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Five Things You Need to Know: The Rebate Check Is In the Mail


How Americans spend those checks may tell us how bad things really are.


Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. The Bad News About Those Rebate Checks

First, the good news: The initial wave of more than $110 billion in tax rebates begin arriving in U.S. mailboxes today. Now, the bad news: The degree to which those rebate checks are spent will show us just how precariously perched over a sea of debt household finances really are.

How so? Well we were reminded of the economic theory behind the spending of rebate checks by the Financial Times this morning. According to the FT, since households generally base their spending decisions on expected lifetime income, a temporary boost to income should induce spending only by those who are "liquidity constrained," or unable to access cash.

For comparison's sake, going back to prior instances of economic stimulus via rebate checks, the FT looked at studies of the 1975 rebate and found only about 12-24% was spent in the quarter in which the rebate was received.

However, fast forward to 2001 and a different pattern emerges. Somewhere between 20-40% of the 2001 rebate was spent in the first quarter it was received, and about two-thirds over two quarters, the newspaper said. If the theory is correct that liquidity constrained households spend the rebate more quickly than more fiscally stable households, then the 2001 spending effect suggests an interesting deterioration compared to 1975.

2. Nationalization Projects: We Finally Made the List!

In case you've been walking around miffed about the socialization of risk for Wall Street while Main Street bears the costs, the Financial Times managed to sum up the core truth of this economic stimulus via rebate checks in a simple sentence: "In effect the government will nationalize part of US household debt – socializing some of the costs of the economic downturn."

We suppose congratulations are in order. This means Main Street has finally made the growing list of U.S. nationalization projects.

3. Credit Card Rates Higher

Conventional wisdom now holds that the debt crisis has passed and things are finally returning to normal. In a very loose sense, this may be true for Wall Street, but we are seeing the trickle-down effect of tighter credit only now beginning to fully impact Main Street. For evidence look no further than your credit card statement.

According to a piece in USA Today, credit card issuers from Washington Mutual (WM) to Discover (DFS) to Bank of America (BAC) are busy raising rates for many credit card customers.

The reasons given for the rate increases are that the issuers are simply responding to increased credit risk. Keith Givens, a spokesman for Washington Mutual, told the newspaper notes that the decision to raise some rates is "an indicator of overall deterioration in the economy." Ironically, as credit card fees go up, many will find it more difficult to keep up with the payment increases.

4. The Recession Diet

Speaking of deterioration in the economy, both the New York Times and USA Today this weekend ran with stories detailing consumer cutbacks.

According to USA Today, citing a an RBC Cash poll, 60% of the public say they are now less comfortable about making a big-ticket financial commitment, such as buying a home or a car, than they were just six months ago.

The article also cited BIGresearch, a firm that tracks consumer behavior, reporting that 53.6% of people they polled focused more on what they needed, rather than what they wanted, during their shopping trips over the last six months. Pam Goodfellow, a senior analyst at BIGresearch, told the newspaper that the frugality has put more of a focus on "smart shopping and bargain hunting. People are picking up fewer items to complement what they already have."

The New York Times article focused on daily trade-offs in diet, outlining what the newspaper characterized as a "Recession Diet."

"In Ohio, Holly Levitsky is replacing the Lucky Charms cereal in her kitchen with Millville Marshmallows and Stars, a less expensive store brand," the newspaper said. Burt Flickinger, a retail consultant, told the newspaper the last time he saw such significant changes in consumer buying patterns was the late 1970s, when runaway inflation prompted Americans to "switch from red meat to pork to poultry to pasta - then to peanut butter and jelly."

5. Dark Thoughts for Dark Times?

By now almost everyone has seen those "demotivation" posters that periodically make their way around the Internet via slide shows. They typically feature a photo and a statement satirizing motivational slugs, such as: "Give up: At some point, hanging in there just makes you look like an even bigger loser." The New York Times Sunday magazine ran a brief feature on the company responsible for them.

Interestingly, until we saw the article, we had no idea the company that makes those posters, Austin, TX-based Despair, Inc., has now been around for a full decade with sales of around $4.5 million a year.

Despair's sales are up about 15% this year, the article noted. "We do see some people are buying because things are getting bad," Justin Sewell, a co-founder of Despair, told the Times. "They're Googling things like 'despair' or 'failure,' and we're popping up."

At the company's Website,, you can order "demotivators" and even construct your own poster, as we did below:

No positions in stocks mentioned.

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