It's not a popular idea right now as pundits predict a full economic recovery. But history and current trends suggest a different possibility that investors should prepare for.
Consumer demand isn't coming back. Not anytime soon. Not for a decade or more. Not anything like the levels of 2006 or 2007, before the global economic crisis hit full force.
I know that's not the conventional wisdom right now.
You've heard the current version of history over and over. Consumers got ahead of themselves in the past few years and spent money that they didn't have by running up balances on their credit cards and treating their houses as ATMs.
The consensus opinion on Wall Street, in Washington, D.C., and on Main Street is that it will take some time, maybe as long as two years, to work off the excesses of the past couple of years. And then consumer demand will return to something like the level of the years before the global economic crisis. Consumers may not go back to spending like it's 2007, but they will spend like it's 2006 or 2005 or . . .
Frankly, I don't think anyone is terribly convinced by that story. It's just that the alternative is too grim to contemplate. Most folks in the financial-advice industry and most politicians in Washington would rather go whistling past the graveyard and hope nothing bites them.
But I think there's a good chance this story and this reading of history are wrong. Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 304, 314, {"configCsid": "MSNmoney", "configName": "player-money-4x3-articles-inline", "player.vcq": "videoByUuids.aspx?uuids=6c7fea95-0b33-4693-95a2-18c2a1f00a04,e893d2ea-4b88-4e74-b2cf-5ec27cfafc40,39a17fd9-8680-4d21-8ab9-1dfcd5474432,140cbaf3-440d-412f-8660-6ca6feeeaf7a", "player.fr": "iv2_en-us_money_article_Investing-JubaksJournal-inline"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=6c7fea95-0b33-4693-95a2-18c2a1f00a04,e893d2ea-4b88-4e74-b2cf-5ec27cfafc40,39a17fd9-8680-4d21-8ab9-1dfcd5474432,140cbaf3-440d-412f-8660-6ca6feeeaf7a;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');Not a certainty, mind you, but a very good chance. And if you don't at least consider the possibility that the story and the history are wrong, you can't possibly hope to protect your portfolio or come up with a strategy to grow its value.
I think there's an alternative history of the global consumer that makes waiting for demand to come back to "normal" absolutely wrong. It's at least as likely -- more so, I think, but you decide after you've read my arguments -- as the mush that clogs the political and economic discourse of the moment.Demand: Gone but not forgotten The result of investing in anticipation of demand coming back to pre-crisis levels would be absolutely painful if it's wrong. Stop worrying about whether the current downturn will become a full-scale correction of 10% or worse. We've been through that. We know -- sort of -- how to deal with it.
But if global consumer demand isn't set to bounce back, then we as investors face a huge challenge. And we'd better face up to it and formulate some strategies for coping with it, even if it's not a certainty.
I'm increasingly convinced that the behavior of global consumers in general, and of U.S. consumers in particular, over the past 20 years was an aberration. And that what we're seeing now isn't the beginning of a gradual recovery to the spending levels of the years before the global economic crisis but a return to the long-term spending (and saving) trend that stretches back to 1945.
If that's the case, the global economy is indeed awash in excess manufacturing and service capacity because companies and industries had projected future consumer demand by drawing trend lines from consumer behavior over the past couple of decades. They then built factories and service networks to meet that projected demand.
The global economy isn't going back to that trend line. Over the next decade or more, industry after industry isn't going to gracefully absorb that temporary extra capacity. Instead, the global economy is in for a decade or more of tooth-and-claw fights for market share, bloody consolidation as industries are forced to radically shrink capacity, and an increasing number of the walking dead that are kept alive only by large infusions of capital from national governments.
This isn't the first time recently that I've said this.
How to invest during a recession
I've referred to this scenario in a number of recent blog posts, including one in which I even suggested a couple of ways to cope with this scenario as an investor. But a recent piece from global consulting company McKinsey fleshes out some of the details of this alternative history. (You can find the article at McKinsey's online journal, the McKinsey Quarterly.)Like many other consultants these days, McKinsey has been busy asking consumers about their spending plans. In March 2009, for example, 90% of the U.S. households McKinsey surveyed said they had reduced their spending because of the recession. About 33% of respondents said they'd reduced spending significantly. Roughly 45% of those who had reduced spending did so because of necessity. More than half of those who said they had reduced spending said they planned to keep their spending down after the recession.
