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VIDEOFrom the Relationship Era to the Breakup Age
By
Peter Atwater
Jan 21, 2010 12:40 pm
The change is evident in deteriorating connections between consumer borrowers and banks.
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While the target of the phrase was the growing disconnect between President Obama’s “preoccupations and the concerns of the people,” I think she hit that nail on the head of something much, much bigger.
And I couldn’t help but notice, the headline copy for Arianna Huffington’s Wall Street Journal op-ed this morning either: “Democrats Should Dump Their Banker Friends."
Still, in reflecting on the past 30 years (if not longer), it's not hard to see example after example of how the growth in “relationships” benefited the global economy. From the peace dividend, to supply chain management, to the record flows of goods and capital flows -- not to mention the “connections” facilitated by the world wide web, it's been a remarkable era of good feeling between importers and exporters, buyers and sellers, lenders and borrowers, government and the private sector, not to mention historically political and military enemies.
We are the world.
As I measure it, though, the Relationship Era peaked back in 2007 -- for as the markets topped, risk reduction was easily seen in the record profit margins of most corporations and banks.
But I think Peggy Noonan is right, we're now on the other side. We're living in the Breakup Age. She sees it in the political arena. I see it in the deteriorating relationships between consumer borrowers and the banks.
But if strong global relationships manifested themselves in high margin/low risk earnings, I think it reasonable to expect far lower margins and much greater risk as we morph from “We are the world” to “Breaking up is hard to do."
But I would offer another aspect to the Breakup Age, which I think many have too easily discounted, and that is “correlation” risk. Most banks and many corporations operate with a heavy reliance on computer-based behavioral models. Yet for most of these models, the baseline data is drawn from the Relationship Era.
For what is ahead, I suspect that most behavioral models will be of limited use.
And let me give you just one example. One of the “cornerstones” of post-World War II consumer banking in the United States is the assumption that homeowners will pay their mortgages first. And this is reflected in the pricing and loss forecasts of every other consumer credit product.
But as I've written about on several prior occasions, the “relationship” between underwater mortgage borrowers and the banks is breaking up, as many borrowers are now opting for strategic default instead. And how this impacts home equity lending or credit cards has yet to fully play out.
And then there's banking regulation. As evidenced this morning by the President’s speech, the relationship between Washington and Wall Street is clearly on the rocks.
I don’t profess to know where it all ends, but I suspect that many investors are likely to end up as collateral damage as the dishes fly with both greater frequency and force.
Position in SPY, SRS and JPM.
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