Christmas Spending: Think Middle

Perhaps one of the more interesting pieces of data about consumer spending came from Gallup this week. To the initiated, the fact that “better off” people are cutting back much more than the middle or lower group is easy to understand. The lower poor group were the non or late receivers of the inflationary and credit bubbles of the last several years, and their big spending drop already occurred between 2007-2008. This group was afflicted by the earlier big inflation and received no speculative benefit from it, only pain. Since almost all Americans drive, I suspect that recent price relief has helped this group some. Accordingly, their Christmas spending this year is only off slightly (8%).

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With big bubbles (and scams) bursting right and left, the most afflicted group are the wealthy and it is starting to show. The middle income worker was too tied in to the housing market, and as I described in my earlier analysis of the Fed Z1 report, as a group they will likely lose about a fifth of their net worth per every 10% drop in housing prices. In looking at the bottom 80%, I made this prior observation in 2006 about the data:

• The bottom 80% (and really the 20-70 group in the middle) owns 9.4% of all stock and mutual funds, but 34.6% of housing equity. That’s $938 billion in shares, and $7.08 trillion in housing equity (including land and farms). In the last three years stocks have nicely appreciated, but bottom 80s have not been there to exploit it. The bottom 80s have much more, in fact just about everything, riding on the housing bubble.

I am a theorist and don’t have the resources to run economic computer models, but would suggest that this exercise should be analyzed by those who do. We can see that the stock market panic hurt this group to the tune of $200-300 billion, not too big a deal, and not enough to significantly impact them. However, if we use the Schiller Case index of a national 21% decline in housing price, the hit was about $1.5 trillion. Adding the two is about $1.75 trillion.

Offsetting this considerably, the gasoline rebate alone will return in the neighborhood of $300 billion (80% of total of total population) over a year and we are well into the period of lower prices already. The rest of the commodity rebate will return about $1,500 per person annually. Add tax rebates likely to come, and I would guess that about half of this groups “asset” loss will be made up for by mid 2009. By dropping his discretionary consumption by 15-20% (as Gallup suggests), this group will also save to offset a good chunk of his loss. If he were smart, he might even recover it quicker via the stock market.

Next let’s look at the top 10%, where we can estimate where the sudden late in the cycle stock panic blew away $2.5 trillion in net worth. The more wealthy as a rule were also more concentrated in early receiver regions (Mad Goof land) of the country where housing prices have now fallen the most. So I will ballpark 30% for that, which knocks off another $2.8 billion. The wealthy class has lost $5.3 trillion in these crashes, and feels exposed and defensive on the rest. He has also lost an indeterminate amount on non-public businesses. The Mad Goof fiasco adds fuel to that fire.

Little wonder that their Christmas spending is off 30% versus 20% for the middle groups. The party is over. Also the commodity/gasoline rebate has a much smaller impact, as it they are only 10% of the population= $35 billion. And also little wonder that the media (which the plutocratic class controls) is howling at the moon like a mad dog for bailouts to “save workers” (code for their businesses). Part of this game plan is to exaggerate job loss numbers, which right now simply fail to correspond with wages withheld (this number should be checked today for direct comparison).

• The top 10% owned 78.8% (as of 2004) of all stocks and mutual funds (including pensions), and owned 45.9% of housing equity. Based on the 3Q 2006 Fed Z1 release, and assuming that the percentage of ownership is about the same as the 2004 Fed survey, that would be $7.86 trillion in shares, and $9.4 trillion in housing equity (which would include farms and land).

The new administration is also more “worker and labor friendly”, and less inclined to be sympathetic to wealthy plutocrats. In fact, if anything they will attempt to redistribute wealth away from the super rich towards the lower 80% class. Although transparency is extremely poor on the debt securities owed by these respective classes, if I were running money pools, I would be buying subprime or non-luxury auto ABS and avoiding jumbo and Alt A mortgages, or luxury car pools. I suspect pricing is very inefficient in these areas. I would tend towards cherry picking middle America companies, and avoiding the crowded plutocrat space for now. Think middle.

I am going to follow this on Actionables with ideas that fit into this theory.