In last weekend's column, "Restaurants Reflect Consumption Trends (Literally)," I noted that the National Restaurant Association's Restaurant Performance Index (RPI) had been in decline throughout this year even as the restaurant stocks in aggregate, as measured by the performance of Restaurant ETF BITE, had been slowly but steadily rising.
This issue and dichotomy have since caught the attention of restaurant analysts at Stifel Nicolaus and referred to by many financial publications in articles headlined with the risk of imminent recession.
This is an accurate description of what a decline in consumer discretionary spending implies, as I noted in the previous column.
However, as I also noted, I believe the decline this time is less about consumer negativity and more about consumers, especially the younger generations, preparing to reallocate income to housing and away from the areas discretionary income has been allocated toward for the past several years.
The reason that's important is that a decline in discretionary spending is also traditionally considered a negative for housing. The logic is that if people aren't financially comfortable enough to spend money at a restaurant, they're surely not confident enough in the security of their income to obligate themselves to the servicing of a mortgage.
That's traditionally true, but again, I don't think it applies this time.
I also do not expect financial analysts and investors to become aware of the consumer reallocation thesis I've presented in previous columns recently, or at least not to take a similar position publicly.
I don't offer this as a criticism of any analysts. Taking a public position based on a "this time is different" logic requires moving away from consensus and is a good way to put your job at risk if you're wrong.
I'm doing so simply because the totality of the macroeconomic forces indicates, to me, that this time is indeed different, the logic of which I've explained in several recent columns.
Part of that logic is that the decline in economic activity and consumer spending will provide support for bond traders and investors willing to bid more aggressively for U.S. Treasuries, which will put downward pressure on yields and drive mortgage rates lower.
The result is that the recessionary trajectory, and perhaps recession, will help to align the debt markets with the desires of first-time homebuyers, and set the stage for a housing boom in that sector, rather than a housing bust, which is what a decline in consumer spending and recession normally implies.
There are other ways of tackling and even speculating on this scenario playing out, other than by solely buying Beazer Homes USA BZH and Hovnanian Enterprises HOV and hoping that it plays out as I've outlined.
There are two inverse ETFs in the consumer space that have been crushed over the past five years as discretionary spending increased at the expense of items usually funded through disposable income; the most important of which has been housing. They are the ProShares UltraShort Consumer Goods (SZK) and the ProShares UltraShort Consumer Services (SCC) , which are down by 81% and 87%, respectively, in the past five years.
If the trends and trajectory for them that I've presented continue, both of these should perform very well, even if the first-time homebuyers do not respond with the surge in interest I'm expecting.
I think it's a good idea to track them regularly now, regardless of whether you take a position or not. I will caution as well that these are not trading vehicles as they are not bid well and have very little liquidity as a result. If you want to take a position, you should do so with the intention that it's a six- to 18-month hold.
It's also important to note that in order for the consumer budget reallocation thesis to lead to an increase in first-time homebuyer activity, far more than just reducing spending at restaurants will be required.
The entire discretionary sector will get hit, as will consumer staples. That means consumer spending on things that are perceived to be staples or necessities will have to be reduced at the margin, with the savings reallocated to mortgage servicing.
The easiest way to track the activity in both areas as an indication of whether this is occurring is through the Consumer Discretionary Select Sector SPDR ETF (XLY) and the Consumer Staples Select Sector SPDR ETF (XLP) , and to track the performance of their individual holdings.
If the trends hold, both should decline for the rest of this year, at least.