I belong to the blank generation and I can take it or leave it each time.
Richard Hell “Blank Generation”

Like Richard Hell, I too am a member of the blank generation… the blank check generation. These blank checks arrive virtually every day. They arrive via email and priority mail. They arrive tucked between the pages of the Sunday newspaper, plastered to my car windshield, bannered across the Web sites I visit. Some of these blank checks are for that family vacation we didn’t save for, or that home improvement project I meant to tackle last year but couldn’t fit in the budget. Others are for computer equipment, home appliances or, ironically (and perhaps misleadingly), debt reduction.

Twenty years ago it was almost unheard of to have the kind of access to credit we have now. The New York Times, in its ongoing three-week series on class in America, observed recently that the barriers between classes have become blurred, making it more difficult to identify occupants of the lower, middle and upper classes. Whereas possessions, such as clothing, automobiles, watches, etc., used to act as class signifiers, it is becoming increasingly difficult to discern class based on possessions alone. According to the Times overview, “Factories in China and elsewhere churn out picture-taking cell-phones and other luxuries that are now affordable to almost everyone.”

I disagree, at least as far as “affordability” goes. Afford-ability is different from spending-ability. The easy access to credit, available levels of credit unheard of 20, or even 10 years ago, has unquestionably raised spending-ability, but true afford-ability remains elusive.

Retail brokers see this up close and personal every single day when they are forced to explain to their clients, yet again, why their retirement income expectations are far greater than their portfolio growth capabilities... and that’s if everything goes perfectly according to plan.

As awareness of the gaps between savings and investments and retirement income expectations grows, one would naturally expect risk aversion to set in. On the retail side this is already manifesting itself in the increased retail appetite for asset allocation investment schemes to “protect” from the type of one-sided portfolio bets that exposed investors to losses in the tech-focused unwinding of 2000-2002.

Bloomberg columnist Chet Currier recently wrote about what he calls a “mad rush to the middle,” on the part of mutual fund investors. “The quest for a safer, saner style of long-term investing has taken a new turn in the last few years. Behold, moderate allocation mania -- a stampede into highly diversified mutual funds that mix stocks and bonds together in a classic conservative style."

Risk aversion, a decrease in time preferences, continues to develop as a common theme among the retail investor, while an increased appetite for risk in the face of compression continues to develop among institutions, corporations and hedge funds.

An example of this risk chase was visible in yesterday’s news that Washington Mutual (WM) will buy Providian Financial (PVN) for $6.45 billion in cash and stock. While the deal is being sold as WM’s wise maneuver to “diversify” its consumer banking-product portfolio, an alternative view might be that WM, after fumbling through consecutive quarters of unstable earnings and profit woes, has now embarked on a new venture outside of its core business; in other words, the company has taken on greater risk to meet its original objectives. Huh, taking on more risk to generate increased returns.  Where have we seen that before?

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