This isn’t the first time in recent months we have heard serious warnings of a new and potentially quite dangerous credit bubble. Recall back in September, when Blackstone’s head of private equity proclaimed that “we are in the middle of an epic credit bubble... the good times will not last forever” Well they should know, because according to the article below from Reuters, the OCC believes Blackstone and many other private equity firms are the “alternative asset managers” directly responsible for its creation.
We may not know much about "Keynesian economics" (and neither does anyone else: they just plug and pray, literally), but we know one thing: when real disposable personal income drops by 0.2% from a month earlier, and plummets by 2.7% from a year ago, the biggest collapse since the semi-depression in 1974, something is wrong with the US consumer.
Americans Burned Through $46 Billion In Savings To Fund December Purchases: Savings Rate Lowest Since January 2013Submitted by Tyler Durden on 01/31/2014 - 08:48
If there was any confusion where the funding for what little shopping spree Americans engaged in during December, it should all go away now. While the street was expecting a 0.2% increase in both personal income and personal spending in the month of December, what it got instead was a flat print in income (i.e. unchanged from November) while spending (mostly for non-durable goods) spiked by 0.4% meaning there was a 0.4% funding hold that had to be filled somehow. That somehow we now know is personal savings, which tumbled from a revised 4.3% to 3.9% - the lowest since January 2013, only back then incomes would rise for the rest of the year driven by the 30% increase in the S&P "wealth effect." This time, with the Fed now tapering QE, the only way is down for both the "wealth effect" and Personal Incomes... and thus Personal spending, that majority component of US GDP. Finally, this data means that according to the BEA in December US consumers funded some $46 billion in spending through burning down their savings.
There is one major problem when the entire market is a rigged casino (by both the Fed and HFTs), favoring degenerate gamblers over traditional investors: at the first whiff of trouble everyone bails. Or as BofA politely puts it, "Typically flows follow returns and this week was no exception." In the past week, trouble whiffed, and the degenerate gamblers, loaded up to the gills with record margin debt hightailed it out of the casino, leading to the largest weekly equity fund outflow in over two years! Add some record leverage to the equity withdrawal, continued EM turbulence, ongoing Japanese deflation exports, oh and of course the ongoing Fed taper which has been solely responsible for all S&P gains since 666, and suddenly you have all the ingredients for a broad market crash.
That didn't take long. Moments ago the world's largest retailer (sorry AMZN) WoeMart (sic) just confirmed what everyone who is not an economist knows - the US consumer is barely alive. The reasons: cut in foodstamps, and of course, the weather: "“Despite a holiday season that delivered positive comps, two factors contributed to lower comp sales performance for the 14-week period for Walmart U.S. First, the sales impact from the reduction in SNAP (the U.S. government Supplemental Nutrition Assistance Program) benefits that went into effect Nov. 1 is greater than we expected. And, second, eight named winter storms resulted in store closures that impacted traffic throughout the quarter."
- Even Obama's fans has turning on him: "The Decline and Fall of 'Hope and Change'"
- European Stocks Drop, Head for Worst January Since 2009 (BBG)
- Euro-Area Inflation at 0.7% Builds Rate Pressure on ECB (BBG)
- Japan’s Inflation Accelerates as Abe Seeks Wage Gains (BBG)
- Unpossible - this is the USSA: Detroit Debt Proposal Favors Pension Funds (WSJ)
- Keystone Report Said Likely to Disappoint Pipeline Foes (BBG)
- YHOO still pretending someone cares about it: Yahoo says detected hacking attempt on email accounts (Reuters)
- How Google's Costly Motorola Maneuver May Pay Off (WSJ)
- Mexico Surpassing Japan as No. 2 Auto Exporter to U.S. (BBG)
The wild volatility continues, with markets set to open well in the negative wiping out all of yesterday's gains and then some, only this time the catalyst is not emerging market crashing and burning (at least not yet even though moments ago the ZAR weakened to a new 5 year low against the USD and the USDTRY is reaching back for the 2.30 level) but European inflation, where the CPI printed at 0.70%, dropping once again from 0.8%, remaining under 1% for the fourth straight month and missing estimates of a pick up to 0.9%. Perhaps only economists are surprised at this reading considering last night Japan reported its highest (energy and food-driven) inflation print in years: so to explain it once again for the cheap seats - Japan is exporting its "deflation monster", Europe is importing it. It also means Mario Draghi is again in a corner and this time will probably have to come up with some emergency tool to boost European inflation or otherwise the ECB will promptly start to lose credibility - is the long awaited unsterilized QE from the ECB finally imminent?
