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"Freely Traded Markets Are An Anachronism; Fundamental Rules No Longer Apply"
Submitted by Lance Roberts of Street Talk Live,
March Spending Driven By Surge In Services
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. As I searched the various headlines, and read several of the economic releases, I came across only one analysis that questioned the headline report.
"Despite expectations that following several months of subpar income growth offset by rampaging spending and thus a plunging savings rate, March incomes would rise by 0.4%, while spending would be flat, this did not happen, and instead both spending and incomes rose by the same amount, or 0.2% in the past month.
Worse, when adjusting for inflation, real disposable income rose just 1.1% compared to last March, and just barely above the 0% breakeven. On the other side, real spending was up 2.2% Y/Y just barely above the 2% recessionary threshold. And even that number is misleading as spending on Total Goods (including durable, already known as being quite abysmal, and non-durable), dropped by $32.8 billion in nominal dollars. What was the offset? Why a massive surge in consumption expenditures on services, which rose by $53.8 billion, which absent the spending aberration for September 11, 2001, which was reversed in the following month, was the biggest monthly increase on record! What drove this record services spending spree is anyone's guess."
Tyler is correct and the chart of the monthly dollar change in services spending shows it to be the largest single monthly increase since January 2002. However, we don't have to "guess" at where the dollars were spent - all we have to do is dig down into the report.
In the month of March, as noted above, the increase in services related spending offset the decline in both durable and non-durable goods spending. The chart below shows PCE, and its major subcomponents, on a net dollar and net percentage change from February to March.
Of course, as Tyler correctly questioned, where were the dollars on "services" actually spent. For clarification the category of "services" comprises any item that is immediately consumed. This category covers everything from housing to financial services to food to transportation. The next chart below shows the major sub-categories of the "services" component of overall PCE.
As you can see consumers spent almost 50% of their money on housing and utilities in March. The stuff that we produce, which has the largest multiplier in the economy, declined which speaks to the weakness seen in all of the recent manufacturing reports.
However, if we dig down into the services sector, we can quickly find the reason that consumers are spending less on manufactured goods as their utility costs jumped sharply in March as several cold fronts ran accross the nation. The chart below shows the total increase in services consumption in March, the total spent on household utilities and the total of household utilities spent on electricity and gas.
However, as we analyze the services sector spending in more detail, there are some other very interesting data points as it relates to the consumer. The chart below shows the various subcomponents of the services category that had the biggest net percentage change in March.
What immediately jumps out is the decrease in bank and securities related fees. With the market surging to all-time highs, and the media chastising individuals for not chasing the markets, you would expect to see these figures rising. Alas, that is not the case and more of individuals disposable income is being diverted into not only utilities, but also public transportation, clothing repair, internet access, personal care labor union dues and employment agencies. The ongoing theme seems to be job hunting. With incomes not rising fast enough to offset real inflation, and more individuals having ever tougher times making ends meet, it appears that they are beginning to clean themselves up and go looking for additional work.
Of course, when you aren't looking for work, and need to fill some time, it appears that the onset of spring, is drawing individuals into movie theaters and sporting arenas - including casinos.
As a side note - it is mildly amusing is the casino gambling is up while commissions for the largest casino on the planet, the stock market, are down. Maybe individuals are catching on that they have a better chance of winning in Vegas.
However, the bottom line is that if you want to know where individuals are spending the bulk of their money in the most recent month - 73% of the money spent on "services" fell into four major categories.
The personal income and spending report does little to brighten the economic picture. As we have been discussing over the past couple of weeks, see here and here, the economy clearly peaked in 2011 and has been slowing since. Despite the Fed's inflation of asset prices - there is little translation into the real economy. As we discussed in this past weekend's newsletter the disconnect between the economy, and the markets, continues to widen due to liquidity driven interventions, the suppression of interest rates and the Central Bank's direct purchases of equities.
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 risk is not lost on the Federal Reserve as Minneapolis Fed President Kocherlakota recently stated:
"Unusually low real interest rates should be expected to be linked with inflated asset prices, high asset return volatility and heightened merger activity. All of these financial market outcomes are often interpreted as signifying financial market instability...[the FOMC] may only be able to achieve its macroeconomic objectives in association with signs of instability in financial markets. These financial market phenomena could pose macroeconomic risks."
In other words the only way for the Fed to achieve its goals of inflating the economy is to create an asset bubble. Of course, the insanity is that once the goals are achieved the asset bubble busts and then the process must be started all over again. Of course, through the long course of the Federal Reserve's ongoing interventions into the economy they have never witnessed an asset bubble before it burst and they are unlikely to do so this time either.
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.
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Vaya farsa de mercados...."MARKETS FULLY RIGGED"
La única página web financiera del mundo que merece la pena es ZEROHEDGE.
Un abrazo a todo Zerohedge desde España
Hugo
I hate to fight Central banks each day of my life...but i prefer to have honor and dignity rather than be part of the scam rigged manipulated markets
Then you should just buy physical gold and silver and take possession.....don't play their ETFs........they're a ponzi......stay out of the casino as Taibbi said its all rigged
Hmm. Did not know that .gov tracked "clothing repair."
and everyone is still going to the movies for their "education"
I just figured it was the SEC working overtime...
