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Wednesday, December 29, 2010

Notes from the USA (Dec 2010) – a guest post

Despite QE2 and the combined efforts of Bernanke, Geithner and Obama, the American consumer is not spending as much as is required for the US economy to get back on track. Corporations are sitting on cash but job openings are few. Consumers have become debt-shy and are using debit cards or cash – as KKP elaborates in this month’s guest post (written before the Christmas holidays).

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How’s the 2010 Shopping Season shaping up in the US?

Santa is out there packaging the gifts for all the deserving kids……How good is he going to be this year? Well for Santa to be good, the parents have to be out there shopping and hiding the gifts in the attic or basement!

People who live in Asia are very used to using cash, although some have started to leverage the ‘other people’s money’ concept. In the US, consumers are all used to leveraging the plastic money and soon moving to electronic money. It seems that with all the debt default issues of the past three years, and the advent of ‘debit’ card, people are shunning credit cards like never before in history. Card issuers are fighting back with huge incentives to get people charging again, as they used to do pre-2008. So far in 2010, it’s not working!

The New York Times reports that the lowest percentage of shoppers in the 27-year-history of a national survey have used credit cards over the Thanksgiving weekend (Nov 21 to 28), while the use of general credit cards like Visa and MasterCard fell 11 percent in the third quarter from a year earlier, according to the credit bureau TransUnion. One of the biggest reasons developing this season is an extremely cold winter season. Temperatures in the upper northern part of the US is between -20 degree and 0 degree Centigrade (bone chilling cold). My friend who called me from the mall today told me that there are barely 200 people including employees in a huge mall with 100 stores (some of them being multi-story department stores).

The consumer has been feeling the pinch in a huge way and just like the 2009 shopping season, we will see the 2010 shopping season to be weak relative to the go-go years. These consumers are just trying to come out of the hole, and there are many avenues teaching the consumer to cut those cards and get back to basics, i.e. debit card or cash. Debit cards allow purchasing to be done if there is money available in the checking account where the card is directly linked.

In the US, the Thanksgiving weekend kicks off the ‘shopping season’ where family and friends buy gifts for people they love, they like and they are related to……This sounds like a big list, and for millions of families, it is a big list. My kids buy gifts for all of their cousins and friends at school. It does get expensive, which is why the normal American spending pattern has shown an average spending of $250 to $500 per family during this season. This used to be $800 to a $1000 per family a few years ago. $250-$500 might not sound a lot, but this is an average. Middle income to high middle income families spent way in excess of this number in the great years, with the ‘replace or upgrade’ attitudes of American consumers.

We have already bought the gifts and handed them to the kids this year, so our Christmas tree is not going to have any surprise gifts on Christmas Eve! It was Aero-jeans, Aero-face jacket, iPod external speakers, Cell phone and fancy head-phones for their iPods. Per Asian tradition, they will probably get some cash on Christmas day, which they will appreciate very much……Kids enjoy the gifts at Diwali and also at Christmas in most Indian families in the US.

In reality, some people are shunning credit cards for budgeting reasons, while others do not have a choice. More than 15 million Americans lost their cards because of strict credit-card regulations that were passed last year, or when issuers cut back on credit during the recession. My tenants at the apartments do not carry credit cards. They all deal with cash or a check book. As per my annual tradition, I closed out many of my cards that we do not use, since it is usually a risk to have them open. After this recent clean-up (closing 7 credit cards), I still have approximately 12-14 cards open for one reason or another. This might be a bit high for an Asian, but I take ‘huge’ advantages of the ‘promotional offers’ that are offered from time to time.

As an example, the “Chase Freedom” and “Discover More” cards are offering $100 bonuses when new credit card customers spend a certain amount within the first three months, along with 5 percent cash back on holiday purchases at department stores and other categories. See, this is what makes me a sucker for these kinds of cards! $100 is enough to get me to act for 20minutes of work (to open, shop and close card)! And, of course, I now have an extra card in my wallet.

Citibank is giving Dividend cardholders 5 percent cash back on spending at department, clothing and electronics stores through Dec 31, 2010. Stores like Target is giving its cardholders a 5 percent discount on purchases, Neiman Marcus is advertising extra rewards points on most purchases on certain days this month, and Sears has been running a variety of no-payment, no-interest offers on its credit cards throughout the holidays.

Back to the report…….it showed that credit-card debt fell for a 26th consecutive time, showing Americans continue to pay down debt, one reason spending has been slow to recover. Revolving debt, which includes credit cards, dropped by $5.64 billion in October, according to the Fed. Non-revolving debt, which in addition to student borrowing also includes loans for cars and mobile homes, rose by $9.02 billion.

Total Revolving Credit

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Worries Still Out There

All the worries that we were facing in 2008, 2009 and 2010 are still around. They are masked by the stimulus spending, renewal of tax-cuts, extension to unemployment payments, reconstruction of highways (with stimulus money), and other government programs. If this stays in place long enough while the economy revives, we are out of the woods. If not, then we will go into a much deeper recession/depression again, and will be compounded with the fall in US$. Obama and Bernanke are really struggling to keep the economy going, but the undertone is really still very grim. See stats released recently….

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Bottom line is: Attitudes Rule

It's consumer attitudes that Bernanke is fighting in a huge way since he cannot seem to give this economy the kick start, even with all of these finance infusions rolling out. Corporations are also very leery in doing new hiring and according to an ex-CIO I met today, Corporations with job openings are looking for ‘purple monkeys’! This means that they all look for a ‘perfect candidate’ who does not exist and hence delay hiring for months. The QE2 (quantitative easing part 2) is coming out although consumers are still not feeling the ‘comfort’ to spend. So, it is a battle that Bernanke seems to be losing. Let us see what the rest of December brings to this season, and is it credit, debit or cash….

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

2 comments:

Niteen S Dharmawat said...

Hi KKP,

It was after a long time (3 months is a long time now a days ;-) that I have got to know about your views. I second your thoughts and add that here in Europe things are absolutely similar, or worse. I am in UK and on Boxing day sale, which is the next day of Christmas and is known for shoppers queuing up since morning/late night, was a different experience this year. In one of the biggest malls, offering fantastic discounts, there were hardly any European buyers. The buyers were all Indians (or of India origin). For each European buyer, I could see at least 4 Indian buyers. The scene here is gloomy and people are scared esp. with what is happening in some of the European countries.

Let's wish things change for good in New Year, though I have my doubts.

Cheers,
Niteen S Dharmawat

Kenny said...

For the last 3 decades, Asians have been living within their means and saving. This is so true across the globe. This is NOT true for the current Gen X of Asians who are born and raised in a non-Indian-environment. They are all in the buy versus repair, replace vs use-to-end-of-life.

Good to have your views from Europe to know it is almost the same.....