If the current trend of Americans to save rather than spend continues, what difference would it make to us as investors? It could make a world of difference.
Fueled by abundant and cheap credit, we have been a nation of spenders for so long that an entire generation has never known an economy where saving is respected and bling is rejected. We borrowed more than we should have, bought more than we needed, and looked for short-term gain rather than long-term benefit.
Do Americans have what it takes to kick this addiction? There are those who would say no. I disagree -- don’t sell Americans short. Just when you think we’ve lost our common sense and our work ethic, we’ll shake off the malaise.
If I’m right, just think of how it will affect some of the sectors that comprise many current favored investments. You can throw many of the investment themes and recommendations right out the window. For instance…
Housing. If solvency trumps profligacy, just imagine how it will affect Homebuilders, Realtors, Mortgage Lenders, and Banks. There’d be no reason to try to catch the “bottom” in homebuilding stocks. When people have to put down 20% of the cost of a home, they’ll be living in rental apartments and rental homes longer. This will benefit a number of apartment REITs that have crashed right alongside the homebuilders. But there would be less demand for single-family homes. That will still be the American Dream, but a dream slightly delayed, as it was for decades before it suddenly became everyone’s birthright.
Mortgage lenders would be lousy investments since they depend on volume, not creditworthiness. The economies of scale trumpeted by publicly-traded realtors would evaporate in favor of local markets where smaller realtor-entrepreneurs do best. Banks, which have depended upon real estate loans immediately sold to Fannie Mae and Freddie Mac, would have to lend money to small businesses and creditworthy consumers to make a profit. Their growth would slow even as their deposits increased, since they wouldn’t be making nearly as much on credit cards. Keeping bankers from having excess money to play with might actually help their bottom line.
Retailing. Whether Consumer Durables, Consumer Non-Durables, or Gasoline, growth would slow until household debt is brought under control. The economy should function the same as our own heart does –rhythmically expanding and it contracting, pumping lifeblood throughout the system. Like our heart, if the economy races along, ever-expanding and never contracting, sooner or later, it will require emergency intervention. It isn’t A Bad Thing when the economy contracts; it’s part of the natural rhythm.
If the population elects to pay down debt and live within their means, it does not bode well, during the contraction, for big-ticket items like new cars, pleasure boats, small aircraft, snowmobiles and such. Nor for new-home big-ticket items like furnishings and appliances. You could cross manufacturers of such big-ticket items off your watch list for the duration of the contraction.
Ditto for non-durables like clothing, footwear, and other soft goods, although the personal care, cosmetics, and food components of consumer non-durables should continue to do quite well. In a Saver Scenario, we would still enjoy “little rewards” and these items would top the list. Clothing retailers might still do OK if enough people consider it a little reward but others might look at their overstuffed closets and realize they own clothes they’ve never even worn.
There is no subset of retailing for gasoline and other fuel; it is just another non-durable. I break it out separately only to highlight the fact that energy costs are counted as part of the “retailing” numbers. So in May, for instance, retail sales as reported increased 0.5%, causing Wall Street to beat the Happy Drum. If people are buying more stuff, the economy is clearly on the mend, right?
Not exactly. In fact, three-fifths of that “increase in retail sales” was simply because we paid more at the pump for gasoline in May than we did in April. Joe the Dry Cleaner (or Auto Mechanic or Convenience Store Owner) made 0.2% more in May than in April. For every $1000 he made in April, he made $1002 in May – but spent $3 more for his gas. Only to a government bureaucrat would this be reason for celebration!
Food/Drink/Dining. If we become a nation of savers, even for a short time, the intelligent investor might want to view Restaurants, Grocery Stores, Food Distribution and Distillers, Vintners, and Breweries in a whole new light. Some of these staid, boring, steady companies are likely be the ones that continue to increase their earnings and dividends, trumping their more high-flying brethren. Dining in might be more the norm but dining out would be one of those treats that satisfies in lieu of a new snowmobile or personal watercraft. As for Distillers, Vintners, and Breweries, ya gotta eat and ya oughta have something to enjoy between bites, as well. Good times or bad, people will continue to enjoy a cocktail or two. At this point in the market, food and drink stocks are overlooked. Maybe they shouldn’t be.
Agriculture. Whether Food Producers, Fertilizer Suppliers, Land Owners, Water Providers, or Machinery Makers, if people are going to eat, someone has to grow the food. Those in the Agriculture sector know their businesses to be cyclical, dependent upon the weather and upon over- or under-supply because of new crop innovations, good years, bad years, dining trends, and what the competition is doing. But the one thing we can depend upon, as investors, is the cyclicality of it all. Buy ‘em when they’re cheap on an earnings and cash flow basis. Sell ‘em when they are dear. They’re cheap right now.
Energy. We exert no more control over the cost of energy than we do the cost of food. But we could. Both fossil and alternative energy get cheap from time to time. Alternative energy schemes abound so demand more vigilance in analysis and due diligence in purchasing than fossil fuel providers. Oil at $34 a barrel was clearly below the cost of new production and destined not to last. Yet most investors didn’t want to touch it then but are clamoring to buy now. Why? Like food, it is a constant need. Buy ‘em when they’re cheap on an earnings and cash flow basis. Sell ‘em when they are dear. They aren’t cheap right now.
Health & Personal Care. This is an area we skimp on until we really need it but when we really need it we demand the best. The problem is that, while health care is clearly a constant need like food and energy, it is such a political football right now that the judicious investor might want to see which way the battle shakes out before investing. If it looks good for Pharmaceutical Manufacturers or Biotechnology or Cost Containment Providers or any of the other subsets of this sector, there will be time to jump aboard. Saver or spendthrift, when you need health care, you need it. But, as with the above two categories, there’s a time to buy and a time to stand aside.
