What About Your Spending & Your Friends/Family?
How about you, have you cut down your spending, what about friends and family? If you look at this group collectively it would be hard to argue that the collective purse strings are not as open as this time last year.
Now, what about the people who are in debt and struggling? Whether they like it or not most of them have all had to cut their spending, and many in this group although not necessarily poor were experts at shopping and raking up their credit card bills.
And what about the high earners, the ones that are not affected by present money worries? Are they going to cut back, if only because they realise that even for them trouble could be around the corner. I would suggest that at least 10% of this social group have reduced their spending.
One could also argue that some of the savvy cash rich are hoarding their money waiting to pick up bargains later in the year or beyond. For example if somebody had the money and wanted to buy something like a new Flat Screen TV I'd advise them to ask for a 10% discount. Some of the shops would tell you politely to get stuffed but I'm confident it wouldn't take long to strike a deal with one of the retailers.
So for every financial and social class I think there's an obvious trend of cutbacks developing (forced or self-imposed). And just what is this going to do for corporate profits, 10% or 20% lower in general over the next 2 years might seem like a fair prediction.
Whichever way you look at the problem, money is scarce right now for everyone, whether you're a company looking for financing or the man on the street. So in the current climate I cannot see stock prices rising and the probabilities suggest the next move will be on the downside.
Is Frugality Going To Be A New Trend
In the past I've lived well above my means, within my means, and right now below my means.
All spending habits come with their own associated advantages and disadvantages but spending frugally (but not necessarily living frugally) is not a bad way to live.
In fact one can easily argue that shopping with the goal of saving money is a sense of achievement, especially when in the past shopping has often resulted in a grievous assault on our wallets and Credit Cards. And often what have we got to show for this high spending.....
But there is a big difference between living and spending frugally -
- Living frugally - Watching every penny, keeping the house cold, almost never going out, doing anything and everything to save a penny
- Spending frugally - Cutting back just a touch on the basics and watching how you spend your money. Never buying stuff you don't need plus always on the lookout for bargains and special offers
As more and more people (I believe) are going to be forced to become frugal with their spending the question might become - are they going to like it?
I think a fair proportion of them will. This is because it's somewhat of a game where as I've said before you can get a real sense of achievement from ferreting out deals and saving money. And the effects will be magnified when the money saved goes towards repaying debt.
If this frugality trend develops, and I think it's a given, then it's going to add further pressure on corporate profits and in turn the Stockmarket's potential. And remember I'm talking about many different companies here, not just say the leisure sector where people will go out less, but also the utility companies which will be affected by customers cutting down on power/gas usage etc.
Summary
Overall the question must be - do we collectively in the UK and the US have enough money and personal cash flow to pay for our excesses over the last decade or so? Some do, but I think that many don't.
Simple economics to me suggest that investing in the stockmarket right now looks a risky bet and one which the forward pricing of stock prices doesn't seem to have considered. I'm not saying that I will be right but at the same time I cannot see how the average UK and US household will not be forced to reduce spending for the foreseeable future.
Stockmarket investors should take note of these arguments and would do well to analyse their portfolios and take necessary action. But this doesn't mean that all stocks should be avoided. I'm still looking to buy shares in the Mining sector because of their excellent long-term potential. But as for investing in the 'general market' I still prefer to earn 6% to 6.5% risk free from a savings account.
'Cash is king' is a phrase that periodically comes in and out of fashion in the investing world and for the next few years I think it's going to be one which more and more financial commentators will be quoting. And who knows, perhaps the phrase 'household crunch' will start to gain momentum.
I'll finish with a recent quote from David Rosenberg an economist at Merrill Lynch -
'How can anything less be avoided (massive household liquidation), in an era when most people are already working full speed, maxed-out and yet still need credit to survive? And now they're cutting off the credit!'
Postscript
This article was written about 1 week ago but meanwhile the press are starting to report some horrendous figures and trading results from the High Street. Expect more and the High Street misery to have a knock-on effect into many other sectors in the stockmarket.
National Debtline Information
National Debtline is a Charity setup by the Government and funded by the major banks, although they DO NOT play any active role in its management nor have any influence over it.
The charity are experts at helping the public both sort out their debt alongside offering advice on how to settle current debts, perhaps by making an offer to pay 50% of the amount owed.
The trouble is that in the current economic climate they're very busy and it can take up to 30 minutes before they answer the phone. DO NOT LET THIS PUT YOU OFF because the advice is both 100% free and excellent. A lot of information is also available to download from their website.
Overall I cannot speak too highly of them and for those looking to sort out their debt problems I would strongly encourage you to contact them.
Starting To Talk Is a MAJOR Step For Those With Debt
One of the problems with being in debt is the so-called Ostrich effect where you just bury your head in the sand. But with debts this is only going to be a short-term solution as they're not going to go away. On a side note there's a funny bumper sticker in America which reads -
"Think nobody cares - Try missing a repayment!"
If you or somebody you know is keeping quiet then the best and perhaps only way to get around the problem and offer some light at the end of the tunnel is to START TALKING.
Start talking to somebody and I guarantee that a massive weight will have been lifted from your shoulders. And although the problems will be far from over there will be a strong sense that the worst is behind you and you can get on with starting to sort your financial situation out.
If you or others you know have problem debts right now then make the call to the National Debtline and start tackling the problem. Good luck.
Beware Of Debt Counselling Companies That Charge
Stay away from most of companies that want to charge you for debt advice. Many of these companies prey on the unsophistication of the indebted and promise a lot but deliver little apart from fees for themselves.
If in doubt about one of these companies and what exactly they're charging for call the National Debtline up and ask for their opinion.
