Is America In Terminal Decline?

Tyler Durden's picture

Authored by Raul Ilargi Meijer via The Automatic Earth blog,

John Rubino recently posted a graph from Bob Prechter’s Elliot Wave that points to some ominous signs. It depicts the S&P 500, combined with consumer confidence and savings rate. As the accompanying video at Elliott Wave, What “Too Confident to Save” Means for Stocks, shows, when the gap between high confidence and low savings is at its widest, a market crash -often- follows.

In 2000, the subsequent crash was 39%, in 2007 it was 54%. We are now again witnessing just such a gap, with the S&P 500 at record levels. Here’s the graph, with John’s comments:

Consumers Are Both Confident And Broke

Elliott Wave International recently put together a chart that illustrates a recurring theme of financial bubbles: When good times have gone on for a sufficiently long time, people forget that it can be any other way and start behaving as if they’re bulletproof. They stop saving, for instance, because they’ll always have their job and their stocks will always go up. Then comes the inevitable bust. On the following chart, this delusion and its aftermath are represented by the gap between consumer confidence (our sense of how good the next year is likely to be) and the saving rate (the portion of each paycheck we keep for a rainy day). The bigger the gap the less realistic we are and the more likely to pay dearly for our hubris.

John is mostly right. But not entirely. Not that I don’t think he knows, he simply forgets to mention it. What I mean is his suggestion that people stop saving because they’re confident, bullish. To understand where and why he slightly misses, let’s turn to Lance Roberts. Before we get to the savings, Lance explains why the difference between the Producer Price Index (PPI) and Consumer Price Index (CPI) is important to note.

Summarized, producer prices are rising, but consumer prices are not.

You Have Been Warned

There is an important picture that is currently developing which, if it continues, will impact earnings and ultimately the stock market. Let’s take a look at some interesting economic numbers out this past week. On Tuesday, we saw the release of the Producer Price Index (PPI) which ROSE 0.4% for the month following a similar rise of 0.4% last month. This surge in prices was NOT surprising given the recent devastation from 3-hurricanes and massive wildfires in California which led to a temporary surge in demand for products and services.

 

Then on Wednesday, the Consumer Price Index (CPI) was released which showed only a small 0.1% increase falling sharply from the 0.5% increase last month.

 

Such differences have real life consequences. In Lance’s words:

This deflationary pressure further showed up on Thursday with a -0.3% decline in Export prices. (Exports make up about 40% of corporate profits) For all of you that continue to insist this is an “earnings-driven market,” you should pay very close attention to those three data points above. When companies have higher input costs in their production they have two choices: 1) “pass along” those price increase to their customers; or 2) absorb those costs internally.

 

If a company opts to “pass along” those costs then we should have seen CPI rise more strongly. Since that didn’t happen, it suggests companies are unable to “pass along” those costs which means a reduction in earnings. The other BIG report released on Wednesday tells you WHY companies have been unable to “pass along” those increased costs.

 

The “retail sales” report came in at just a 0.1% increase for the month. After a large jump in retail sales last month, as was expected following the hurricanes, there should have been some subsequent follow through last month. There simply wasn’t. More importantly, despite annual hopes by the National Retail Federation of surging holiday spending which is consistently over-estimated, the recent surge in consumer debt without a subsequent increase in consumer spending shows the financial distress faced by a vast majority of consumers.

That already hints at what I said above about savings. But it’s Lance’s next graph, versions of which he uses regularly, that makes it even more obvious. (NOTE: I think he means to say 2009, not 2000 below)

The first chart below shows a record gap between the standard cost of living and the debt required to finance that cost of living. Prior to 2000(?!), debt was able to support a rising standard of living, which is no longer the case currently.

The cut-off point is 2009, unless I miss something in Lance’s comment. Before that, borrowing could create the illusion of a rising standard of living. Those days are gone.

And it’s very hard to see, when you take a good look, what could make them come back.

Not only are savings not down because people are too confident to save, they are down because people simply don’t have anything left to save. The American consumer is sliding ever deeper into debt. And as for the Holiday Season, we can confidently -there’s that word again- predict that spending will be disappointing, and that much of what is still spent will add to increasing Consumer Credit Per Capita, as well as the Gap Between Real Disposable Income (DPI) And Cost Of Living.

The last graph, which shows Control Purchases, i.e. what people buy most, a large part of which will be basic needs, makes this even more clear.

With a current shortfall of $18,176 between the standard of living and real disposable incomes, debt is only able to cover about 2/3rds of the difference with a net shortfall of $6,605. This explains the reason why “control purchases” by individuals (those items individuals buy most often) is running at levels more normally consistent with recessions rather than economic expansions.

If companies are unable to pass along rising production costs to consumers, export prices are falling and consumer demand remains weak, be warned of continued weakness in earnings reports in the months ahead. As I stated earlier this year, the recovery in earnings this year was solely a function of the recovering energy sector due to higher oil prices. With that tailwind now firmly behind us, the risk to earnings in the year ahead is dangerous to a market basing its current “overvaluation” on the “strong earnings” story.

