PIMCO’s William Gross has a new Investment Outlook posted on the PIMCO web site and it includes one fascinating insight regarding consumer spending in the current climate:
Into this explosive mixture of fire (debt) and gasoline (pricing power) comes a flame retardant or a fire marshal of sorts – at least in the U.S. Our economic version of Smokey The Bear goes by the name of the refinancable mortgage. No other country really has it and it has saved our fannies up to this point by lowering interest costs and “creating” wealth where no other wealth was to be found. Remember the point about fixed rate debt being a deflationary villain? That applies primarily to companies and in some cases, strangely enough, to consumers via floating, yet somehow, permanently high interest rates in the credit card arena. American style mortgages are another story and because of them, most American homeowners (70% of U.S. households) have been able to keep on consuming via reduced monthly payments, increased equity takeouts, or both. The Queen of England mistakenly knighted Alan Greenspan as the saviour of the global economy. She should have instead tapped the originator of the refinancable mortgage.
I was speaking with a friend the other day about how the American economy has, at least on the consumer side, “shock absorbers” which have helped keep consumers spending. I include credit cards — which allow consumers to keep buying and deferring cash outlays — and now, based on Gross’ insight, the refinancable mortgage. 70 years ago, we had neither and economic reality had a much more direct hit. I suppose the real questions now are how much shock can the economy absorb — and what happens when the shock absorbers bottom out?