Personal Income

There are a dozen significant economic indicators that are warning that the U.S. economy is heading into a recession.  The Dow may have soared past the 15,000 mark, but the economic fundamentals are telling an entirely different story.  If historical patterns hold up, the economy is heading for a very rocky stretch. But most average Americans are not that concerned with the performance of the stock market.  They just want to be able to go to work, pay the bills and provide for their families.  During the last recession, millions of Americans lost their jobs and millions of Americans lost their homes.  If we have another major recession, that will happen again.  Sadly, it appears that another major recession is quickly approaching. The following are 12 recession indicators that are flashing red...

A major issue in America today is the growing gap between the rich and the poor, and the popular narrative is that the disparity is caused by capitalism run wild and only the firm hand of government can fix the problem. But what if this narrative has it backwards? What if the growing wealth disparity in America is actually caused by the government? Take Warren Buffet, a man often at the center of this debate, as not only is he a billionaire, but also a vocal advocate for higher income taxes on the rich. Many are aware of his acumen in making investments that have a “margin of safety” – or minimal downside – but few are aware of the greatest source of such safety for Mr. Buffet in recent years, the US Government.

Monday's income and spending (and implicitly 'saving') data provided plenty of fodder at the headline level for any and every opinion. We explained in great detail just how weak the data really was (here and here). But the following two charts suggest that any optimism of organic consumption-led exuberance is completely misplaced. Retail sales of clothing is growing at the slowest pace since 2010; but while major store sales are about to drop negative YoY for the first time in over 3 years, the utter collapse in general merchandise sales is worse that at the peak of the last recession at -5%. It seems tough to see how a nation with an economy built on 70% consumption is not in a recessionary environment. And while this alone is a dismal signal for the discretionary upside of the US economy/consumer; as Gluskin Sheff's David Rosenberg points out real personal income net of transfer receipts plunged at a stunning 5.8% annual rate in Q1. The other seven times we have seen such a collapse, the economy was either in recession of just coming out of one. But apart from that, everything is fine...

The latest personal income and expenditure report for March was of particularly interesting reading.  However, as opposed to the mainstream headlines that immediately reported that despite higher payroll taxes consumers were still spending, and therefore a sign of a strong economy, it was where they were spending that was most telling. In reality, The personal income and spending report does little to brighten the economic picture. The reality is that we now live in a world where "freely traded markets" are an anachronism and fundamental rules simply no longer apply.  However, the problem is that such actions continually lead to asset bubbles, and eventual busts, that not only impact economic stability but destroy the financial stability of families. The consumer is clearly delivering a message about the state of the real economy.  Eventually, the disconnect between the economy and the markets will merge.  Unfortunately, there is no historical evidence of such reversions being a positive event.

The week ahead will be driven by the heavy end-of-month data schedule. In addition to the usual key releases like ISM and payrolls and ECB meeting, this week we also get an FOMC meeting - though it will hardly see much more than a nod to the weaker activity data of late. For the ECB meeting a full refi but not a deposit rate cut are priced now.  Outside the FOMC and the ECB meeting there will be focus on the RBI meeting in India, with a 25bp cut priced in response to lower inflation numbers recently.

The political class set in motion the eventual obliteration of our economic system with the creation of the Federal Reserve in 1913. Placing the fate of the American people in the hands of a powerful cabal of unaccountable greedy wealthy elitist bankers was destined to lead to poverty for the many, riches for the connected crony capitalists, debasement of the currency, endless war, and ultimately the decline and fall of an empire. The 100 year downward spiral began gradually but has picked up steam in the last sixteen years, as the exponential growth model, built upon ever increasing levels of debt and an ever increasing supply of cheap oil, has proven to be unsustainable and unstable. Those in power are frantically using every tool at their disposal to convince Boobus Americanus they have everything under control and the system is operating normally. Nothing could be further from the truth.

Back in 2010, Goldman's Jan Hatzius, fresh on the heels of QE2, committed rookie Economist mistake 101, and mistook a centrally-planned market response to what then was a record liquidity infusion, for an improvement in the economy (a move we appropriately mocked at the time, as it was quite clear that the Fed's intervention meant the economy was getting worse not better). It took him about 4 months to realize the folly of his ways and realize no recovery for the US or anyone else was on the horizon. He then wised up for a couple of years until some time in December he did the very same mistake again, and once again jumped the shark, forecasting an improvement to the US economy in 2013, albeit in the second half (after all nobody want to predict an improvement in the immediate future: they will be proven wrong very soon) based on consumer strength when in reality the only "reaction function" was that of the market to the Fed's QE4 (or is it 5, and does it even matter any more?). Four months later we get this...

"In this world nothing can be said to be certain, except death and taxes.”