“Prior to 2009, debt was able to support a rising standard of living..” Less than a decade later, it can’t even maintain the status quo. That’s what you call a breaking point.

To put that in numbers, there’s a current shortfall of $18,176 between the standard of living and real disposable incomes. In other words, no matter how much people are borrowing, their standard of living is in decline.

Something else we can glean from the graphs is that after the Great Recession (or GFC) of 2008-9, the economy never recovered. The S&P may have, and the banks are back to profitable ways and big bonuses, but that has nothing to do with real Americans in their own real economy. 2009 was a turning point and the crisis never looked back.

Are the American people actually paying for the so-called recovery? One might be inclined to say so. There is no recovery, there’s whatever the opposite of that is, terminal decline?!. It’s just, where does that consumer confidence level come from? Is that the media? Is The Conference Board pulling our leg? Is it that people think things cannot possibly get worse?

What is by now crystal clear is that Americans don’t choose to not save, they have nothing left to save. And that will have its own nasty consequences down the road. Let’s raise some rates, shall we? And see what happens?!

One consolation: Europe, Japan, China are in the same debt-driven decline that Americans are. We’re all going down together. Or rather, the question is who’s going to go first. That is the only hard call left. America’s a prime candidate.

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JoeTurner's picture

Ctrl-P will fix it!

El Vaquero's picture

This is predictable in a debt backed fiat monetary system.  

Government needs you to pay taxes's picture

10 years of Jew-E, 45 years of fiatbux, 105 years with the Federal Reserve Bank.  Dont forget to get some payback.

JRobby's picture

"Consumers are both confident and broke"

One definition of mass delusion...........

"Your card id declined sir."

"I've got to have the new iGadget!"

"Sir! Your card is declined!"

SILVERGEDDON's picture

The Fed suffers from Buzz Lightyear Syndrome. " TO INFINITY.............AND BEYOND !!! "

News flash, motherfuckers - it only works that way in the movies.

Pay back is gonna be a bitch for y'all. 

Jim Ludwig's picture

 

Precisely. The US suffered two mortal wounds. The Balfour agreement which stole land from actual semites (Palestinians) to create a homeland for Khazarian fake semites ("Red Shield Jews" or Rothschilds {Ashkenazi}), and the punture of and draining of US blood by the "Federal Reserve".

 

Post 9/11, only 3 nations out of 197 on Earth do not have a Rothschild central bank. You guessed it: North Korea, Iran, Cuba. The ultra-villified, while the Red Shielders divide and bloodlet...until the Samson Option do us part.

 

 

Paul Kersey's picture

"Is America In Terminal Decline?"

America is in exponentially growing terminal debt, and the money changers are accelerating their wealth extraction at an alarming rate. It is no accident that Goldmanites Mnuchin and Cohn are the chief authors of the Ryan-Republican, so called tax "reform" plan. The wealth extractors are running the table, as fast as they can, while there is still something left on the table to make a run at.

veritas semper vinces's picture

US is an Empire now,the muscle part of the AAZ empire,the biggest and strongest country of the three . You can not sustain an Empire with paper money,not backed by anything,except force.All countries that tried this collapsed.There is no example in the human history of a country(or empire) using paper money and being successful.None. And no matter how much force it uses ,it's not going to help.Especially that  now other countries have learned to resist.

Other countries are learning the power of "Nyet".It's contagious.

There is no solution to the AAZ Empire's dilemma: if they continue to print and expand the debt,it will collapse.If they stop it,the collapse will be instantaneous.The debt can not be repaid,not because is astronomical(that too),but because the system is set to  not pay the debt,just expand it, and this expansion,combined with the inflation,they call it GDP.Our "growth" depends on the expansion,growth of the DEBT.It's a quagmire. They are cornered,like rats.And they may become very dangerous . I hope they will not trigger a world war,because they can not accept that they lost. On ALL fronts.

Matteo S.'s picture

The reason the debt can not be repaid is not because the system is built in a way that it be not repaid.

The real reason is because extreme wealth for a very few bunch of people at the expense of most other economic agents is extremely inefficient. It destroys real and sustainable demand.

And besides, the super rich are super inefficient, in real economic terms, when they spend their excessive revenues and wealth.

Who needs 20 super-luxury cars ?

Who needs to buy a 500 million dollars private yacht ?

Who needs to pay a psychotherapy for one’s dog ?

... etc.

kochevnik's picture

Wrong.  One can repay the debt.  But one must also pay interest on debt, as counterfeit Jewbucks loaned from counterfeiters at interest.  So more Jewbucks must be printed even for interest payments to be possible, which is another loan at interest that must be repaid.  Every Jewbuck spawns more Jewbuck debt.  To INFINITY and BEYOND!

