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Five Things: From Generation Boom to Generation Sav-A-Lot


Consumers are now saving and repairing balance sheets.


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

From Generation Boom to Generation Sav-A-Lot

Remember these days. These dark economic times will one day be accused of leaving enduring imprints on those who are living through them. Of course, it is really social mood that is responsible for this shift, but in the desire to offer a narrative, a linear explanation to what we are living through, historians will prefer to mark this economic crisis as a turning point in consumer behavior.

Evidence of this shift seems to accumulate by the hour. This morning the Wall Street Journal took a look at the "new frugality" in this piece, "Hard-Hit Families Finally Start Saving, Aggravating Nation's Economic Downturn," noting the role that "savings" plays in the economy:

"Usually, frugality is good for individuals and for the economy. Savings serve as a reservoir of capital that can be used to finance investment, which helps raise a nation's standard of living. But in a recession, increased saving -- or its flip side, decreased spending -- can exacerbate the economy's woes. It's what economists call the "paradox of thrift."

Reservoir? What Reservoir?

Wait, let's back up for a moment. While this part in the Journal article - "savings serve as a reservoir of capital that can be used to finance investment, which helps raise a nation's standard of living" - certainly is true, the real problem is blissfully glossed over into the next sentence on the "flip side" of savings, where "decreased spending... can exacerbate the economy's woes."

See, while decreased spending exacerbates economic woes, that's not the real issue. The real issue is related to first half of the equation; a reservoir of savings. We haven't had a "reservoir of savings" in this country in nearly two decades. Indeed, the central bank, by disguising that lack of savings with artificially low interest rates, is the reason this necessary step to repair consumer balance sheets and restore saving sis going to be so very painful.

The bottom line? Consumers are now saving and repairing balance sheets. This is a secular trend, not a temporary aberration, that will crush consumption for far longer than even the most bearish economists expect.

Meanwhile, even as asset price (stocks, junk bonds, etc.) deflation temporarily stalls, guess what is happening to the labor market and wages? They are deflating at a near-record pace. moreover, this is not just happening in the U.S., but globally. You do not get inflation from this kind of structural deflationary debt unwind, at least not for many, many years.

So, those who today are selling Treasuries, buying risk assets and hoarding gold in anticipation of "The Coming Great Inflation" will, ironically, be among those contributing to the elements of structural deflation in the not-so-distant future.

Winner Winner, Chicken Dinner

Although firm details are only beginning to emerge, among the few clear beneficiaries of President-elect Obama's economic stimulus plan are municipalities; at least that is the perception being reflected in the closed-end funds that are related to municipal bonds.

Muni-related closed-end funds showing breakouts today, include:

  • Intercapital Quality Muni Trust (IQI)
  • BlackRock Florida Municipal 2020 (BFO)
  • Van Kampen Trust for Insured Municipals (VIM)
  • Nuveen Premier Ins Muni Fund (NIF)
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No positions in stocks mentioned.

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