Some Distillations

I hate the word granular. There was a prospective client that would use that word--incessantly. "Let's get more granular on that, tell me...." I'd love the word had our team won the business. We didn't. We essentially negotiated non-stop for 6 months with weekly flights to Philadelphia to meet. I spent my first and only Las Vegas vacation negotiating contract language for the the first 3 hours of each day enduring withering glances from my husband. We were taken to the altar and then cast aside.

I think that there are a few guideposts to keep in mind post sub-prime blow up and whether or not it is a contained contagion. But here are a few of the granular issues that are really as important as (if not related to) this issue:

• Liquidity: Liquidity is bound to be impaired. We can do LOTS of speculation on what it will do to consumer spending, but I think that we can say with certitude it WILL EFFECT the number of new homes sold.

• Economy/Consumer: If the majority of jobs created in this last recovery is reliant on the burgeoning homebuilding industry (as I understand that it is), and we know that industry is impaired, then it is reasonable to deduce that unemployment claims will rise. Calculated Risk has done a remarkable job in detailing his thoughts on the effects on the employment numbers. Job losses will result in consumers tightening up their spending. Plus, for those with rate resets, even if they are PRIME borrowers, that payment increase will take a bite out of their pocketbooks.
  

I can see NO CREDIBLE WAY that the consumer clears this buckle in the economic road--there's not enough suspension to shield the consumer from a bone jarring bump. I don't think that this is hyperbole. BUT....so long as consumer spending holds, you will see it held up as a beacon of light. But once the consumer is lost--then I think that the market will have it's second "come to Jesus" discussion with investors. The consumer story, then, is the next truth to be vetted.

• Other Markets: As you can tell by their reaction, there are not too many "safe-havens". As I understand it, there are two types of risk:
  
• market risk--we just saw that--that risk is endemic to all markets
  
• USD risk--it seems like there are other ways to hedge that bet rather than being in foreign stock ETF's. I don't pretend to know, but I think that there has been a bit of "safe-haven" pedaling regarding foreign markets.
  

• Commodities: These have been volatile. I think that the markets have spoken, and they are saying that THEY depend on the US consumer (such a burden the consumer bears!) to stay healthy and grow. Expect commodities to downturn if the consumer buckles. Many of the emerging markets are commodity centric. Yeah, yeah, I've heard the global infrastructure story, but the global markets are telling us something different for now. At least that is how I understand it.

None of this is new thinking and it can readily be criticized as being self evident. Well, sub-prime was self evident months ago. Just keep these things on your radar screen as you navigate your way.