Taking Stock of Bonds
November 18, 2008
Cheap Chic: When Frugality Becomes Trendy
Frugality is the new "in thing."
A recent New York magazine cover story gave tips on how to live thriftily in Manhattan. Soon after, The New York Times offered a similar take on how the well-heeled were cutting down on expensive goods. A local radio station regularly announces where to get the cheapest gas (a segment which is, interestingly, sponsored by a high-end car maker).
The culture of thrift is not just in New York City. It has already been recorded and espoused in newspapers and other media throughout the US. Until last summer, newspaper columns and television programs were filled with tips on how to redecorate and update furniture or homes, even when they did not need any remodeling. Some major newspapers even produced glossy magazines aimed at big spenders with little in the way of true editorial copy, but with plenty of glossy photos. Eating out was routine and so was travel overseas.
Now, ostentatious living is out. So to meet that change in attitude among consumers there are numerous tips on how to use and reuse necessities longer in an effort to save money. More walking is being done and less driving. There is less flying and more use of trains, and even buses are packed.
The cuts in spending are related, of course, to less credit being available and a rise in unemployment. In some cases, though, the drop in spending on goods and services may not be tied to anything but uncertainty. Once that niggling feeling of wariness about the US economy settles in, more consumer decisions are driven by fear. What was once a necessity is no longer truly needed and that means a great deal can be cut back on.
In 18 months consumers have seen things happen to the US economy and its banking system that were unimaginable not long ago, only stoking the anxiety. Various data illustrate the change in spending patterns. Even Starbucks – where you can buy a cappuccino for the price of two shares of Ford or GM, depending on what day anyone believes a government bailout is in the offing – has seen its same store sales fall off.
So what does this mean for investors, Fed policy makers or anyone still lending?
The massive drop in consumer spending means loans made to corporations in recent years may come under greater stress because not only were their terms easy and breezy, they were made on the assumption that consumers would continue to readily open their wallets and pocket books. That may explain why the Ebitda requirements of loan covenants are being broken routinely in recent months and why more companies are asking lenders forbearance. It also may explain why one bankrupt retailer just gave up and actually liquidated ahead of the Christmas shopping season.
What it means for the Fed is that spurring economic growth may not just mean cutting rates. And for investors there is the tough decision of understanding which company's products fall under the category of "absolute necessities." Some companies may have to jump on the frugality bandwagon and use it to sell their goods and services.
“Fashions are clearly changing toward frugality and sustainability,” Merrill Lynch's David Rosenberg noted. “We are detecting early signs that a new pattern of spending behavior is taking hold in the aftermath of the housing, credit and oil shocks: it is called frugality.”
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