June 15, 2009
– BREAKFAST WITH DAVE
Page 3 of 8
THE NEW FRUGALITY
The market may well have bottomed, and maybe the economy will soon too(though we are not necessarily convinced). Even so, remember that bothbottomed in the summer of 1932 and the depression did not end for anothereight years. Moreover, despite more than a half-decade of New Deal stimulusand government incursion in the capital market and the economy, we finishedoff the 1930s with a 15% unemployment rate, consumer prices deflating at a2% annual rate, the equity market extremely volatile and the long bond yieldheading below 2%. The equity market was volatile and pattern-less following theimmediate aftermath of the post-lows surge in the summer and fall of 1932, and the enduring story was one of deflation, not inflation, and of income growth, notcapital gains. It was not until 1954 that a new bull market began, and theeconomy never did manage to sustain above-trend growth until World War II.What was a lingering theme during the 1930s, as is the case today, wasfrugality; living below one’s means after more than a decade of living aboveone’s means (the 1990s and early 2000’s were the new 1920s as the savingsrate dipped into negative terrain during both go-go periods). Have a look at
ANew Spirit of Sobriety Takes Hold
in the special insert section of the weekendFinancial Times and the story behind why it is that consumer discretionary itemslike Swiss watches are down 24% on a YoY basis — the first time this has everhappened.
THE LENDER OF FIRST AND LAST RESORT … AND EVERYTHING IN BETWEEN
Any country whose central bank takes over as the primary provider of credit to the private sector is a country whose currency is very likely on as secular slipperyslope. This is supposed to be a capitalist economy, and yet the Fed is acting as the credit czar and allocating loans by fiat — see
Lender’s Role For Fed MakesSome Uneasy
on the front page of the Saturday New York Times. Believe it ornot, the Fed is now backing loans for motor homes, rental cars, snowmobilesand recreation equipment. The article says that the Fed recently held aconference call with RV manufacturers for crying out loud; and why shouldn’t it,when the President applies his own pressure — Obama is quoted in the articlesaying “When we talk about layoffs at companies, like Monaco Coach andKeystone RV and Pilgrim International, we’re not just talking numbers. We’re talking about people who’ve lost their livelihoods and don’t know what will takeits place.” Imagine lobbying the Federal Reserve to add loans for recreationalvehicles to its already extensive collateral base in the TALF — and on May 16, the Fed indeed said it would start allowing loans backed by motor homes,campers, boats, snowmobiles and motor vehicles. Where is the independenceof the central bank? At what point is a line drawn between necessity and luxury?The other policy proposal being pursued by President Obama is this $4,500‘cash for clunker’ strategy working its way through Congress to support the autoindustry at the taxpayer’s expense — yet again, the government refuses toaccept the new reality of consumer frugality and savings, which is really quiteregretful.
What was a lingeringtheme during the1930s, as is the casetoday, was frugalityBelieve it or not, theFed is now backingloans of every shapeand form
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