Sleep Well Money

Sleep Well Money

Money that helps me to sleep well tonight is probably not going to help me live well tomorrow. The 5% return many have received in the last ten years of investing is not going to be enough for the next twenty years (Trailing Returns, as of 3Q 2010, for an investment portfolio that is 70% S&P 500, and 30% Barclays Capital US Bond Aggregate Index are shown below via Morningstar Analytics)

trailing returns

However, However this last week lifted my thoughts on a very slow future. Consumer credit balances increased for the first time in eight months, rising at an annualized rate of 1.1%. What's still troubling about this data is the difference between the revolving credit data and the non-revolving data. Revolving credit (often stuff bought with credit cards) is still down 11.4% on an annualized basis. However, non-revolving credit (auto financing for example) is up 8.2% on an annualized basis for September 2010.

My take on it is this: while there is still pent up demand on large items being financed at very low and favorable terms, the expensive financing for credit cards is driving down usage. In addition, there are still processing impediments associated with credit card issuance. This is holding down consumption ( )

While organized credit is still constraining consumption in some parts of the US, overall the grey market for credit is flowing freely. In a recent article I read, one analyst put the amount of extra cash being generated in our economy from those not paying mortgages at $2.6 Billion per month. $2.6 BILLION PER MONTH. ( I want to know what happens when banks finally stop the giveaway at the expense of others. Will consumption shrink? Will those paying their mortgages revolt and take their turn at building savings and consuming on someone else's dime? Let's watch this trend carefully.

What a week. In addition to the credit data, we had over 150,000 jobs added by the private sector and the Fed announced that they will pump $600 Billion into the economy over the next several months. What's even more amazing is that this week we saw historic political change and a shift in rhetoric regarding tax cuts. Now it appears that the current administration might just flex on an extension of tax cuts which will help the equity markets. What does all of this mean for our markets and the short run view of our economy?


Here's how I see it:

We have an inflated stock market that feeds into the wealth effect of the consumer. This will drive consumption up in the short run and perhaps even provide a slight lift to real estate assets. This is the hope of the Fed and I don't like to fight the Fed especially in short bursts.

If consumption lifts we could see a ‘follow-on’ effect with employment continuing at 100,000 + improvements. Remember, there are about 125,000 new entrants into the work force each month and 17+ million unemployed or underemployed.

Here is how Jeremy Grantham from GMO sees it:

Jeremy Grantham is a well respected institutional asset manager for the largest organizations in the country. He manages over 100 billion in assets and always has very interesting and perhaps acerbic comments that cut through all the noise and get to the point. Here are a few few focus points from his most recent letter, titled “Night of the Living Fed:”

  • Long-term data suggests that higher debt levels are not correlated with higher GDP growth rates.

stable era and rising debt