– Benjamin Franklin

In most cases, Mr. Franklin's statement would be correct. However, as you will see below, there are some countries in the world where you can be certain you won't pay taxes. With the year 2013 marking the 100th anniversary of the income tax and the Federal Reserve in the US (two of the most powerful tools the government uses to extract wealth), we thought it would be useful to look at when Tax Freedom Day occurs across the world to gain some perspective. Tax Freedom Day (TFD) is the day of the year that the average person has in theory earned enough money to pay his or her annual tax bill.

Did you know that the greatest period of economic growth in American history was during a time when there was absolutely no federal income tax?  Between the end of the Civil War and 1913, there was an explosion of economic activity in the United States unlike anything ever seen before or since.  Unfortunately, a federal income tax was instituted in 1913, and this year it turned 100 years old.  But there was no fanfare, was there?  There was no celebration because the federal income tax is universally hated.  This year, the American people will shell out approximately $4.22 trillion in state and federal income taxes.  That amount is equivalent to approximately 29.4 percent of all income that Americans will bring in this year, and that does not even take into account the dozens of other taxes that Americans pay each year.  At this point, the U.S. tax code is about 13 miles long, and those that are honest and pay their taxes every year are being absolutely shredded by this system.

While immigration was pretty far down on the priority list at this time last year, recently the topic has taken a front seat in lawmakers’ chambers down in Washington. ConvergEs's Nick Colas notes that policymakers on both sides of ideological spectrum are establishing positions and recommendations for reform, and are familiarizing themselves with some of the lesser-known facts about immigration. In a nutshell, he explains: immigration is not all about border crossings from Mexico and undocumented workers. There are many more figures – and costs – associated with immigration, most of which have palpable and measurable impacts on the US economy. From GDP growth to the health of the housing market, immigration’s influences may not be widely known, but should be in order for policymakers and investors to make informed decisions.

As the holiday weekend starts and quarter ends, what better time is there to go out on a new S&P 500 Index high? The new high was in the cards.

One thing bulls should worry about is a report that pension plans may rebalance as much as $29-35 billion out of stocks to bonds and other assets with the quarter end. We’ll see how that works this coming week.

While the news flow is dominated by Cyprus, it will be important to not lose sight of the developments in Italy, where we will watch the steps taken towards forming a government.  The key release this week is likely to be US consumer confidence. Keep a watchful eye on the health of the consumer in the US after the tax rises in January. So far, household optimism and demand has held up better than expected. The IP data from Taiwan, Singapore, Korea, Thailand, Japan will provide a useful gauge on activity in the region and what it reflects about global activity, however Chinese New Year effects will need to be accounted for in the process.

All eyes should remain focused on Cyprus today, especially since there is no data being reported elsewhere. Financial markets closed Friday on a positive note, as an agreement on Cyprus appeared to be taking shape and a minor relief rally across most asset classes overnight vindicated hopes of a positive outcome as details of the detail were announced overnight. More clarity is still required on some aspects of the agreement (deposit and bondholders) but the fact that the national parliament does not need to vote again should stop the deal from unravelling as it did last week. Whether this is enough to restore confidence and prevent a possible cautionary deposit flight from Cyprus remains to be seen.

The Dow is at a record high and so are corporate profits - so why does it feel like most of the country is deeply suffering right now?  Real household income is the lowest that it has been in a decade, poverty is absolutely soaring, 47 million Americans are on food stamps and the middle class is being systematically destroyed.  How can big corporations be doing so well while most American families are having such a hard time?  Isn't their wealth supposed to "trickle down" to the rest of us?  Unfortunately, that is not how the real world works. But now we have replaced capitalism with something that we like to call "corporatism".  In many ways, it shares a lot of characteristics with communism, and that is why nations such as communist China have embraced it so readily. Today, most big corporations are trying to minimize the number of "expensive" American workers on their payrolls as much as they can. Right now, the system is designed to continually funnel more money and more power to the very top of the pyramid.  The global elite are becoming more dominant with each passing day. The idea of a very tiny elite completely dominating all the rest of us goes against everything that America is supposed to stand for.  In the end, it will result in absolute tyranny if it is not stopped.

Are we running out of time?  For the last several years, we have been living in a false bubble of hope that has been fueled by massive amounts of debt and bailout money.  This illusion of economic stability has convinced most people that the great economic crisis of 2008 was just an "aberration" and that now things are back to normal.  Unfortunately, that is not the case at all.  The truth is that the financial crash of 2008 was just the first wave of our economic troubles.  We have not even come close to recovering from that wave, and the next wave of the economic collapse is rapidly approaching.  Our economy is like a giant sand castle that has been built on a foundation of debt and toilet paper currency.  As each wave of the crisis hits us, the solutions that our leaders will present to us will involve even more debt and even more money printing.  And each time, those "solutions" will only make our problems even worse.  Right now, events are unfolding in Europe and in the United States that are pushing us toward the next major crisis moment.  I sincerely hope that we have some more time before the next crisis overwhelms us, but as you will see, time is rapidly running out. The following are 12 things that just happened that show the next wave of the economic collapse is almost here...