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A year ago this month I wrote As goes Starbucks and Home Depot, so goes the nation, a play on Dwight Eisenhower's “As goes General Motors, so goes the nation.” It was my notice of the impending death of the Monthly Payment Consumer, the backbone of the 35 year American Consumer Fantasy, and the retailers that both satisfied the consumer demand and supplied a steady, albeit modest, income for the innocent young and the older and savings poor. Starbucks and Home Depot were two short fish on the hook. Two big ones got away, but there are more where they came from.
How has Starbucks fared since Oct 15, 2007?
Since Oct. 2007, off 75%
The cloying appeal of sitting with strangers in a space modeled after the living room set from Friends, sipping coffee you can make yourself for a quarter of the price and drink in the quiet and comfort of your own living room, was lost around the time real disposable incomes started to plummet Q4 2007.
How about Home Depot, that mecca of cash-out refi spending during the housing bubble where home flippers and mortgage owers expressed their steadfast commitment to the fiction of continuous home price inflation by roaming the isles in roiling herds, paying prices for kitchens and bathrooms that exceeded the median price of an entire home ten years earlier.
They were told, "It'll pay for itself!" Not quite. March 2006 we warned that all home improvements are negative return investments, also known as an "expense":
Here are the home improvement return on investment facts: minor kitchen face lift: 81%; additional bath: 72%; bathroom remodeling: 84%; family room addition: 71%; kitchen remodeling: 70%; master room addition: 91%; attic bedroom: 65%; two-story addition: 62%; siding replacement: 60%; window replacement: 56%; deck addition: 54%; home office: 65%. Best case you lose only 9% and worse case up to 46% but in no case are you going to make money. Oh, by the way, these data were collected when housing prices were rising.
These economics hit mortgage owers like a ton of bricks a few months before we started to play taps for the Monthly Payment Consumer. 
Since Oct. 2007, off 57%
The stock is holding up better than you might expect, likely due to demand for material needed to convert MacMansions into multifamily homes so renters can help defray the un-affordable mortgage, a development we saw coming in January 2005, plus the do-it-yourselfers trying to save a few bucks rather than pay Joe the Plumber his $22 per hour.
Two that got away
Those were two good catches. What did I miss in my forecast of the demise of the Monthly Payment Consumer?
I should have said, "As goes Starbucks, Home Depot, General Motors, and MGM, so goes the nation.”
Since Oct. 2007, off 87%
When an indebted Consumer is facing unemployment, the last thing on his or her mind is committing a big chunk of the next four to six years' household cash flow to a poorly engineered American gas hog. The gas hog manufacturer's financing arm, not thrilled about lending money to the indebted, soon to be unemployed Consumer, has raised lending standards so high that fewer than half as many applicants can make the hurdle as could this month last year.
In retrospect shorting GM was like shooting fish in a barrel. But the really big one that got away was a slew of stocks that could be caught like school of salmon with a stick of dynamite.
"The only way to make money in a casino is to own one."
- Steve Wynn, founder of Bellagio and the Mirage
- Steve Wynn, founder of Bellagio and the Mirage
I don't envy him. In my August 2007 keynote I put in a strong plug for gold the day before gold broke out of its $650 rut and never looked back until making a run for $1000. Peter gets the other end of the stick; everything is down in today's cold, dark post-nuclear investment climate. (See Janszen's Hard Assets Las Vegas Conference 2007 Keynote Presentation $ubscription.) Of course, we at iTulip don't hang onto gold through the inevitable disinflation to make money, we keep it to hedge the risk that our government will reflate the economy by means that cause the currency to suddenly weaken, and are unlikely to send out a memo before they do.
That summer Las Vegas was crowds speaking Japanese, Mandarin, German, French, any language not denominated in dollars, all enjoying the great American fire sale. I recall thinking, "What happens when the recession goes global and all these tourists stay home?"
Since Oct. 2007, off 90%
Eighty five per cent of Las Vegas visitors gamble and they lose an average of $665 each. The gambling industry and the media that advertises, I mean, reports on it has for years claimed that casino gambling is "recession-proof" as if the the Monthly Payment Consumer cannot possibly find more pleasant and less expensive entertainment than dropping six bills in a bright, noisy, airless, windowless adult amusement dungeon. One look at MGM's stock tells us the Consumer gave up on gambling at precisely the time of his retreat from GM, Chrysler, and Ford. Anyone for a spread bet on the chances of a government bailout of MGM versus GM?
Moral: When The Monthly Payment Consumer goes into hibernation, the credit-based FIRE Economy sputters. But when the 35 year American Consumer Fantasy comes to an end, you cannot be too pessimistic about the prospects for businesses that depend on non-essential household spending.
I'm often asked, "How will we know when the transition out of the American Consumer Fantasy Economy is over?" As I explained in Upside Down to Right Side Up April 2007, when the upside down relationship between savers and lenders reverses.
Upside Down Signs
- Lenders pursue borrowers
- Lenders mail more than 4 billion credit card solicitations per year, often to the least credit-worthy borrowers
- Lenders prefer borrowers with poor credit
- Borrowers who repay are "deadbeats"
- A mortgage is "wealth"
- A house is an "investment"
- Revolving credit is used to finance all purchases, such as food and clothing
- Banks need to be given specific guidance by the FDIC "To make reasonable efforts to determine a borrower's income"
Right Side Up Signs
- Borrowers pursue lenders for loans
- Lenders mail credit card solicitations per year to only the most credit-worthy borrowers
- Lenders prefer credit-worthy borrowers
- Borrowers who do not repay are "deadbeats"
- A mortgage is a debt
- A house is a place to live, the price rises no faster than the inflation rate
- Revolving credit is used to finance major purchases, such as autos
- Banks don't need to be given specific guidance by the FDIC "To make reasonable efforts to determine a borrower's income"
In the mean time, if you are looking to short what remains of the fantasy economy, there's plenty of fish in the sea. Cast a wide net. Just make sure you don't pick anything that's "too big to fail" and get caught holding a whale that Paulson and Pelosi decide to put into the US Treasury's Aquarium Museum of Extinct Businesses. If you do, you'll lose twice: the money you lost betting against the government and the money the government took from you to bail out the company you were shorting. To limit your risk, stick with ETFs and companies that are too small to bail.
iTulip Select: The Investment Thesis for the Next Cycle™
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