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Economic Theory Meets Main Street Reality
Submitted by Lance Roberts via STA Wealth Management,
Since the end of the financial crisis, there has been an ongoing debate about the economy. However, the debate I am speaking of is not between investors and Wall Street, but rather between economic theory and "Main Street" reality.
Over the last few months, in particular, economic and media "experts" have become more vocal about the ongoing detachment between economic theory and actual economic activity. The ongoing hope, as point out by Myles Udland recently, is "this time is different:"
"Right now, this ratio is spiking, indicating that businesses in the US are accumulating a stockpile of goods (this ratio measures how many months it would take businesses to sell down their current stash of stuff).
So the most basic question to answer is: are these inventories being accumulated because businesses can't sell these goods or because they're anticipating selling them soon?"
"But if businesses think that the long-awaited surge in consumer spending that's supposed to follow the decline in gas prices over the last year is finally coming down the pike, then it would make sense to be prepared to this influx of spending. Or more accurately, it made sense three or six months ago to increase futures orders in anticipation of a big holiday shopping season."
Here is the problem that continues to elude academic theory; falling gasoline prices has no "net effect" on economic growth. As I explained previously:
"If I spend less money at the gas pump, I obviously have more money to spend elsewhere. Right?
The problem is that the economy is a ZERO-SUM game and gasoline prices are an excellent example of the mainstream fallacy of lower oil prices.
Example:
- Gasoline Prices Fall By $1.00 Per Gallon
- Consumer Fills Up A 16 Gallon Tank Saving $16 (+16)
- Gas Station Revenue Falls By $16 For The Transaction (-16)
- End Economic Result = $0
Now, the argument is that the $16 saved by the consumer will be spent elsewhere. This is the equivalent of "rearranging deck chairs on the Titanic."
Increased consumer spending is a function of increases in INCOME, not SAVINGS. Consumers only have a finite amount of money to spend. Let's use another example:
Example:
- Big John Has $100 To Spend Each Week On Retail Related Purchases
- Big John Fills Up His Truck For $60 (Used To Cost $80) (+$20)
- Big John Spends His Normal $20 Per Week On His Favorite Craft Beer
- Big John Then Spends His Additional $20 Savings On Roses For His Wife (He Makes A Smart Investment)
- -------------------------------------------------
- Total Spending For The Week = $100
Now, economists quickly jump on the idea that because he spent $20 on roses, there has been an additional boost to the economy. However, this is false. John may have spent his money differently this past week but here is the net effect on the economy.
- Gasoline Station Revenue = (-$20)
- Flower Show Revenue = +$20
- ----------------------------------------------------
- Net Effect To Economy = $0
Graphically, we can show this by analyzing real (inflation adjusted) gasoline prices compared to total Personal Consumption Expenditures (PCE). I am using "PCE" as it is the broadest measure of consumer spending and comprises almost 70% of the entire GDP calculation.
What is missed in the simplistic thought process of "Lower Gas = Higher Spending" are two important points:
- Consumer Psychology: Not spending as much at the pump gets lost in the "daily living" of individuals. There is a big difference in consumer psychology of an "invisible saving" versus a physical "check in the mail" like a tax refund. "Gas savings" simply get consumed in the daily living expenses and payment of debt.
- Declines in oil prices have a larger negative impact on economic growth than the "incremental savings" received by the consumer. Job losses in the energy sector (high wage paying jobs) and cuts in capital expenditures "trickle down" through the economy reducing jobs and incomes in all the areas that support the massive energy-related infrastructure.
The Same Or Not?
However, let's go back to the first chart above. Maybe the current rise in inventories is simply a build-up in expectations for stronger holiday sales? Maybe the current rise is more equivalent to that seen in the 1990's where increases did not coincide with a recession?
If the inventory build is going to be "ultimately" consumed, we should be able to look at the consumption side of the equation for clues.
The first chart below shows durable goods and "core" durable goods orders.
The difference between the current economic backdrop, and that of the 1990's, is that durable goods orders never substantially declined into negative territory. The strength in durable goods orders in the 1990's led to "inventory cycle builds" that were ultimately consumed by an economy that was growing at roughly 4% on average.
Currently, durable goods orders have fallen significantly into negative territory as inventories of unsold products builds. With an economy that will likely turn in growth of below 2%, the economic backdrop to "absorb" such a large inventory build is not readily available.
However, let's look at the consumer specifically with respect to "retail sales." We also find a substantial difference between today and that of the 1990's as well.
