In Our Zero Sum Economy, Are You Winning or Losing?

By Peter Atwater  OCT 19, 2010 9:20 AM

Right now, the winners are US retail, the credit card banks, and the automakers; the losers are the banks and the holders/guarantors of US mortgage debt.


Normally I'd wait until the end of December to share my “big theme” for the New Year. This year, however, I'm not sure my big theme can wait that long.

On Friday, I shared on the Buzz & Banter this quote from Jim Cramer from his Thursday night Mad Money show:

Banks can’t get their money back on their mortgages? -- Terrific -- [It’s a] big transference of wealth to struggling homeowners who can then spend their money at Target (TGT) or “Chief Fat Pants” purveyor Kohl’s (KSS). No wonder the RTH, that’s the retail ETF, has been going up while the bank stocks have been going down. It’s a total seizure and redistribution of capital from the banks to the retail proletariat. Just like my Great Great Uncle Vlad [Cramer holds up a portrait of Lenin] would have ordered.

Instead of paying Wells Fargo (WFC), you’re spending at TJX (TJX) and Ross Stores (ROST) and "dressing for more" as Wells gets less. Heck, maybe you’re buying a car with money that was meant for JPMorgan (JPM). Go buy some Ford (F). Go buy some auto-parts makers too. How bout the railroads? To ship those goods -- like CSX (CSX) or Union Pacific (UNP) or underground railroader Berkshire Hathaway (BRK.A) now that it’s bought Burlington Northern (BNI)

Unemployment still high? What does that mean? It means more entitlement benefits coming to these households. It means checks. It means food stamps. Go buy Family Dollar (FDO) and Dollar General (DG), they’re working.

And then yesterday morning, I saw this from BlackRock (BLK) vice chairwoman Barbara Novick in her op-ed in the Wall Street Journal:

The primary beneficiaries of HAMP (Home Affordable Modification Program) have been holders of unsecured consumer debt (credit cards, car loans, etc.) that have benefited from borrowers' reduced debt burden, despite the dismal reality that half of all borrowers emerge from HAMP with a total debt-to-income ratio greater than 63.5%, according to the most recent Treasury data.

Like it or not, given the negligible real growth in our economy, we've reached the point where it's truly a zero-sum game. In order for me to win, someone else must lose.

Right now, as Mr. Cramer and Ms. Novick point out, the winners are US retail, the credit card banks, and the automakers. And the losers are the banks and the holders/guarantors of US mortgage debt.

Mr. Cramer thinks that this provides a foundation for a viable investment strategy. Ms. Novick believes it's a “bad idea” “sticking the [mortgage-backed bond] investor with a larger loss and preventing the housing market from fixing itself."

I suppose where you stand depends on where you sit. Or put differently, in our zero-sum economy, are you winning or are you losing?

As I look at the economic landscape, there are winners and losers everywhere.

Savers -- losers; overleveraged borrowers (of all kinds) winners.

Commodity providers -- winners; commodity users losers.

And I could go on. And you probably have an even better list than I have.

But note that because overall growth in the US is so slow, there's no collective victory. And as a consequence, I expect many behaviors to change.


First, focused industry trade groups will become much more influential than broad over-arching organizations. The American Bankers Association, for example, will lose power to the Community Bankers Association and the Mortgage Bankers Association. It’s a real life/real time version of Survivor and organizations (not to mention people) will align with those groups that meet their most immediate need.

Second, increasingly both Congress and the judiciary branch of the federal government will be called upon to play referee between the winners and losers. In her op-ed this morning, for example, Ms. Novick wants Congress to enact consumer bankruptcy reform that advantages mortgage-lenders over unsecured debt-holders. And as you may know, 49 state attorneys general want foreclosure action; and the Department of Justice wants debit and credit card merchant fee reform.

But rather than the marketplace driving these outcomes, elected officials and judges will be called upon to weigh in, and I suspect that not all outcomes will necessarily be as “populist” as many currently believe.

Further, in this kind of environment, business decisions will have not only economic consequences, but enormous political implications as well. And with the US government an active shareholder/guarantor of some of our largest financial institutions, not to mention automakers, this may create unanticipated consequences. For example, with Fannie Mae and Freddie Mac, the guarantors of most US mortgage debt, how excited do you think Washington is watching strategic default dollars being used to pay down Capital One (COF) credit cards or to purchase T-shirts at the Gap (GPS)? Then again, Washington might feel differently if mortgage payments are instead used to buy GM cars and trucks, particularly in advance of say, an IPO?

Third, the potential for price competition/margin compression is huge, particularly in places where the government may be a major buyer. Remember, it's a zero-sum game for Washington, too. For example, I can easily foresee Congress demanding “rebates” when food stamps are used at places like Walmart (WMT). And with many corporations limited on how much further they can cut headcount, the only place to turn for expense savings is input costs and operating budgets. In a zero-sum economy, when it comes to spending, less is the new flat.

I also think that the zero-sum economy could create an "every man for himself” environment among historically oligopolistic industries, particularly where there may be a particularly vulnerable enterprise. For example, it was very telling to me that Visa (V) and Mastercard (MA) settled with the Department of Justice, while American Express (AXP) held out. And I expect that we'll soon see marketing campaigns from both Visa and Mastercard that specifically target Amex as the “high cost” merchant alternative.

And needless to say, all of this is highly deflationary.

Fourth, and related, the Robin Hood economy, which I discussed last year, isn't dead, but just being taken to a new extreme. And with it now clear that the winners over the past year have been not just the banks, but large multinational corporations too, I fully expect that whether directly or indirectly, developed nations globally will seek to translate higher corporate earnings into higher taxes.

Fifth, I wouldn't underestimate the social upheaval as extended high unemployment rates transform the zero-sum economy from a short-term event into an era. It’s one thing to lose for a little while. It's another thing altogether to see those losses become permanent -- especially when others appear to be benefiting on the other side.

As you may have seen, this weekend, laborers all but shut down France’s airports by cutting off fuel deliveries. The workers were angry about the proposed increase in the French retirement age to 62. And then there's Iceland, where underwater homeowners have banded together to gain relief.

Finally, and really as a function of all of the above, I’d offer that the zero-sum economy will force organizations from small business through to the federal government to make very difficult choices which will, ironically, only further accentuate the divisions between the winners and losers. And in this regard, I'd pay particularly close attention to the mortgage space, as it remains largely unresolved how that sector’s increasing losses will be “resyndicated” among homeowners, bondholders, Fannie Mae and Freddie Mac, underwriters, originators -- not to mention home equity lenders, credit card companies, and even US retailers.

And I see similar “resyndication” efforts necessary in both the municipal and sovereign debt space as well.

Today, folks like Mr. Cramer see the zero-sum economy as a viable investment strategy. I’d offer that whatever gains there are, they're likely to be fleeting at best, particularly as folks like Ms. Novick become much more outspoken with their concerns.

Position in SPY,SH, and JPM.

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