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The New Normal

We’ve mentioned David Rosenberg of Gluskin Sheff (Link to site) before in these pages.   Mr. Rosenberg is a good analyst, though he shouldn’t be read by anyone suffering from depression; his work is gloomy enough to send a mildly depressed person over the edge.

At any rate, we wanted to repeat something Rosenberg  wrote is his June 30 “Breakfast with Dave” report that echoes our own thoughts:

Much is being made out of the prospect that June auto sales in the U.S. will come in at or even above 10 million units at an annual rate….  This is the new normal—a boom is 10 million units, less than half the peak, 25% lower than year-ago levels and, to be honest, at levels that prevailed in the mid-1960s, which was a time when two-car families were viewed as being ostentatious (today, 20% are three-car families—and this is what is changing.  It’s called “getting smaller”, and no, it’s not Armageddon, it’s just living within our means.) …   The New Normal = Frugality, and this is a secular theme, not cyclical.

Rosenberg does not focus heavily on demographics; he looks instead at what he calls the “deleveraging credit contraction cycle.”  It is our view that demographics are a major reason for this contraction cycle, but that is another argument for another day.

We like how Rosenberg puts things into perspective.  No, car sales are not going to zero, and neither are sales of other consumer goods.  And we’re certainly not witnessing the “end of capitalism” or any of the other nonsense you read out there.  But we are now in a period in which a “normal” economy must be redefined and in which expectations must be lowered.

The “New Normal” will be marked by a higher savings rate, lower profit margins, higher unemployment and lower rates of economic growth.  Essentially, we’re looking at reliving the Japan experience of the 1990s.   Welcome to the New Normal.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy