy prices through the roof.  In his budget, he is eliminating intangible drilling cost (IDC) and depletion deductions.  That may not mean much to you but it is the one incentive for investment dollars to fund drilling programs.  If these deductions are eliminated, most independent oil & gas exploration in the U.S. will cease thus increasing the decline curve of our production.  As production decreases, the prices of existing oil & gas will increase.  The oil & gas industry is a capital intensive industry that supports manufacturing, services, and provides a notable tax base for many state and county budgets.  Obama’s advisors don’t seem to understand that “going green” requires an orderly transition and you don’t cut off your current source of energy until the replacement (whatever it may be) is ramped up.  What are these guys thinking?  Building optimistic budgeting/financial scenarios on a PC rarely reflects reality and their assumption will come back and bite them as well as the American public.

Interest rates are where the battle lines will be drawn.  Savers would rather make 1 to 3% on their money than to risk the principal.  Consider this, if you have a 6% note on your home mortgage, you make more money by paying on it than risking your money in the market.  In the end, you own your home and have one less thing to worry about.  When alternatives promised higher returns, there was no incentive to pay off the home loan but times have changed.

Gold took a notable drop while the G20 is in town.  Once again, the boys have orchestrated a perception that the Dollar is recovering.  With the U.S. continuing to go hyperbolic with budget deficits that have not been seen in over 60 years, the dollar will be sacrificed to keep the politicians in office.  Restraint is not in the politicians’ dictionary.

I expect a “black swan” event to take place soon, maybe within 24-36 months.  An unexpected event has a dramatic psychological effect on the population and takes its focus off of the current pain and redirects it to a new, patriotic path.  The current Administration is starting a trade war with China, our largest creditor.  We may win the battle but lose the war on this economic front.  Whatever happens, I recommend that you continue the path of simplification, low or no debt, and minimize cash outflows where ever possible.  Remember the days when we didn’t have air conditioning and slept with the windows open?

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