Читать книгу Active Investing in the Age of Disruption - Evan L. Jones - Страница 28

If inflating assets was the primary success of central bank intervention, creating a low rate environment to support US consumer spending was the second success. Federal Reserve support has kept the US consumer happy with low rates and flush with credit. Consumer purchases are made with either current income or credit. Current income has not grown and can be driven only by a thriving economy and even then income only grows marginally each year. Credit can be greatly influenced by low rates and new financing strategies. Credit growth has been the primary driver behind the US consumer economy for more than 30 years, but low rates have had a material influence since the 2008 financial crisis. Consumer spending now drives the entire US economy, because US manufacturing strength has waned since the 1990s. Consumer-related companies, regardless of their quality, competitive positioning, or good management, are strengthened by cheap, easy consumer credit. When consumers spend at the levels they have over the last decade, it covers up a lot of operating or capital allocation mistakes made by subpar consumer companies. The success of subpar companies hurts the security selection differentiation contribution to investment alpha. If credit were to slow or rates rise, the weaker companies would falter and good research would be rewarded.

Mortgage rates have been maintained in the 4.0% range for ten years, saving the consumer thousands of dollars a year on mortgage interest. Home buyers generally do not really care what they pay for a house; what they care about is whether they can afford the monthly payment. A $300,000 home purchased with a 90% loan to value mortgage at 4% rather than 7% will save the homeowner about $9,000 per year. Another way to think about mortgage rates and home values is that for every 1% (100 basis points) drop in the mortgage rate a homeowner can pay about $50,000 more for the same house. That same homeowner who bought a $300,000 home at 7% can afford a $450,000 home at 4% mortgage rates. This is both a boost to housing prices and to consumer sentiment and spurs a willingness to borrow and spend. Figure 2.9 illustrates the downward trend in mortgage rates since 1997.

Auto loans, student loans, and credit card debt are the other keys to a confident, spending consumer. Figure 2.10 shows outstanding US credit card debt in millions of dollars. Low rates have created the ability to take on more credit card debt by consumers and the willingness for financial institutions to take more risk. Credit card debt outstanding has increased 300% since the 1990s. Figure 2.10 highlights the huge increase in outstanding credit card debt over both the last decade and the prior decade.

There was a time when consumers routinely paid cash for automobiles, then three-year auto loans were extended to five years to spur sales by lowering monthly payments. Today seven-year loans are very common and zero percent financing is a common selling point for auto companies that have created financing subsidiaries that would not exist if the markets were not willing to take risk in a search for yield. Student loans have delinquency rates over 50% and many students expect (hope) their loans will simply be forgiven by the government, which given the importance of consumer spending and avoiding deflation may be a likely outcome.

FIGURE 2.9 30-year average US fixed mortgage rate (1997 to November 2019)

FIGURE 2.10 US outstanding credit card debt (1997 to October 2019)

In total, the average US consumer has benefitted by approximately $1,000 per month since the 2008 financial crisis due to low rates and easy credit access. This is massive stimulus considering the average median income in the US is approximately $60,000 and has barely risen this decade. An increase of $1,000 after tax per month is more than a 25% after-tax income increase for the median household. If mortgage, auto loan, and credit card rates were to increase back to historical levels, consumer spending would drop precipitously causing significant problems for the overall economy.

The increased after-tax income has been spent in the 2010s driving the S&P 500 consumer discretionary sector up over 400%, as seen in Figure 2.11. This gain includes the many retailers that have been disrupted due to e-commerce competition. If there had been any recession or consumer spending slowdown during the last ten years, dozens of additional retail chains would have closed their doors. In the 2020s decade, there will be many more retail store closings, as both disruption and a slower economy combine to add stress to the retail industry.

Americans have been the beneficiaries of all this credit through increased consumption. From the perspective of an investment manager all consumer-related companies have been major beneficiaries and have had success beyond historical standards. This, again, lowers the contribution of security selection due to their being little benefit in avoiding weaker companies. Going forward, any changes in the cost or accessibility of consumer credit should be closely monitored by investors. Low rates and credit accessibility have pulled consumer demand forward, as buyers take advantage of cheap credit opportunities. At some point in time, there will be a contraction in credit accessibility or consumers will become more concerned about their future earnings potential and consumer spending will slow from these historically high levels.

FIGURE 2.11 S&P 500 Consumer Discretionary Sector Price Index (2009 to October 2019)

The US consumer has been the most resilient part of the American economy in the 2010s buoyed by the central bank–driven low rates and credit accessibility. As evidenced in the University of Michigan Consumer Sentiment Index (Figure 2.12), sentiment rose from 2010 to 2016 and has now plateaued. Sentiment is cyclical and does not generally last for more than a decade. Eventually consumer sentiment and demand weaken. Consumer companies will face slowing revenues, increasing margins, and industry disruption after a decade of strong consumer spending and cost savings driven by the globalization of supply chains.

FIGURE 2.12 University of Michigan Consumer Sentiment Index (1994 to October 2019)

The power and breadth of low rates has clearly been the most important driver of financial markets in the 2010s, but technological disruption is a close second, and there is a synergistic relationship between the two most prominent forces of the 2010s.