State of the Consumer: History 101

One thing I’ve learned at Research Edge is how to be a student of history, and understand how the sins of the past shaped the challenges we face today. The evolution of the wealth effect is classic.

One of the biggest drains on the consumer today is the fact that the personal savings rate is hovering near zero. Yes, we debate academically as to how it is calculated, and how it could technically go below zero (which it has). But let’s look at the big picture here. The chart below says it all.

1. Starting in the Regan/Volcker years and all the way through the end of the Clinton era (when the tech bubble burst), we had a 20-year uber-bull market for equities driven in part by systematic cuts in interest rates to drive consumer spending and keep the economy cranking forward.

2. Once we saw George W. come into office, the equity markets took a pause, but the housing market went parabolic.

3. Put those two together and what do you get?? What I’d consider a 27-year wealth effect. By the way, that’s within 5 years of the average age of a Wall Street analyst. Sad.

4. While this freight train rolled on, the consumer took down the savings rate from the peak of 11.2%, to less than 1% today. As a frame of reference, China’s savings rate is near 40%.

5. Now what? Housing values are deflating, and equity markets do nothing but go down. My sense is that consumers take whatever they can and actually save a bit for once. In fact, it was fascinating to see that the tax rebate checks that hit this summer went almost entirely to beef up savings (the rate temporarily bumped to 2.5%) and repay debt.

As sure as the sun will shine, this savings rate needs to head higher. The order of operation will need to be 1) survive (buy essentials, etc…), 2) pay down debt/save money, 3) buy a $500 cashmere sweater at Saks.

NKE: Ultimate Pricing Power

Nike has taken ‘surgical pricing’ to the tune of 5-10% -- but the 5,000% increase on a new Nike Dunk takes pricing to a new level. $5,405, and dipped in gold. A better return than being levered long.

Eye on Free Market Capitalism...

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October 9, 2008

Capitalism Without Guilt: The Moral Case for Freedom

Who: Yaron Brook, executive director of the Ayn Rand Center for Individual Rights

What: A talk defending the profit motive and presenting the moral case for laissez-faire capitalism. A Q&A will follow.

Where: National Press Club, 529 14th Street NW, Washington, D.C.

When: Wednesday, October 22, 2008, at 6:30 PM

The public and media are invited. Admission is FREE.

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Morgan Stanley (MS) confirms their clients have a say...

In our 9/17/08 note (Morgan Stanley (MS): "Rumors and Fear"), we called out the obvious that John Mack's blaming of the short sellers for his stock price decline was ridiculous and alarmist all at once. Prime Brokerage clients (hedge funds) don't like to be blamed for being the customer, nor do they appreciate having the CEO of MS engineer a short selling ban alongside his cronies at the SEC.

The result of his reactive behavior? Here's what MS disclosed on this front in their 10Q this week: "Subsequent to August 31, 2008, the company’s prime brokerage business experienced significant outflows as clients withdrew some of their cash balances and reallocated positions. These outflows will negatively impact prime brokerage’s operating results in Q4 of fiscal 2008."
  • Our price target for MS moved down a penny from Thursday. We're now at $9.02/share.
(Chart courtesy of

GE's CFO on Goldman and Morgan Stanley...

(Reuters) - "If Goldman and Morgan Stanley became bank holding companies, certainly you'd expect us to at least evaluate what would that mean for us as a backup alternative to whatever we're doing."

Goldman (GS): Let's Have A Town Hall Debate...

Goldman conveniently waited until after 5PM on a Friday of the worst week in the US stock market since the early 1930's to file a mixed shelf registration of "indeterminate amount". Marcus Goldman must be rolling in his grave.

Investors, including Warren Buffett, and clients alike must watch what GS and MS do, not what they say. Never mind this ridiculous notion that it’s the evil doer short sellers at fault. That is both alarmist and un-American. Bear, Lehman, Merrill, Morgan, and Goldman all said they didn't need capital, remember? Earlier this week, Lehman’s Dick Fuld appeared in front of the American people. He still couldn’t find it within him to take on 100% of the accountability for Lehman’s demise. If you guys are going to get paid to wear the ‘C’ on your jerseys, let’s get real.

Research Edge is built on 3 core principles: Transparency, Accountability, and Trust. I am issuing an open challenge to the CEO's of these two companies, Goldman Sachs and Morgan Stanley, to come to New Haven, CT, and have a Yale student organized town hall meeting on those three items and how they see them fitting into their current business model. CNBC can televise it, instead of wasting people’s money and time with “Fast Money”. We can start at 6PM, promptly.

Times are changing. Americans are tired of hearing about a Japanese bank taking a stake in Morgan Stanley. How many press releases were issued this week on that front? Too many.

I am sure Americans would appreciate these highly paid CEO's to take a stake in American principles. Crisis creates opportunity, here’s yours guys. Give us a call at , and we’ll set up the debate.

Keith McCullough

(chart courtesy of

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