Mixed data from Japan did nothing to excite and while markets oscillated for a few hours after the US close (and subsequent pile-driver from AMZN), they are now unwinding most of the dead-cat-bounce seen during the US day-session. Japanese stocks are back at fresh 2-month lows with the Nikkei 225 under 15,000 (down over 400 points from day-session highs) and testing debt-ceiling lows. JPY strength has driven USDJPY back below 102.50 and therefore US futures are re-tumbling - down 14 points from US day-session highs. EM FX is drifting lower. With China about to dark for a week for lunar new year, this could get interesting very fast.
While we are sure it is hard to make ends meet on the minimum-wage-paying positions at fast food restaurants these days; the lengths that one McDonald's employee in Pittsburgh went to subsidize her income could be a little much. As CNN reports, Shantia Dennis, 26, would drop a handy baggy of heroin in drive-thru customers' boxes if they uttered the secret phrase "I'd like to order a toy" with their food order. Police recovered over 50 bags of heroin and a small amount of marijuana... brings a whole new meaning to the term "Happy Meal".
As we have discussed in the past, the large majority of American's live paycheck to paycheck. American's do not lack for a vehicle to invest savings in for retirement (Roth IRA's, IRA's, 401k's, SEP's, etc.) but lack the ability to save. The problem that needs to be addressed is from the economic front. With 92.8 million individuals excluded from the work force, 1 in 3 American's on some sort of Government assistance, stagnant wage growth over the last 5 years and 1 in 5 on food stamps, the issue is about employment rather than saving. Solve the employment problem in America and the retirement savings dilemma will begin to resolve itself. It seemed to me that the entire point of the MyRA was really more of about getting "votes" than actually helping middle class American's substantially change their retirement futures.
Over a year after Shinzo Abe unveiled his devalue-the-currency three arrows plan to save his demographically-challenged and debt-riddled nation from a third lost decade... and aside from a stock market that soared as the currency collapsed - the Japanese people have little (or worse less) to show for it. As MarketWatch reports, Japan Automobile Manufacturers Association said Thursday that auto demand in Japan is expected to drop 9.8% in 2014 as the sales tax increase in April will dent consumer sentiment. The decline will be the first and sharpest drop in three years after auto demand remained nearly flat last year. It seems that 'recovery' will have to wait.
Hinting that the worst is yet to come, was none other than India's Central Bank governor Raghuram Rajan himself, who yesterday in an interview in Mumbai with Bloomberg TV India, said that "international monetary cooperation has broken down." Of course, when the Fed was monetizing $85 billion each and every month and stocks could only go up, nobody had a complaint about any cooperation, be it monetary or international. However, a 4% drop in the S&P from its all time high... and everyone begins to panic.
On the heels of the President's State of the Union address, in which he announced his new executive order to raise the minimum wage by nearly 40% for those employed by federal contractors, Barack Obama is now peddling said promises to the heartlands. While discussing the rightness or wrongness of such a move is frustrating, and we're sympathetic to those who earn $7.24/hour, a simple thought entered our minds once again; a thought that often crops up whenever we hear a politician make such a magnanimous and grandiose claim - how is this going to be paid for?
In a mere 140 seconds, Jim Grant explains to an almost stunned into silence Rick Santelli how we all "live in a valuation hall of mirrors" as the Fed manipulates everything. Thanks to it's "fingers and thumbs on the scales of finance," Grant continues, the Fed "insists on saving us from 'everyday low prices'" - what they call deflation - and by doing so it manufactures "redundant credit" which "does mischief" in and out of markets. Grant, ominously concludes, "there is no suspense as to how [this will] end... [it will] end badly."