Monday, December 15, 2008

Some Very Interesting Observations

The following is from a Barron's interview with Stephanie Pomboy:

What else do you see happening in the near term?

With the government guaranteeing all manner of private-credit claims, many investors may decide to get long "socialism," for lack of a better term. Or, as some euphemistically put it, this is partnering with the government. So in the short run, we could see a rally in risky assets and a selloff in Treasuries. But the economic deleveraging has barely begun, and that's my longer-term thesis. It all revolves around the idea that 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.

Hence, consumption declines.

Right. Wages have been silently crowded out by benefits as a share of total compensation, as companies look to offset rising health-care costs. The result is that the share of income that consumers can actually spend is at its lowest in the post-war period. It had not been a problem, because consumers would just borrow to fill that gap. But now, they don't have appreciating assets against which to borrow. So while we could get a rally in risk assets -- including high-yield debt -- it's likely to be a short-term rally within a context of a secular bear market.

I have not seen this idea/concept phrased as well. Wages -- the actual dollars that people spend -- have been crowded out by benefits -- as in medical insurance. In other words, the raise that people thought they were getting in their overall compensation in fact went to something they could only spend on one thing -- namely health care. As a result, people have to borrow to buy other stuff. Hence we have seen the following events.

Consumer debt has been increasing:

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Savings has been decreasing:

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