A couple of weeks ago I was out shopping for a car. I wanted to find a cheap, decent used car that would take me to the office and back. Boy was I frustrated as I went from dealer to dealer without result, there was nothing within my budget ($5000); and you should know that where I live, there is a car salesman every hundred feet.
This made me more attentive to the other cars on the road. The more I observed, the more amazed I was; most Americans drive an almost brand new car. How is that possible?
§ If the US consumer was a country, he would be twice the size of the Japanese economy, triple the size of the German, and four times the sizes of UK and France. Almost 20% of the World’s GDP.
§ 10% of all American house owners have negative equity value, and it’s projected to go to 30% in the near future. Even if they sold the house, added the flat-screen and the Jacuzzi, they still wouldn’t be able to pay off their mortgage.
§ Mortgage debt is 70% of GDP (Only the UK is worse with 80%, no other country is even close.)
With that in mind, I understand why the market was happy with today’s 0.2% (MoM) increase in retail sales. Although we’re not buying a lot more, we’re at least not buying less. However, in today’s economy there is no silver lining, it is all because of oil prices. Take away gas and food and we’re looking at a 0.1% decrease; and no wonder IKEA is cutting price, furniture spending is down 10.2% (YoY). Clothing -2.0%, motor vehicles -6.8, building materials -9.6%, and… you can see where this is going.
But what about the stimulus package, tax rebates, and lowered Fed funds rate? Hold that against a deteriorated consumer confidence index (University of Michigan index at 63.2!), an accelerating unemployment rate, and an ongoing credit crisis (home equity lines are cut, credit card holders have their credit substantially limited, and still negative savings). Would you go out and buy another SUV?
My take is that we have, by far, underestimated the importance of the US consumer. The ripple effect we may have if spending goes down in the US can get nasty for all of us. I don’t know from the top of my head how much exports we have to the US, but I assume it’s enough to be frightened. And it’s not only that the US will buy less from us but also that they will buy less from Germany (among others), that in turn will buy less from us.
For tomorrow I hope we can hold on to that positive sentiment we saw in the end of the trading day. If the PPI (14:30) comes in soft, it may get even better. OMX is bound to end a day in positive territory soon, and tomorrow might be it. I was lucky not to get filled when I tried to buy back my bears seconds ahead of the closing bell.