Entertainment and Travel. The International Air Transport Association just revised (by double) their forecast for world Airline losses in 2009. They now say the airlines will lose some $9 billion this year. Warren Buffett once said of airlines, “…I have this 800 number, and if I ever have the urge to buy an airline stock, I dial this number and I say my name is Warren Buffett and I'm an airoholic. Then this guy talks me down on the other end." In tough times, or when people are trying to pay down debt, they don’t fly. The increase in road trips would help the Hotels except that hotels depend upon business travelers for their bread and butter and business travelers are being told to curtail travel in favor of videoconferencing and picking up the phone. Cruise ships may, at the right price, lure many travelers residing near the coasts who consider it a Little Extravagance, but there’s a problem. To bring prices down to the Little Extravagance level, the cruise lines need $34 a barrel oil, compliant unions, cheap food prices, and no unexpected expenses. Few bargains here.
Because Savers will stay at home more, and travel to events and attractions closer to home, however, some Consumer Electronics firms should do quite well. Both Productivity Tools and Electronic Games might thrive in this environment, supplanting entertainment outside the home. Movie Theaters might provide sufficient escape to themselves escape the fate of lowered sales and earnings but clearly DVDs are eating into that market, as well. Home Entertainment Providers, right-priced Flat Screen TV Manufacturers, and the Electric Utilities that get paid by the kilowatt for all those Nintendos, Wiis, TVs, DVD players, and CD players humming at home because people spend more time there should benefit.
Then there is Gambling entertainment. (Or, as they prefer to call it in my home state of Nevada, “gaming.” I guess they think that sounds more innocent.) Who’s going to pick up and fly to Vegas for the weekend these days? Sure, there are those who will – but having been lured from my mountaintop aerie at Lake Tahoe recently to a conference in Sin City, I can tell you there aren’t enough visitors to generate enough sin to pay the neon bill, let alone to ensure profits. State lotteries will probably do better, as will casinos at some close-to-urban-centers Indian Nations, but the play here, if there is one, is on the firms that provide and maintain the machines, not the big casinos.
Education. Private education providers have been on a tear. I’m not sure it can continue during a time of saving versus spending. Secondary education expenses will be increasingly scrutinized by parents. Yes, they may still want their children in private schools, but will they pay $20,000 a year for it when the school down the street charges $10,000? At the college level, I imagine the land-grant colleges will enjoy a resurgence over the private universities. Four years at UCLA cost me considerably less than the number cited above for one year at a kid’s private school. (Of course, that was just before the Civil War, so things may have changed a bit since then…)
Financial Providers. My dislike for the derision and condescension these firms have displayed toward their clients for my nearly four decades of investing may color my viewpoint here. Certainly, the Wall Street Brokerages will have a tough go of it if they can’t churn the marks and convince them to buy yet another untested product of their febrile imagination, or some hot concept stock du jour. They can still trade for their own account, placing themselves in direct conflict with their clients in a number of areas. (See my article here for a discussion of how “their own account” places them at odds with individual bond buyers and sellers.) And certainly, since they ensure that a steady flow of employees take sabbaticals in “public service” – always at the national level – they can depend upon rich contracts funded by taxpayers and directed to them by their colleagues temporarily in government. (As, for example, after having nearly destroyed the US economy, they got paid to undo the damage they’d done because only they knew how to. And they say existentialism is dead.)
National/international money center Banks will always find a way to lose money. There is no way to sugar-coat this. The history of Too Big To Fail, Not Too Big To Flail banks makes the case without embellishment. The originator of the phrase, “Even a blind pig can find an acorn every now and again” obviously never met a money center banker.
Insurance companies typically make their money on float (as do brokers and bankers.) Life insurers, for instance, know they are going to pay out on most every policy. But they are betting they can take your premium money, invest it, and make enough on it to pay your death benefit, with enough left over to pay for company cars, CEO bonuses, and a faux gold watch for loyal employees after 40 years of work. The problem is, this works well in normal times, with markets that reward them. How will they do when markets take more than they give?
Financial Advisors will probably fare best among the Financial Providers. 401k’s, 403b’s, employee incentive plans, and the markets themselves have become so complex that many investors will seek professional counsel. Remember, professional doesn’t always mean better results; it just means they do it 8 or 10 hours a day. But many will decide they don’t have the time, the inclination, or the knowledge to deal with the complexities and will hire others who actually enjoy this stuff.
Bonds. Finally, we come to the fixed income side of the equation. In normal times, more savers means more interest in the certainty of receiving a steady income and the guarantee, as long as the firm stayed in business, that they would redeem the bond at par. More demand on constant supply would typically result in higher prices for bonds and lower yields. But a nation does not irresponsibly borrow and print $13 trillion and expect “normal times.” Inflation will inevitably result and inflation erodes the value of that repayment at par. What good is the guarantee to return your $1000 in 25 years if $1000 then only buys you a Happy Meal and a pack of gum? I’m not certain how this one will play out but my bias is to keep all bond positions short-term and to seek income investments in dividend-paying firms which can raise the dividend as their earnings rise as a result of the declining value of the dollar.
I may be wrong. We may not become a nation of savers. But if we do, the time to think about investment implications is today, not after the fact. I hope this serves as a springboard for thinking about those possibilities.
DISCLOSURE: We are long short-term income instruments, gold, cash equivalents, and a few inverse ETFs. Looking to buy many of the above on pullbacks.