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What I Learned from a Salesman at Lowe's

By Tom Dyson, publisher, The Palm Beach Letter
Monday, September 14, 2009

I know a salesman at Lowe's, the home improvement superstore. He sells refrigerators, washing machines, vacuum cleaners, and other "big ticket" consumer items.

Last week, he sold a $400 fridge-freezer to a woman. The woman wanted to pay for it on credit. So my friend walked her through the application for a Lowe's credit card. She filled out the paperwork and submitted it...

The Lowe's credit-card department wouldn't approve her application, and my friend lost the sale. "They used to approve anyone," he complained. "I'd never seen them decline an application until last year. Now, they turn them down all the time."

Without credit from Lowe's, my friend has a hard time making sales. But it's worse for the cabinet sellers, he says. Cabinets cost thousands of dollars, so it's even harder to get credit. Besides, people buy cabinets when they move into new houses. And right now, no one's buying new houses.

"I work next to the cabinet guys," he said. "Business has completely dried up over there. Like nothing. No sales whatsoever."

Each month, the Federal Reserve calculates and reports the total amount of consumer credit outstanding in America. This is the money Americans have borrowed to pay for cars, vacations, education, and fridge-freezers at Lowe's.

When this number rises, it means credit is easy and Americans are in consumption mode. They're buying SUVs, houses, flat-screen TVs, granite countertops, and stainless-steel appliances. And they're borrowing money to make these purchases – often using credit cards – so they're not worried about finances.

When this number falls, Americans are in thrift mode. They prefer saving money and paying off debt to shopping at the mall and going on vacation.

Right now, we're in a recession. Unemployment is rising, and house prices are falling. It's no surprise over the last six months, seasonally adjusted total consumer debt outstanding has fallen an annualized 7.1%, the fastest rate of decline since World War II.

Here's the thing: With the "cash for clunkers" program and the economic recovery they're talking about on the news, you'd expect consumer debt to start growing again soon.

The latest consumer credit report came out last week. In July, Americans reduced their consumer debt by $21 billion... the sixth monthly decline in a row and the largest monthly drop in borrowing ever recorded. (They started measuring consumer debt in 1943.) This fall translates to a 10.4% annual decline in consumer debt. Economists had predicted only a $4 billion decline, so this number was a huge shock to Wall Street...

Consumer spending accounts for 70% of the total economic activity in America. Plus, most exporter countries like China owe a huge percentage of their economic activity to the U.S. consumer. It's no exaggeration to say the American consumer is the single most important engine of growth for the entire world economy.

The stock market is rising, and retail stocks like Lowe's and Home Depot have both risen over 75% since March. But as long as Americans are saving more and borrowing less, the world economy has a gargantuan problem on its hands. There's literally no way out of the recession.

Until the consumer starts borrowing again, I must assume this rally is nothing but a bounce in an ongoing bear market.

So I'm keeping my portfolio in maximum defense mode. We're sticking to the safest bonds and fixed-income investments I can find. We're making 8% from these bonds, but more importantly, our money is safe if the stock market starts tanking again. As for stocks, we're buying blue-chip companies that never stop raising their dividends.

As I parted company with my friend at Lowe's, I asked him if he'd seen any signs of economic recovery in his department, despite the fact people couldn't get credit...

"It's been flat all year," he said. "We haven't seen any improvement yet."

Good investing,


Market Notes


Visa (V)... credit cards
Goldcorp (GG)... gold miner
Jaguar Mining (JAG)... gold miner
Eldorado Gold (EGO)... gold miner
Silvercorp (SVM)... silver miner
Silver Wheaton (SLW)... silver royalties
Apple (AAPL)... iPods and computers
Western Digital (WDC)... hard drives
Annaly Capital (NLY)... virtual banking
Cresud (CRESY)... Argentine land
Carmax (KMX)... used car seller
Baidu (BIDU)... the "Google of China"
S&P Retail ETF (XRT)... like a cockroach, the consumer lives!
Shuffle Master (SHFL)... gambling machines
International Game Tech (IGT)... gambling machines
Goldman Sachs (GS)... gambling machines
Starbucks (SBUX)... deficit coffee spending
Singapore Fund (SGF)... top Jim Rogers country
iShares Corporate Bond (LQD)... bailouts for everyone helps bonds
Gold Miner ETF (GDX)... our inflation hound reaches a new high


U.S. dollar... you mean we can't tax and spend our way to prosperity?

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