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Significance of consumer deleveraging


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Given that consumer spending represents 70% of the GDP here is a rather sobering view on what could (or is that will) happen as consumers begin to deleverage.




For some time it has been our view that the recent recession, unlike all other post-war recessions, was caused by a credit crisis, and that it would therefore be followed by a series of weak recoveries and frequent recessions until consumers successfully deleveraged their exceedingly heavy debt loads.  That scenario now seems to be happening in accordance with our projections.  A statistical economic recovery that was already far weaker than average has decelerated even further and the ECRI weekly leading indicator index strongly suggests that another recession may be in store.


Consumers have only begun to cut back on their severe debt burdens, and the process will take a number of years.  Household debt relative to GDP soared from a range of 43% to 49% in the 20-year period between 1965 and 1985 to a peak of 97.3% in 2009.  As of March 31st (the latest data point) this dropped only slightly to 92.7%.  To provide some more perspective, Ned Davis Research estimates the mean to be 54.2% over the past 58 years.  The percentage climbed gradually to 65% in 1998, and then really accelerated to its recent peak.


To be conservative, let's assume that the household debt/GDP ratio falls back only to the 65% level of 1998 rather than to the lower level between 1965 and 1985 or to the long-term mean.  Under that assumption household debt would have to be pared back by about $ 4 trillion (from the present total of $13.5 trillion), an amount that constitutes about 40% of current consumer expenditures.  While this could be accomplished over a number of years, it can readily be seen that the deleveraging would create a highly significant drag on consumer outlays for an extended period.  Since such spending accounts for some 70% of GDP, this creates a serious drag on the overall economy as well.


not very Cheery!!




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I think that's what most people on this board are expecting too. I believe that it will take a while and that our expected ROE should be much lower then pre-crisis levels up until the leverage gets to a normal level.


Here is my cheery opinion tough. Companies in a lack of good opportunities will most likely increase their dividends/buybacks and reduce their investments. I see it a shareholders cash return on their investments.



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I would put far more trust in the dating skill of the main body for dating recessions than the one quoted in that article (http://www.nber.org/cycles.html#navDiv=6) Notice they have not called the end of the recession that started in 2007 yet while the article is already talking of a new recession - how can you have a new one when there is doubt the original one has ended yet?


"Q: Why did the committee not declare the end of the recession when in met on April 8, 2010 even though,

as it noted in its announcement, most indicators have turned up?

A: The committee does not judge in real time. Rather, once all the relevant data are in and the early revisions have

occurred, it looks back on history and determines in what month the economy reached bottom and began to

expand again. The committee also has to guard against the possibility, even if very small, that what seems to be

the beginning of an expansion is actually just an interruption in a longer contraction."




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I would also be concerned with the growing disparity between the rich and poor in America.  Poverty here has hit a new 40-50 year high.  And we all know about the faltering middle class.  Will the trend continue?  That depends on the economy, obviously.  What's interesting to me is even with the contraction of credit, the economy has posted gains in real GDP.  This is impressive to me.  In the past recessions, GDP increased along with credit growth.  So, if credit can be expanded, I believe the U.S. should see significant gains in GDP.  And credit expansion has seemed to turn the corner. 



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