Consumers are not only spending less; they're also borrowing less and saving more. In the quarter ending in June 2008, net consumer mortgage borrowing turned negative for the first time since 1946. In March 2009, the personal savings rate reached 5.7% of disposable income, a 14-year high. That still lags the post-1945 average of 9%.
Continued: Different, sure, but how?More from MSN Money and MoneyShow.com
Smooth sailing now; icebergs aheadA 'lost decade' for investors? Not for allAnarchy in the UK (and US, too)?Jubak on video: The new, 'free' economyAnother lost decade for investors?Jubak on video: A different way to look at banks1 | 2 | 3 | next >
Rate this Article Click on one of the stars below to rate this article from 1 (lowest) to 5 (highest). LowThank you for rating.UGR('ratCntrl')High var avgRating=0;avgRating=8.201093; if(avgRating!=0){avgRating=avgRating/2;avgRating=Math.round(avgRating*100)/100;var sDisplayText="Average rating: " + avgRating + " from ";var usersCount=915;sDisplayText = sDisplayText + usersCount;if (usersCount==1)sDisplayText=sDisplayText + " user";else sDisplayText=sDisplayText + " users";avgRatingElem=document.getElementById("averageRating");avgRatingElem.innerText=sDisplayText;} View all top-rated articlesE-mail us your comments on this article Discuss in a message board Stock PicksJubak's PicksCheck out Jim's top stocks for the next 12 months.
Jubak's How To StartRead how to invest with Jubak's showcase portfolio.
Jubak Picks 50Follow the long-term portfolio from Jim's book "The Jubak Picks."
Dividend stocks for income investorsSee Jim's new portfolio to help navigate the treacherous interest-rate environment.
Connect with JimBecome a fan on FacebookSubscribe to his e-mail newsletterDecision CentersStart InvestingMutual FundsFind Hot StocksSimple StrategiesPower ToolsInvesting for IncomeReal Estate InvestingRecent Articles by Jim Jubak3 stocks whose time has come 01/25/2010Smooth sailing now; icebergs ahead 01/21/20103 stocks, 3 sectors for tough times 01/18/2010More...Jim's Most Recent Top Stocks PostsHeaded for a 10% correction?Up in the air in ChileCongress whiffs on the deficit -- again!Fund data provided by Morningstar, Inc. © 2009. All rights reserved.StockScouter data provided by Gradient Analytics, Inc.Quotes supplied by Interactive Data.MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.Msn.Video.createWidget('Gallery8Container', 'Gallery', 500, 230, {"configCsid": "MSNmoney", "configName": "gallery-money-article-site-wide"}, 'Gallery8');msft.msn._ic.cid='ajdca68cgxbxkvmm7rspk3aewb2utmtn';msft.msn._ic.pst=false;msft.msn._ic.pgn=1; Join the discussion!Add a commentShow commentsSort by:Newest firstOldest first_uc2f12('iucGo');1 - 10 of 102PreviousNextLeffin Atchoo #1Thursday, January 28, 2010 9:05:14 PMYOU THINK THINGS ARE BAD NOW!!!!
WAITE UNTIL NEXT YEAR!
REMEMBER CASH CASH CASH CASH!!!
ReplyReport AbuseA60750 #2Thursday, January 28, 2010 9:24:50 PMIt's simple: My 25-year-old son got laid off and is still unemployed a year later. My 29 & 33-year-old sons had their hours cut in half. My discretionary money goes to help them meet living expenses (they live in another town). So it's an easy answer: Jobs, jobs, jobs. No extra purchases for me, my sons, or their families until the economy turns around. We do not borrow; we have always lived within our means, even if it means cutting way back.ReplyReport Abuselarryjjj #3Thursday, January 28, 2010 9:37:44 PMjimmy, jimmy, jimmy........you just give people too much credit. most are stupid and will continue to spend more than they make. I think your crystal ball is broken!ReplyReport Abusedeeeeman #4Thursday, January 28, 2010 9:54:05 PMGood article, Jim. I respect your independent thinking.You are truly knowledgeable and wise. The reason we don't comment much on your column is that you are usually so sensible we don't have anything to add.ReplyReport AbuseSan Diego cardholder #5Thursday, January 28, 2010 10:01:32 PMIf your prognostication is correct, then we ought not look upon 2010-2020 as a "lost decade", but rather as "the decade stocks went on sale". With careful picking and choosing, and a willingness to buy (and sell as needed), the careful investor can take advantage of fire-sale prices, and amass a sizable nest-egg at the lowest possible cost. If stock prices remain low, and dividend prices remain stable or rise, net yield over the decade should be sizable for the long-term investor.
