Stop Trying to Jump-Start the Consumer - Barron's Interview

Barron's interviews Robert Albertson, Sandler O'Neill's chief strategist and principal. "Denial is growing," he warned in Nov. 2006. "The markets are hearing what they want."

What surprises Albertson most about how the crisis has unfolded:

Instead of recognizing the damage in a controlled fashion and trying to deal with it, everything has gone to the other extreme. In other words, stress tests back in 2005 or 2006 were useless; they were silly and assumed things were going to continue to go to the moon. Now you hear about nothing but toxic assets and their worthlessness and the impending disaster, and I have to believe the reality is probably somewhere in between.

What has to happen for things to return to normal, he says, is a deleveraging of consumer debt and an increase in savings. Consumer debt is currently 130% of (annual) income - up from 100% in 2000 and 80-90% before that. "It has to come down" in order to repair the consumer's balance sheet. The savings rate used to be 10-12% of income. Now it's 3%. These two factors will reduce consumer spending by $2.5T over the coming years - and "no government-stimulus program is going to offset that effectively." Which is why Albertson is critical of the government's current process, which seems to be focused on "jumpstarting" the economy instead of recognizing that deleveraging is a necessary part of recovery. "Jump-start consumer credit for what? So we can be more indebted?"

Instead of focusing on increasing credit, he says, we should have the patience to de-lever. The biggest danger of the stimulus plan is that it will be a false start, causing the economy to crash even harder and prolonging recovery.

The mistake is that the government believes credit drives the economy, instead of the economy driving credit. They have got that backward, and this is a very dangerous time to be misfiring.

Furthermore, he's worried officials are short-sightedly taking on massive debt thinking 2-3% interest rates aren't bad, but at some point they'll be servicing that debt at 5%, 6%, 7% and 8%. "If they really understood that, I don't think they would be so ready to put the taxpayer at risk."

On toxic assets, Albertson thinks we're throwing out the baby with the bathwater. Just like we ignored the absurdity of home prices on the way up, we're writing down many valuable securities to ridiculously low levels.

His advice to investors: keep your powder dry. Sectors he likes: infrastructure, agriculture/commodities.

Comments

[Thomas J. G...:]

Good article, thanks. Reinforces what Denninger and Merkel say about debt. How do you think Albertson defines consumer debt? I assume mortgages are not included. I would think consumer debt would be credit cards, auto loans, + personal loans. If that's at 130% of income that is bad. These people also have to pay their mortgage.

Feb 16 05:15 PM

[Jay-Dawg, CDA:]

Amen!

I believe politicians genuinely want to solve the economic problems that we are facing, however it seems they are unwilling to sacrifice economic growth, employment, asset prices, etc., as that would materially harm their approval ratings. Unfortunately, it is impossible to do both. In order to set off a new cycle of economic growth and prosperity, we will all have to make sacrifices and tighten our belts for a while, or else things will get worse before they get any better.

Bottom line is banks, businesses and consumers have unhealthy balance sheets that need to be improved. Deleveraging is the only thing that will achieve this. No trust between these economic agents will exist without it. I doubt any government intervention to "thaw" the credit markets will have any positive long lasting impacts on the economy.

Jay

Feb 16 05:19 PM

[ps55:]

I think one of the problems here is that you cannot 'deleverage' and 'jumpstart' at the same time. The only thing that will heal this wound is time, but we cannot simply do away with the things that helped build our economy, such as credit and leverage.

Share your thoughts with others at MarketFriends.com

Feb 16 05:33 PM

[Stone Fox C...:]

The US savings rate is one of the most inaccurately used figures around. To economists it seems that savings is the portion of income but under the mattresss, but it never factors in investment/capital gains. If I spend all my income this year, but make $50K in the stock market, the govt says that my savings rate is 0. The savings rate in the US is alot higher then the govts continues to mislead with. I know very few people that have 'zero' savings as the govt suggests. .

Feb 16 06:01 PM

[Reggie:]

Not enough is said about the role of state and local governments. They are generally in debt and spend more than they take in. Yes, I know many state constitutions say they must have a balanced budget. But we all know there are ways of getting around that--float some bonds, for example.

Point is: Consumers can save and improve their balance sheets but if cities, states, and the federal government don't move in this direction, there is a lot of pain to come.

While consumers soon see the sense of saving and cutting debt, politicians have no incentive to do this.

I'm trying to find a logical way out of this but until the voter forces the politician to change, it won't happen. And, frankly, the voter doesn't have a lot of clout in this battle.

I hope one of you can show me where I am wrong.

Feb 16 06:14 PM

[JohnAl:]

Mr. Albertson is right.

Time will heal the economy. What we are experiencing today, after all, is nothing more than the economy readjusting to the malinvestments made during the growth of the artificially created credit bubble. The government's attempt to reflate the credit bubble is the wrong medicine at the wrong time and will only prolong the readjustment period.

