A Long and Painful Consumer Slowdown - Barron's Interview

Includes: DIA, SPY, XLY
by: SA Eli Hoffmann

Barron's magazine interviews Stephanie Pomboy, Founder and President of MacroMavens, a firm that provides macroeconomic research and commentary to the institutional investment community. Pomboy was early (2002) to predict the collapse in consumer spending fueled by home price growth many thought would never stop. Now that her premonition has become a reality, she goes on the record saying the slowdown will be long and painful.

My fear is that it's actually just in the early stages and that it is going to get substantially worse on the economic side, although all the government measures that have taken place so far might help to insulate some of the damage on the financial side.

Short-term, she says commercial paper (both investment grade and junk) might rally and Treasurys sell off as investors 'go long socialism,' what with the government guaranteeing "all manner of private-credit claims." Longer-term, though, Pomboy says deleveraging is in its infancy, with Joe blue-collar leading the next wave: "U.S. consumers are actually going to do the unthinkable -- they are going to save -- and that we will be more like Japan than anyone believes is possible."

Foreign investors have already pared their buying of Treasurys, and are likely to grow more wary as long as the government acts as though it can print money without consequences. Raising interest rates significantly to bring investors back will not be an option due to the U.S.'s massive leverage - which means its only lure can be a weaker dollar. Ultimately, she thinks investors will rotate from paper to hard assets - she's bullish gold.

Pomboy sees GDP at 1% for at least the next five years, with sustained 10% unemployment a distinct possibility. On the equity front, she thinks emerging markets will outperform - and suggests looking at emerging Asian countries, including China.


In its Follow Up column this week, Barron's takes the opposite side of the debate. In a story titled Don't Give Up on This Economy Barron's sees economic growth accelerating to 2.3% and 3% in Q3 and Q4 of 2009, and unemployment peaking at about 7.6%.

For a deeper understanding of stock market cycles, I suggest John Lounsbury's superb 10-part series (part I, further links here).