Despite all the talk comparing our current economic situation to the Great Depression, the FT.com’s Krishna Guha hits a bit closer to home when he writes that the US is likely to plunge “…into what many experts believe will be its worst recession since 1982.” Today, this comparison carries more weight psychologically because more people can relate to 1982 than they can to 1932.
The impact of the current credit market collapse on the banking and finance industries has been unexpectedly wide-spread and deep-rooted, no doubt, presenting our leaders with the opportunity to transfer more than $700 billion from the public coffers to the private sector. I say “more than” because there has yet to be a government program with an estimated cost in the “B” billions that has not just come in over budget, but in some cases astronomically so. But that’s a different discussion. The one point that has not been totally absent but nonetheless rather down-played from the high-minded talks about how best to spend US Treasury funds is the supreme importance of the consumer in all of this. You and me (and Joe the Plumber, if he ever gets his shit together and buys that damn business. In today’s economy, he defs has the upper hand in negotiations with respect to an in-going valuation.)
The US economy is driven by consumer consumption. How much of that $700 billion+ is being ear-marked for the consumer’s pocket? Not enough, apparently, in light of falling consumer confidence coupled with rising unemployment that has reduced the consumer’s propensity to spend. As reported in Guha’s article, the unemployment rate is expected by some to jump from its 6.1% level to somewhere north of 8%. “Oh shi!#.” In other words, people are thinking more about how to pay their bills and make sure there is enough cash set aside in the much ignored Emergency Fund. So despite the credible stories of tighter consumer credit lending standards (have the banks done too little too late?), I’m also curious about the metrics out there on the rate of consumer demand for such products. My logic tells me that the tighter lending standards were accompanied (if not preceded) by reduced demand for consumer loans in the face of rising uncertainty.
So if the credit markets do “thaw” and the lending spigots reopen, it is the institutional side of the market that will be back in play, but the consumer side is likely to take longer to come back to life. More important than the the consumer’s access to credit is the state of the consumer’s balance sheet, which is in pretty bad shape following the substantial decline in its equity account. In other words, the level of liabilities relative to equity has shot up because of the decline in value of real estate values (the major piece of equity on the balance sheet). That’s not good, to be technical about it.
For example, before the economy swan-dived into the shitter, let’s say I owed $400,000 on my mortgage (my liabilities), but the market value of the my house (my equity) was $650,000 and my stock portfolio was valued at another $250,000 so I was feeling rather flush. I might have even considered taking out $100K in equity to buy stuff (Hello MacBook Pro!). But now, I still owe $400 large, but the market value of the property has declined to $450,000 and my equity portfolio is now worth a $1.49, so now I’m feeling like I just lost a shitload of money and not really in the mood to spend (It’s a Dell, Doooode). In order to boost my confidence and get me back to spending, I’m gonna need my liabilities to decline, my equity to increase or some combination of the two. And in all honesty, at this point, I’d prefer that increase to be more liquid (like stocks) than not (property value). [This last point is for another post on the volitility of the equity markets - any gain in stocks' value will be quickly followed by people looking to cash out, (sell) which will then push down equity values. What a fucking see saw.]
Hobo Soup, monsieur?
