Three stocks that are immune to reckless consumer spending are Amazon (AMZN), Walmart (WMT) and Visa (V). Monitor them in light of the next 6-12 months as reckless will eventually be decimated.
Consumer spending has been loose for the past 2 years. It has propped up the revenues of companies that sell discretionary products and services. We are on the cusp of a shift in consumer spending that will drastically change the outlook for certain consumer facing companies.
Those which sell high felicific ROIC products will continue to do well.
Those which sell low felicific ROIC products will fail.
What the heck does that mean?
Allow me to introduce a concept for analyzing consumer discretionary companies: Felicific ROIC.
For an investment, ROIC is the financial Return on Invested Capital. For a luxury purchase, felicific ROIC is the happiness return on invested capital. In other words, it is how much incremental happiness a consumer gets from spending on a given item or service relative to the cost of that item or service.
In the past 2 years, felicific ROIC has not mattered because consumers have generally had such an abundance of discretionary income. They could simply buy everything they wanted, and they did.
I posit that this loose spending behavior is about to change and the resurgence of thriftiness will be the death blow to wasteful products/services.
In order to understand why reckless spending is about to end, we first must grasp what caused it in the first place.
The Dawn of Reckless Spending
In previous generations one would start at the bottom of the job market and work their way up over time. It resulted in reasonably low discretionary income which forced people to make choices when it comes to spending. They learned to do an informal equivalent of ROIC analysis on their discretionary spending.
This dynamic changed for the millennial generation. Clearly this is a generalization, but broadly speaking this generation acquired a set of tech skills that was not as prevalent in older generations and this particular skillset has been in high demand. As a result, many millennials skipped the ground floor of the job market and entered directly into very high paying jobs.
That is fantastic, but at the same time it resulted in entirely skipping the phase of low spending power. These high paying jobs combined with not yet having children meant that many immediately had huge disposable income.
Without scarcity there was no need to develop thriftiness. Frankly, the spending habits are irresponsible for many of those who entered the job market directly into high paying jobs. There are plenty of fiscally responsible individual people out there, but at a broad level I think the above statement holds true.
Spending has been getting increasingly loose over the past decade, but it really came to a crescendo in the post-pandemic era as stimulus checks and saved up money from when we just sat at home for a year combined to form a mountain of excess cash.
The conditions which facilitated the loose spending behavior are reversing.
The End of Reckless Spending
Consumer finances are taking 3 big hits sequentially:
Inflation increasing the cost of the same purchases.
Depletion of cash and accrual of debt.
Layoffs of white-collar workers.
I will keep the inflation discussion brief because it is already well known. Put simply, living costs more now and wages have not kept up
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