The ever-informative John Dizard of the Financial Times inspects the theory that the US economy will be shored up by the spending of LBO proceeds and finds it wanting:
There’s a thought in the market that while the Wal-Mart consumer has been hit by the weaker housing market, the economy will be bailed out by rich people spending the proceeds of leveraged buy-outs.
It’s an appealing thought. It takes me back to my childhood, when we in the audience for a production of Peter Pan were able to bring Tinkerbell back to life by clapping loudly.
This “salvation through LBOs” was expressed by Bridgewater Associates, which in a recent issue of its “Daily Observations” noted, correctly, that high-end retailers’ stocks had been outperforming those of lower-end retailers. True, but backward-looking.
It is true there are sources of demand in the world other than the middle American consumer. Asian, European and Middle Eastern retail buyers are, for now, taking up the slack. But in the US itself, the increase in upper-end incomes from stock buy-outs will not be offsetting the weakness caused by the start of house de-leveraging.
Susan Sterne of Economic Analysis, who is based among the champion US consumers of Greenwich, Connecticut, says the high-end group “is just not big enough to make up for weakness in the middle and lower groups”. They also don’t have the same propensity to spend. Households with income over $90,000 a year spend 68 per cent of their income, compared to those with incomes of $40,000 to $50,000 a year, who spend 90 per cent of their income.
The group with $302,000 in income spends just $107,000. Also, as she notes, wealthy consumers increase spending at the beginning of an economic cycle, because they see improving income before other people. They don’t increase their spending late in the cycle, which is now. “It’s not that they don’t have the money. They always have the money. It’s psychological. They think they shouldn’t spend the money.”
Even with the estimated $300bn in private equity funds, waiting to be spent on rich people’s shares, the rich are not feeling all that happy. Consumer sentiment surveys in March showed declining sentiment in the highest-income group.
Where you are likely to see the LBO purchase proceeds thrown around like play money is in big auction houses’ sales towards the middle of this year.
Count on the contemporary and Impressionist and modern sales this month and the next to show very strong results. But let’s say they bump up the totals by another couple of hundred million on last year’s numbers. That’s not much compared with the losses being booked on busted subprime lenders.
Corporate treasurers are far more cautious than the private equity people, which is why company cash levels are still so high. While the deal people see the cheap and available money in their immediate future, the companies see weaker sales.
