Some economists have mused about the way spending behavior changes following a recession. The last couple of recessions were fairly mild and didn’t seem to change consumer behavior at all. But people who lived through the Great Depression in the 1930s did change their spending habits, many of them permanently. The experience of the Depression was so vivid and their fear of a recurrence was so big that they were essentially scared into becoming savers.
I’ve seen a couple of recent articles about consumer spending. One article in the Washington Post points out that debit card spending is rising at the expense of credit cards. Consumers are choosing only to spend what they have and are not comfortable extending themselves on credit any longer. Another article in the Wall Street Journal talks about the deleveraging process that consumers are going through. For the first time in a long time, consumers are paying down their debt rather than adding to it.
When there is a regime change like this, there will inevitably be investment implications. As in the 1930s, things might never go back to the way they were before. (Consequences seem to be like matter—they can neither be created nor destroyed. For every obvious consequence, there seem to be a dozen that are unforeseen!) Perhaps we will see a recovery led by business and industrial investment for a change, because consumers will still be busy rebuilding their balance sheets. Maybe we will see more growth in sales for small-ticket items rather than for big-ticket items. But beyond any obvious guesses I can make, there will be hundreds of other implications, both macro and micro. If domestic consumer spending drops for big ticket televisions, for example, what happens to the economies in Asia that survive by exporting them? What happens to their currency vis-a-vis the dollar? How does it affect their domestic politics and what kind of political leaders come to power overseas? And how does that circle back to affect us?
The necessity for an adaptive investment process is really highlighted under these conditions. With so many variables and so many unknowns, it’s really impossible beforehand to pick out what investment themes might work going forward. Our systematic relative strength process will continue to adapt as the themes change.