Again, we see that during the 1990's retail sales never declined to levels more normally associated with economic recessions and weak consumption. Today, that is not the case. (in order to strip out the "seasonal adjustment fudging," I have used a simple 12-month moving average of non-seasonally adjusted data.)
While there are many that continue to dismiss individual "economic data points" in order to promote a "bullish bias" for the equity markets, it is more important to accumulate the "weight of evidence."
Currently, the economic data does show that the U.S. is in a recession. I am also not suggesting it is. However, with many economic indicators showing signs of weakness, combined with the global deflationary pressures sweeping back into the U.S., it is dangerous to ignore the mounting warning signs. Furthermore, by the time "revisions" to the economic data are made, it will be far too late for investors to make any difference.
The rising inventory levels, weak consumption, and plunging imports all suggest that the domestic consumer is much weaker than currently believed. The last time this combination of data points collided was just prior to the start of the last recession.
But then again, this is where "economic theory" collides with "Main Street realities." Place your bets carefully.
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"Since the end of the financial crisis..."
Exactly when was that?
Theory or propaganda?....it's a fine line these days
Please, you are take poll:
https://twitter.com/BorisAlatovkrap/status/666629780033269760
Sorry Boris,,, I don't do the farcebook, twiddle thing. Maybe post your poll here for us malcontents.
<-- You are unhappy?
<-- You are not so happy?
This is pole for malcontent.
Happy is one of the seven dwarfs... the cheerful one.
I rear-ended a car at last week. The driver got out and,... he's a dwarf.
He comes up to my car and says, "I am NOT happy!"
So I said, "Okay you little phooker... Which one are you?"
Tsk, didn't you see the news report of fairies riding into town on unicorns?
Where is Skittle color? Where is sparkle dust? Ecommunist is maybe not so much connect with reality...
Please, eCONomics is a social science. Remember, when fraud is the status quo, possession is the only "law" that matters. Now stop crying and evolve or die.
same as it ever was...
A social science with imaginary numbers......
Charts don't matter . There is only P&P ( print and propaganda).
The current state of US economy-
1. High unemployment, coupled with anemic job growth- >90% of “new” jobs are temp positions- low pay, no benefits, no job security.
2. Rents are going up as is the cost of health care, further reducing the purchasing power of working people.
3. Since 2008 financial crisis, Central banks- US FED, BOJ and ECB have flooded banks with $ trillions from taxpayers at zero interest rates, which has worked its way into stocks and “trendy” real estate in SF, NYC, Boston, etc, creating new financial bubbles. As a result, stock markets in US, EU and Japan have become addicted to this ultra-cheap money to keep markets inflated.
4. As extensively documented by ZH, auto sales have been propped up with sub-prime auto loans.
When this bubble bursts, it will make the 2008 crash look like a picnic.
Don't overthink this, call it what is really is;
The planet is performing a "let the majority eat cake" monetary experiment. We all know how this turns out. Money is not capital. High prices do not always mean something is of high "value".
ZIRP/NIRP is capital and resource mis-allocation and mal-investment on a scale never before seen.
"If I spend less money at the gas pump, I obviously have more money to spend elsewhere. Right?
The problem is that the economy is a ZERO-SUM game and gasoline prices are an excellent example of the mainstream fallacy of lower oil prices.
Example:
Except the gas station doesn't care about revenue, it cares about profit. Back to ECON 101 for this guy.
Noticed that did you? Things are complex in even he simplest systems and it is matter of survival when one thing gets cheaper and everything else gets more expensive. The government uses static scoring of the economy instead of dynamic, since they know that they can't predict outcomes in the real world that is actually involving people making decisions....
Yes,,, he seems to be overlooking that.
Also if the Gas Station reduces it's prices slowly over a few days/weeks its profit could actually increase a little which is pretty much what they actually do.
Both revenues and profits are down in most sectors with a few exceptions and that is where the illusion comes in to play. Also, when you count tax, like the Unaffordable Healthcare Act as part of economic growth, then ...well it speaks for itself.
The rise in Healthcare costs at the place where you receive services is going to surge and surge and surge some more because of the same group that got us into this mess; the Baby Bummer generation. The most immoral and ungodly generation that is the real "ME" generation who exchanged the true God for the god of materialism...Satan is a good salesbeing.
It is not a generational thing. There are worthless eaters and users in every generation. Most Boomers haven't retired yet and are still productive. They are even more likely to have jobs than the younger generations because they have the skills that are in demand. I will be ready for you crocodile when you come to take what I have earned.
