The Economist has a great piece out about how the overleveraged American Consumer of recent memory is going to quietly take a backseat to the saving oriented consumer of decades past. Why? Well, because they will have to. The recession obviously has a negative impact on spending power and we've written numerous times about this current/upcoming phenomenon. Firstly, the decline in housing prices and the increase in the unemployment rate will obviously have a negative effect on the economy and in turn the consumer. Visa's consumer trends have already started to show this. Secondly, as these consumers find themselves struggling to get by, we'll notice that credit card debt will rise and we'll get a credit card squeeze. This, along with a ton of auto loan exposure has been the macro thesis behind shorting Capital One (COF). Add in the fact that they are continually seeing rising charge-offs and delinquencies and it's not a pretty picture. Lastly, add in the fact that many Americans have suffered from the destruction of wealth due to a horrible year in the stock markets.
All of the above plays right into our theme of shorting discretionary retailers and going long the "cheapest of the cheap" in consumer plays. The only retailers we want to be long in this environment are McDonald's (MCD) and Walmart (WMT). MCD makes sense because they provide cheap and easy food. When people are short on cash, that dollar menu goes a long way. WMT benefits from a similar thesis. When you're buying groceries, toiletries, you name it... Walmart has it and at the cheapest prices. Not to mention, they've got the Sam's club warehouse as well, playing right into our 'cheap' theme. As far as shorting discretionary retail goes, you can really take your pick. Whether it be casual dining chains, jewelry stores, or any leveraged consumer play, you have plenty of options. Or, you could just short the RTH retail index and then go long a select few retailers as a hedge. Consumers are/will be in a pinch for a few months to come and that's how you play it.
Now, take all the aforementioned facts and then add in this commentary from The Economist and you'll notice that a shift is coming. They write,
"On average, consumers from 1950 to 1985 saved 9% of their disposable income. That saving rate then steadily declined, to around zero earlier this year (see chart). At the same time, consumer and mortgage debts rose to 127% of disposable income, from 77% in 1990. Those forces have now reversed. The stockmarket has fallen to the levels of a decade ago. House values have fallen 18% since their peak in 2006. Banks and other lenders have tightened lending standards on all types of consumer loans. As a consequence, consumer spending fell at a 3.1% annual rate in the third quarter (in part because tax rebates boosted spending in the second), the steepest since the second quarter of 1980 when Jimmy Carter briefly imposed credit controls. More such declines are likely to follow. Richard Berner of Morgan Stanley projects that in the 12 months up to the second quarter of next year real consumer spending will fall by 1.6%—a post-war record. “The golden age of spending for the American consumer has ended and a new age of thrift likely has begun,” he says."
Lastly, take a look at this powerful chart. Personal savings has been in a steady downtrend ever since the '90s. Household debt, on the other hand, has almost doubled since the '90s. Something's got to give.
(click to enlarge)Source: The Economist