Feb 16 06:15 PM

[User 357093:]

I can't believe this:

"Bank CEO' s drop bombshell: Bailout actually not necessary."

bizzlo.com/story.php?S...

Feb 16 06:35 PM

[levin70:]

"What has to happen for things to return to normal, he says, is a deleveraging of consumer debt and an increase in savings. Consumer debt is currently 130% of (annual) income - up from 100% in 2000 and 80-90% before that. "It has to come down" in order to repair the consumer's balance sheet. The savings rate used to be 10-12% of income. Now it's 3%. These two factors will reduce consumer spending by $2.5T over the coming years - and "no government-stimulus program is going to offset that effectively."

You know the Fed (can't remember which branch) did a study in 2004/2005 in which it looked at historical savings rates dating back to WW2 (or shortly thereafter). You know what they found that was interesting? They found that the savings rate had changed little for the bottom 80% of wage earners in that time period, even though the national rate had declined from 12% to essentially zero. Thus from inference, we can say that the savings rate went way below zero for the top 20% of wage earners.

So what can we take away from this? I don't know, but maybe we should give out those wall street bonuses :) - but only if they plan on spending it?

Regards

Feb 16 06:42 PM

[twitee:]

This article is a pure nonsense and full of nonsense.

For the economy to revive you need:
1. Consumers to spend (63% of GDP the world economy depends on it)
2. Extend credit for growth and innovation
3. Create jobs
4. Eliminate CREDIT SWAP (Wall street 24 hr Gambling operation)
5. Increase the High School education standards (which is the poorest in
the world)

Feb 16 06:56 PM

[DavyJ:]

You said: "If I spend all my income this year, but make $50K in the stock market, the govt says that my savings rate is 0."

I ask: And what is your savings rate if you spend all your income this year, but lose $50K in the stock market?


On Feb 16 06:01 PM Stone Fox Capital wrote:

> The US savings rate is one of the most inaccurately used figures
> around. To economists it seems that savings is the portion of income
> but under the mattresss, but it never factors in investment/capital
> gains. If I spend all my income this year, but make $50K in the stock
> market, the govt says that my savings rate is 0. The savings rate
> in the US is alot higher then the govts continues to mislead with.
> I know very few people that have 'zero' savings as the govt suggests.
> .

Feb 16 09:06 PM

[Dragon Master:]

Idiot! If 25% of subprime got bailed out, then more subprime will be generated after since people see the free lunch.

Feb 16 09:24 PM

[User 358261:]

Time will heal the economy?,,,That didn't happen during the last depression did it? Unfortunately it was the WWII that ended the
Depression and started three decades of American prosperity.

Now, why did that happen? Not because of any monitary policy, or savings, or deleveraging. It happened because we had a REAL ECONOMY. We were MANUFACTURING. And, we were EXPORTING as much or more than we were importing.

During the three post WWII decades we were the benificiaries of the huge demand for our products caused the massive bombing of our competitor's factories. Finally, the world repaired itself and once agin we had competition. And then unfortunately we made religion of free trade,...and it has been our undoing.

The only way that the world economy is going to function in a healthy fashion is for free trade to be conducted as BALANCED TRADE. Each significant trading partnership must buy as much from their partner as they sell to their partner. That way nations will not be drawn into debt and trade will become a cooperative precess.



On Feb 16 06:15 PM JohnAl wrote:

> Mr. Albertson is right.
>
> Time will heal the economy. What we are experiencing today, after
> all, is nothing more than the economy readjusting to the malinvestments
> made during the growth of the artificially created credit bubble.
> The government's attempt to reflate the credit bubble is the wrong
> medicine at the wrong time and will only prolong the readjustment
> period.

Feb 16 09:44 PM

[Moon Kil Woong:]

I agree with the cruz of the problem, as in every cyclical downturn almost every financial party is over-leveraged to some degree. This is banks, financial, businesses, and consumers alike. Blaming just one component is silly.

Needless to say supply and demand need to balance. Less supply, less demand, and lower prices. Then we have an economic base to see where to go from there. The longer we try to prevent the economy from balancing by artificially keeping prices high, encouraging over production and keeping dead companies operational, and giving stimulus to get consumers and businesses to spend one time money, the longer it will take to reach that real bottom.

In reality, the government has been adding to uncertainty and destabilizing the market since this recession began. Thus the result has been predictable.

It is like scratching a wound. It only gets worse.

Feb 16 10:29 PM

[rm:]

[If I spend all my income this year, but make $50K in the stock market, the govt says that my savings rate is 0. ]

Okay, so if you spend all your income this year, LOSE $50k in the stock market, then what is your savings rate?

Feb 17 11:06 AM

[henarl:]

Politicians don't keep their jobs by making the population tighten their belts and reduce the excessive lifestyles the have gotten used to, and keeping their jobs is priority one with the pols. That's why they are doing everything in their power to regain and maintain the consumer economy. Long term (after their tenure) consequences are way down on the priority list.

Feb 17 06:32 PM