The Consumer has run out of options

Good Evening!

Well we saw one heck of a gloomy a market today as sentiment among investors begins to worsen. Every indicator is showing we are heading for a deep slowdown. Overpriced housing, soaring energy cost, flat wages, food inflation, failing banks. Did I leave anything out?

Oil continues to ratchet up and is starting to put a tremendous amount of pressure on your average Joe. The average per capita income is around $37,000/year in this country. After taxes, you figure the average household is taking home $2300 a month give or take.

When your gas tank costs $60-70 a pop, and you fill it at least once a week, it starts to really hurt you in the the wallet. If you fill it up 6 times a month it comes out to about $400 a month. Add your $200 gas or heating bill on top of that and your energy costs start to look like another mortgage payment!

This is what Americans are facing with $130/oil and $4/gallon gas. Credit availability is now dwindling because the banks are struggling to stay solvent as housing delinquencies rise. So where does this leave the consumer?

The only answer to this is the consumer will be forced to STOP SPENDING. The consumer can no longer attain anymore credit, and the house is now dropping in value.

Interest rates going forward will be rising, and until they do, inflation is going to continue to be relentless on the consumer. When rates finally rise he will get killed on the value of his house. Sadly, its a lose/lose for the consumer in either scenario.

We all know how we got here

The party for the consumer started in the mid 90's as we came out of the last housing slump and the tech boom hit. We partied like rock starts as Amazon and Pets.com went to $300/share.

We had a small recession when the music stopped. The Fed then said "Hey don't worry we will help" and proceded to lower interest rates and hold them there wayyy to long. This of course created the housing bubble, and like very other bubble in history, we know how they end.

So whats next?

This is where we need to start to focus. I think its pretty obvious to anyone not involved in the stock market that we are heading towards a big slowdown and a lower standard of living for awhile.

The Fed and Wall St. will fight this until the very end, but history repeats itself and today is no different. The financial innovation of today has gotten much more sophisticated. This has allowed the party to go on for a much longer period of time. However, it will still end up failing because in the end, people are human and we make mistakes.

I think we are heading for another 1070's style stagflation over the next decade as we wring out the greed and fraud of the past 20 years. We will have a huge correction followed by a decade of finger pointing, regulation, and lawsuits that will eventually clean up this mess.

Anyone thinking there will be hyperinflation with people stocking their houses with gold and guns needs to get real. This country always comes back, and I will never underestimate the resolve of Americans or the ongoing greed on Wall St.!!

I believe the next game on Wall St. is already being woven and it will be alternative energy. We need to wring out the losses from todays greed before this game really gets going. Stocks have a long way to fall IMO.

The big players need to take their hits and build capital before starting up the music again. Many investors simply don't realize this. The music always stops before the next game can begin as the losses of the previous game get worked out of the system.

The investors piling into alternative energy right now are playing a risky game because is there is a ton of desperate money out there that is looking high returns. As a result, many of these stocks like First Solar are already bubbly because there are so few areas in which to make money in a market like this. We all know what happens to bubbles now right?

These stocks will eventually get taken to the cleaners because they will get run up by speculators to ridiculous earnings multiples that will be impossible for these companies to achieve. Its too late to get into them now. Think Dotcom part Deux.

You better be nimble if you are going to play with these stocks and commodities in general. They are going to be volatile to say the least.

Bottom Line:

Now is a time for patience and conservative investing. The bull will be back but its going to be awhile. However, this too shall pass and we will slowly begin to recover over time.