Real-world families and economics rarely coincides with academic economics - listen to stories about the Great Depression, and contrast with what we're seeing now.
Speaking of freely traded markets (ha), have metals found their bottom or will they get smacked down tomorrow and Wednesday in a last gasp full-retard all in move?
Hmmmm, after utlities,the next highest service item is net foreign travel.
Last vacation fling before declaring bankruptcy.
Setting up their own private Galt's gulch, like Simon Black in Chile, Porter Stansberry in Nicaragua and Doug Casey in Argentina?
Or just arranging to have their "boating accidents" where metal detectors aren't common?
The only services money that people on the Left Coast increased in March was for tax preparers.
You might as well throw technicals out the window, while you're at it... All that matters is Chair Satans, endless (POMO) rampfest.
Easy solution, sell inflated paper assets now to invest in the real economy. #isthatthegoal?
Where is the column for wall street banker expenditures on hookers and cocaine?
I was thinking the same thing when he mentioned the {outsized services portion} of the gain.
This endless FED intervention is causing problems with the correct pricing of goods and services. It's causing distortions. They'll get worse as time goes by. They are creating multiple bubbles. Odds are they'll all pop at the same time. What fools.
Distortions? Did you mean:
A decade plus of free money under ZIRP, a stock market rising at a 30% annual rate accelerating higher on bad news, record low junk bond yields, oversubscribed high yield funds, leveraged bond funds, massive buy to rent programs in real estate, student loan forgiveness removing the pressure to lower tuitions OR retail getting back into the stock market, FHA home subsidies, mortgage cramdowns, robosigning lawsuits, cash for clunkers, energy efficiency tax credits, healthcare tax deductibility, mortgage tax deductibility, fictitious inflation, GDP, employment statistics, 15% carried interest subsidy, HAMP, HARP, TARP, OMT, QE, Central bank equity purchases, Syphillus, etc?
Come on, there are no distortions. Everything is fine. Somene forgot to take their prozac this morning....
I only need it when I think of those things together.
khakuda ... did you 'riff' extemporaneously?
Just keep in mind Bernanke, Evans, Dudley and Yellen cannot stop. There is no way out for the Fed.
Currency wars until the US has a currency crisis.
Bernanke and the Fed may step up debt buying. LOL, Fed's missing 9 trillion.
http://investmentwatchblog.com/9-trillion-dollars-missing-from-federal-reserve-fed-inspector-general-cant-explain/
While other countries are silently dumping US dollars, the FED and government as BSing until the US dollar implodes.
So "other services" isn't Hookers & Blow?
Central Bank Playbook
Phase 1: Create bubble
Phase 2: Deny existence of said bubble
Phase 3: Stand by and watch implosion of bubble
Phase 4: Claim NO ONE, maybe just 4 people or so who will be investigated, saw said bubble
Phase 5: Blame someone else and create next bubble
I have a theory on this "services" spike.
Small businesses are now more than ever switching to "contractual non-employees" and 1099ing them instead of the traditional route of signing them on as employees and paying all the shit that goes along with it. The end result is that these "independent contractors" are not having taxes withheld from their compensation. They're spending the extra up-front cash on utilities and entertainment.
Look for some serious recoil next tax season when all these "independent contractors" haven't socked away enough to cover their self-employment taxes.
Thoughts?
They would typically contract with an agency rather than risk the liability of going one on one with who knows who.
I see what you mean there. But I'm talking even smaller than that. For example, recently I worked on a tree farm where there were only a few of us employees, except this time around we weren't employees. We were contractors, from a legal perspective. So taxes weren't withheld from our checks.
I'm willing to bet that this is going on all over the place, and that a lot of these new "contractors" either don't know they're supposed to stash away money for self-employment tax, or they have immediate needs (like utilities) that effectively force them to dip into their reserves and spend that money, and that's what's showing up in the "services" spike.
It is that phenomenon that made me draw the connection to the increase in the demand for "services" among consumers. And if that's what's going on, that alone (all the other problems notwithstanding) will lead to a whole lotta broke people this time next year.
This could possibly be a very positive development if all the new "contractors" simply do not file tax returns next year since they didn't pay anything in and so are not due a refund. Mass refusal to file tax returns, along with removal of money from the banks, would be a long step toward the needed revolution.
That may very well happen, without even the notion of refusal, but by accident.
I do not believe the figures for "movie theatres"....with all the crap that is being released now who would waste their time or money on it? Must be some sort of excel spreadsheet error....for sure.
How about accounting fees for tax preparation?
Hah, thought so. I read some lighthearted article today about how everybody is spending merrily even though their salaries are stagnating so I tweeted the author and asked "is this DISCRETIONARY income being spent? how does it break down?" he never did answer me and I didn't think he would. But just as I suspected, and these charts point out, people are not buying frivolity for the most part (depending on what "other services" are of course. LOL).