Interesting. Tell me, do you have "everything you have earned" in a bunker somewhere that you know is secure and safe. You see, when fraud is the status quo, possession quickly becomes 100% of the law. Moral Hazard is a real motherfucker. Now remind us, how many of those bankers and financiers who caused (and profitted from) the financial crisis have gone to prison?
Still blaming mommy and daddy. Neurotic idiot.
Don't forget the 50% to 100% increase in healthcare costs under Obama. How do we pay for that?
But we no longer use economic activity to value stocks, just if Japan is buying stocks today or not.
Did we just blow thru the SPX 200 dma like it wasn't even there? Gartman is correct, Terror is good for stocks
VIX spike lower are happening again
I am 100% convinced that the Federal Reserve is buying stocks through their primary dealer banks. Without the Fed buying,we would see a massive stock market collapse and that would hurt the Democrats in 2016 and Obama's recovery legacy. Think about it, there is no good economic data which justifies the stock market rallies.
The Federal Reserve is unaudited so they can get away with creating electronic money out of thin air to buy stocks with. What's to stop them?
I hope that zerohedge and the Tylers will do a more in-depth investigation on what the Fed is doing behind the scenes. Someone has to come forward and expose the Fed.
lester,
ZH has been doing that for 7 years.
I'm inclined to think the same, but can you tell me what happens if they own all the stocks?
I mean the way this is going they are owning more and more each day, which really puts them in a shitty position should this thing crash.
Can they even stop buying anymore? If they never stop they will own all the companies and it will be something akin to communism ?!
That's exactly what's going on...what else explains the VIX??! The "market" has been having heart attack after heart attack and somehow the patient isn't dying.
The defibrillator is overheating but it is still being applied to the point, I fear, where the defibrillator is simply being left on ALL the time now...because that's the way to save a heart attack patient!!
It's time to remove the "Cheney Model" Keynesian heart and replace it with something that has some gold in the valves.
I'll give Tyler credit, he's tireless in his cheerleading of a coming recession.
For the sake of the rest of us, I'm happy that he's been wrong about it for the last 6 years.
Tyler is wrong? ...about what?
There had been no recovery...a glance at the M2 Money Velocity chart proves that.
There is a substantial amount of fuckery in the "markets" right now...has been for a long time and it's been getting worse.
I KNOW Tyler is right about that. What none of us know is what the outcome is going to be.
Are we all waiting for the instant gratification that a total market collapse will give us? That day where we can revel in being "right" about all this bullshit? OR, do we watch the economy slowly sink into the ocean of debt like what is happening in Japan, where it takes 20+ years of deflation and still no recovery in sight?
Someone explain to me... WHAT is a recovery?
A recovery from what?? Debt? Worthless Fiat? Manipulated markets? A broken economic model?
I could really use the answer to that question now, please.
A real recovery would be real increase in jobs, wages and GDP, not fake debt fueled market inflation and goal-seeked statistics
A real recovery would be felt by most of society and people would be happy about it
A real recovery is what's not going to happen until the whole financial system gets a big overhaul, which could be ... way late or maybe never?
Yes, anyone who imagines the economy is improving needs to carefully examine the "labor participation rate" from the 1960s (or earlier) to today.
That chart tells the true story as well as any.
Can you spell "falling off a cliff"?
Fraud has been the game played for the last 3 to 4 years to keep wall street and the banksters flush. Everything to protect wall street and the markets has been on a full Monty.
They make up economic numbers, they allow companies to report their earnings using NON-GAAP accounting, they are now ignoring the stock buybacks that are juicing numbers, they have the fed A'holes on TV whenever they need to keep the markets humming, etc. etc....
The only real thing is that we know all the numbers are cooked. We just didn't know how far they would go and it looks like whatever it takes.
Who in their right mind was buying the market yesterday? Had to be the central banks selling the VIX and buying the markets. Manipulation has become a daily event and now everyone simply expects it.
This article is a complete Keynesian fallacy. Spending beyond our income can only be achieved by saving. Rise in income can only be achieved by saving as well. The whole problem is the quantity of money. Central planners don't allow the economy to adjust the value of the existing money in circulation (i.e. the "purchasing power"). When manipulating the quantity of money THEN you have a zero sum game.
Let the amount of the existing circulating money to get the price according supply and demand and you have a fair economy with clear signals.