Best of all, as many of the dogs fall by the wayside due to their inability to adapt, consolidation also means that stock ownership in marginal companies becomes ownership in the purchasing corporations that swallow them up at no cost to the investor.
Many of the weakest corporations have already gone belly-up, and the rest of the weaker performers are scrambling to adapt and repair their business models. Meanwhile, those already in a good financial position, with an affirmative business plan, will continue to improve their business models to increase their market share.
I don't see this coming decade as a time to be afraid; I see it as a once-in-a-lifetime opportunity to build my personal wealth. Cautious but steady investment is my personal plan.
ReplyReport Abusecragig #6Thursday, January 28, 2010 10:16:08 PMI put my faith in basic human nature, fear and greed. Nobody's spending because nobody's spending. When everybody's spending, everybody's spending. Watch, in a few years things will take off again on the next big bubble caused by ? People will be buying big houses and driving big SUVs again. Then after a few years there will be another crash. Round and round, history is full of booms and busts of all kinds. It is normal, humans have such a short memory and even if they remember, it don't matter because fear and greed is built in. It overrides everything.ReplyReport AbuseAtheist25 #7Thursday, January 28, 2010 10:25:01 PM
Jim, you are my favorite writer. I truly hope you are wrong. But, as usual, you keep speculation to minimum and just lay out the possibilities with sound logic.
In my opinion, layoffs are leading to a double dip. We need to stop saving the world and worry about home. Instead of taxing business at home so high, we need to tax goods and services coming from other countires. Our businesses need at least an even playing field. I don't think Dem or Repub will give that to us any time soon.
ReplyReport Abuse2clear4u #8Thursday, January 28, 2010 10:32:18 PMbuy now no interest for 10 years there is no limit on the amount you can purchase. wow wow this will get it going wow wowReplyReport AbuseWho Is Durin #9Thursday, January 28, 2010 10:32:44 PMThis is one of the best articles I have read in a long time. If the common man, both Democrat, Republican, and Independent doesn't understand what the FEDERAL DEFICIT & FEDERAL DEBT is going to do to all of us, we are doomed. Why should we spend our money when our elected government is burying the currency and hoping to ignite inflation. How else do you pay someone else back these enormous sums, except with worthless money. If someone was able to put Bernanke under a lie detector, we would be scared, so what else do you expect him to say. The current problem they have though is: so many American families are going under, they can't get ahead of the curve. And those us us that still have jobs and equity are not going to spend money till they eliminate government pensions and create a large government surplus. (Ha Ha) Best wishes to all, and prepare for the worst.ReplyReport AbuseDavid in Kenosha #10Thursday, January 28, 2010 10:45:27 PMA60750: your son's solution is simple. If nobody has needed his services for over a year, he needs to stop sitting around and waiting for "the government" to "create" him a job, and go out, get retrained in a skill that is employable and get back in the workforce. There's 10% unemployment, but it seemd that 90% are "crying" for the government to "create" jobs without spending a nickel. Get off your lazy conservative whining butts and get yourself retrained or re-educated for a new job that employers want. Or start your own business. But stop whining and being so hypocritical. People demand less government, but they want it to do more for them. Insanity.ReplyReport Abuse1 - 10 of 102PreviousNext_ucf13('0'); _iuc2Om1('MSNPortalInlineComments','Initial_Load_Comment_View','http://articles.moneycentral.msn.com/Investing/JubaksJournal/what-if-consumer-demand-is-dead.aspx?page=2&','en-us');Are you sure you want to delete this comment?Report AbusePlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease notify us using the Report abuse form below. We will investigate your report and take appropriate action against offenders. We report all illegal activity to authorities.CategoriesSpam or advertisingChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatOtherAdditional comments(optional)100 character limit To add a comment, pleasesign in/*MSN PrivacyLegalAdvertiseRSS Read Full Article »