For years, Americans have been mocked for their materialistic nature. A "gotta have it now" mentality has become the norm for consumers, and the middle class has literally disguised itself as part of the wealthy. At nearly every level of our society, individuals have been living well beyond their means, thanks to a dirty four-letter word: debt.
Behind the expensive cars, luxury clothing, hottest gadgets and of course, the McMansion homes, lies an enormous pile of debt. As a nation, we collectively have about $850 billion, or $9,659 per household, outstanding in credit card debt alone. Total U.S. household debt as a percentage of GDP has risen from 23.5% in 1952 to 97.8% today. The personal savings rate has been hovering in the 0-2% range for years. Putting money away for a rainy day has become a concept of yesteryear.
But that rainy day is here...
And it has made one heck of a grand, torrential entrance. Banks have collapsed, home "owners" have been forced into foreclosure, and consumer confidence is at its lowest level ever recorded. The possibility of a borrower being risky has finally caught the attention of lenders, but it's too late. After handing out credit cards to everyone in line at Macy's and issuing mortgages without down payments, our entire economy is swamped by debt. We don't have the means to pay it off, and we're so reliant on it that life without more credit is slowing our economy to a halt.
Policymakers may not like it, but de-leveraging must occur, and we suspect it's going to be a bloody drubbing since many stocks were boosted by the consumer spending frenzy. We've long been suspicious that easy credit and a related asset bubble had been firing up GDP growth for ages now that was not only unsustainable but artificial, since it wasn't based on real income. Well, the dirty little secret is out -- and it's not pretty.
The end of an indebted era
The era of conspicuous consumption will have to turn into one of austere frugality. High-end luxury goods are going to collect dust on store shelves as consumers either have no way to finance them or simply realize that their debt-fueled lifestyle is completely unsustainable. That's right, Saks (NYSE: SKS ) , pricey stores aren't going to appeal to consumers who just had their credit lines slashed. Those that have shelled out cold hard cash for premium prices at Whole Foods (Nasdaq: WFMI ) on a weekly basis might find themselves trading down to a traditional grocery. And without the swipe of a Mastercard (NYSE: MA ) , few will be able to truly afford a night out at Ruth's Hospitality and McCormick & Schmick's.
We already know the current problem doesn't bode well for holiday shopping this year. But more importantly, what does all of this mean for the long term future of luxury retail? Not only does our economy need to shake out the excessive debt it has taken on over the past few years, but it seems that a permanent change will be required in the retail world, as a seismic shift in the way consumers spend money is inevitable. Sure, Coach (NYSE: COH ) purses will always be sought out by a certain caliber, and there will always be young professionals who can afford J. Crew's latest line. But the herds that drove to these stores in the past years simply won't have the means to "buy big" anymore.
The housing bust has been a lesson well learned for those that pushed their living style to the limit. Leverage can only be used for so long and without maxing out credit lines, and individuals are being snapped back to middle class reality. Like the bubbled housing market fueled by gigantic loans, the retail industry's past performance and valuations have been stimulated by credit cards. Thus, the historical growth rates many of these companies have enjoyed in the past won't be possible in the future, or at least in the next few years. And while many retailers look cheap in comparison to past ratios, it's important that investors remember to factor in a drastic reduction in growth to come when looking longingly at some of those single-digit P/Es.
Weeding out the winners
There's no way to sugarcoat this situation. Still, investors should remember the tenets of long-term investing. Difficult times yield opportunities for the very long term, provided you've got nerves of steel and the ability to weed out the best potential investments. The highest-quality retailers, fortified with the strongest balance sheets and best brands, will be the ultimate survivors. And with overall growth rates trending downward, superior inventory management will be key. Finding companies like Nordstrom (NYSE: JWN ) , which can drive return on investment without hefty growth expansion, will help you get out of this mess alive.
In the meantime, look for companies that actually thrive from thrifty spending, given the uncertainty of when consumer spending will rebound. It doesn't take rocket science to see why McDonald's (NYSE: MCD ) has been on fire lately. And Costco's (Nasdaq: COST ) high-end merchandise sold at rock-bottom prices will always attract bargain-oriented shoppers.
Choose the stocks you invest in carefully, Fools -- pick strong companies with great brands, not fads or second-tier consumer-facing companies. And weigh your decisions carefully, since many luxuries may become nothing more than symbols of an age of excessive, debt-fueled lifestyles -- an age that is now past.