Pandora's Box

Let it never be said I am not a contrarian at heart. I have the most annoying habit of responding to most statements with, "why?" This market and economy is presenting me with a quandry. When all are abandoning ship I am looking for hope. Afterall in mythology when Pandora opened the box letting loose upon the world all the ills to come, one item remained in the box, hope. So the contrarian in me is looking for hope and the harder I search the more elusive it seems.

We are in a new secular market that will alter behaviour not just of investment but also of personal behaviour of years to come. The investment strategies and tactics that worked for years, need to be dismantled, cleaned and set aside. I feel the danger in saying, "this time it's different." I have never said it before. Not in the asian meltdown of the late nineties, not in the dot com bubble, but now, I relent.

Hope springs eternal, but I don't like the data. Cyclical aspects of our economy that have been predictable are out of sync and the relationships of cause and effect that held for more than a half century are breaking. Let me explain.

In each of the recessions of the past sixty years certain truths held firm. Increases in inflation brought about accompanying decreases in real personal consumption and vice versa. The connection held true since 1950, until now. Last year as CPI fell dramatically, consumption fell even faster.

In a period of falling prices, by definition, purchasing power increases. But real consumption fell at a pace unseen in post war United States. The one-two punch of job losses and credit curtailment came together in a perfect storm.

Recovery in past recessions came on the back of consumer spending. Unfortunately the american consumer is tapped out.



By two separate measurements, the tail wind of consumer spending looks like it is shifting to a headwind as needed savings comes at the expense of spending. Historically consumer spending has run in the low to mid 60%'s. In recent years, however, consumer spending rose to above 70% of GDP. By far the highest in the world. Perhaps even starker evidence is found in that consumption on a national level rose to over 95% of personal disposable income. The reversion to more sustainable levels of consumption will result in higher savings and a significant drag on returning the economy to its previous path of annual increase.




This secular shift in aggregate economic behavior will have an effect for years. Investors and savers will find that opportunity and safety will exist in new strategies.

John Barnyak
President