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Consumers Still Not Consuming

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Weak demand for debt sign of changed social mood, not improving conditions.

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As lawmakers busily laud their own efforts to unlock credit markets and jumpstart lending, consumers yawn. They just don't want to spend.

And it's not just those out of work who are paring back expenditures. According to the Wall Street Journal, even the dwindling ranks of the employed are getting thrifty. Computer users are enduring slow machines rather than buying new ones, clothes-shopping trips are being delayed, and coupon clipping is once again the vogue.

Discounters like Wal-Mart (WMT) are benefitting from bargain hunters looking to save a couple bucks, while AutoZone's (AZO) stock sprinted to a 52-week high last week, as drivers opt to do it themselves.

Politicians, rushing to restore the "prosperity" we so recently enjoyed, are confident this is just a passing fad, and that we'll soon return to our spend-happy ways. Indeed, the viability of President Obama's new $3.4 trillion budget is predicated on the US economy's skipping along at a 3.4% growth rate next year - and expanding even faster in 2011.

This optimism -- idealistic at best, delusional at worst -- ignores the extent to which Americans are embracing a new, sustainable way of making ends meet: Spending less.

Meanwhile, the Federal Reserve, busy waving its magic wand over reeling credit markets, is similarly out of touch with reality.

As noted by our friends at BTIG, new federal lending initiatives aimed at funneling money to credit-starved consumers are undersubscribed. In his speech last Friday, New York Fed President Bill Dudley pointed to weak demand as evidence that financial markets were in better condition than many believed, and that investors could be willing to start taking risk again.

Not likely.

As I noted a few weeks back, consumers are roundly rejecting the idea that more debt is a good thing. Even small community banks that have money to hand out can't find any takers. (Wells Fargo (WFC), Bank of America (BAC) and Citigroup (C) are quietly thanking their lucky stars, since they're out of cash anyway.)

The ongoing foreclosure crisis, rising bankruptcy filings and tumbling equity values, though they do cause meaningful hardships for millions of Americans, do have a silver lining: The realization that unbridled consumerism does ultimately come at a cost. This is fostering a renewed understanding of the importance of fiscal responsibility.

Most media outlets report this in terms of increased savings, which is almost universally viewed as bad in the short run, if good long-term.

But saving now is good. Period. The notion that spending what you don't have is somehow the patriotic thing to do is absurd. The only way out of this mess is through saving, not spending.

That is, of course, if one's time horizon extends beyond the 2, 4 or 6-year election cycle.
No positions in stocks mentioned.

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