Before fiat same scheme with gold. Since impossible to repay loan interest in gold, debtors were lifted by rope above courtyard, then dropped onto the stones.  That solved the problem

duo's picture

$18,000, isn't that the Obamacare premium?

In the history books it will be called the Obamacare recession, covered up by bogus statistics and the MSM until it was too late to hide.

JRobby's picture

For 6 months, yes it is!

ali-ali-al-qomfri's picture

"BERNANKE Well, again, we were aware of the fact that house prices were very high. And we thought it quite possible that they would correct at some point. By 2006, 2007, we also were aware of the problems in the subprime lending market. What we did not anticipate and no one anticipated was the vulnerability of the financial system overall to a run, a panic. You know, in the 19th century, early 20th century, we had bank runs all the time. People would run to the bank, pull their cash out and the bank would have to close. That was this, in the 1930s story. So now we have deposit insurance. We didn't see that coming.

 

The Courage To Act/s

FreeShitter's picture

Been in terminal financial decline...... also..........  morally and socially.

Government needs you to pay taxes's picture

I just became aware that pegging is now a thing, culturally.  That's where a man-who-considers-himself-heterosexual gets a woman to Don D Strapon and plug him in the ass.  I checked it out online, and sure enough, the free porn sites are loaded with everything from preggo women to wives 'pegging' their men.  This is what masculinity has come to . . .

ArmaG3don's picture

Porno is a form of mass control. Growing industry let them make an ICO for it.

OverTheHedge's picture

I absolutely never look at porn but there seems to be a huge increase in incest mother/son father/daughter brother/sister/grandad/neighbour etc. It's getting to the point where, if I ever wanted to watch, I wouldn't, if you see what I mean. Pornography is supposed to excite and titillate, not repel and sicken. Maybe I'm not a millennial, so I don't understand .

FreeShitter's picture

Yeah its a sick fucking world, I try do my part to detach from it.

dogballs's picture

NIRP is coming to us all - Nine Inch Repeated Pegging - until the morale improves.

dogballs's picture

NIRP is coming to us all - Nine Inch Repeat Pegging

land_of_the_few's picture

It's crappy jobs plus investment in nothing-but-housing-bubble. Not just US. Anywhere sufficiently "Western".

Throat-warbler Mangrove's picture

If you had not nailed him to the perch, he'd be pushing up the QEs.

Seasmoke's picture

Death Spirals are Terminal !!!!

dark_matter's picture
Turning and turning in the widening gyre    The falcon cannot hear the falconer;  Things fall apart; the centre cannot hold; 
Solio's picture

You don't need to ask with so much pizza.

Internet-is-Beast's picture

The S & P should be shown in 1970 dollars in the first chart.

Internet-is-Beast's picture

The S & P should be shown in 1970 dollars in the first chart.

44magnum's picture

The bankers should go down first then we can stand on them.

zzzz88's picture

in this everything and everywhere bubble, once it is down, it is down hard.

the head of china central bank said that right now short/mid/long term cycles peak simultanously, once it is down, it is minsky moment. sounds very reasonable.

but nobody cares right now, because most people look at their paper wealth of stocks and houses, laugh to the heaven

ArmaG3don's picture

So how probable this minsky moment? At the 2008 analytics claim the number of systemic risk at 5% whatever they meant by it.

Batman11's picture

Capitalism is under siege after four decades of half baked neoliberalism.

Capitalism – back to basics

Disposable income = wages – (taxes + the cost of living)

Workers want more disposable income

Business wants to pay lower wages for higher profits

The rentiers look to push up the cost of living.

The government takes taxes.

Generation rent see the problems as low wages and a high costs of living.

The cost of living = housing costs + healthcare costs + student loan costs + food + other costs of living

The real estate boom passed gains to one generation at the expense of all future generations.

It’s turning the US and UK socialist, Bernie Sanders is the most popular politician in the US and Corbyn’s star is rising.

The cost of living = housing costs + healthcare costs + student loan costs + food + other costs of living

This has turned the bastion of capitalism, the US, socialist.

 

Disposable income = wages – (taxes + the cost of living)

Business wants to pay lower wages for higher profits

The “cost of living” variable makes Asia or Mexico the favourite for those seeking the best returns. 

Adios America.

Batman11's picture

In the US they use the left hand side of the brain to get the best return on their investments and the right hand side of the brain to worry about the new multi polar world.

The left side of my brain tells me to invest in China for higher profits.

The right hand side of my brain worries about a powerful China

Never the twain shall meet.

tion's picture

Being employed by someone else is not an entitlement.

Renting someone else's property is not an entitlement.  

To believe otherwise is to lie to yourself.

Generation rent is trying to live beyond their means, in higher rent districts than they can truly afford, driving leased cars that they cannot afford, eating most meals out when they can't really afford to.  They were raised financially illiterate and will remain so until they realize that they are going to have to take responsibility for reassessing their situation, resetting their expectations, and taking the necessary steps to educate themselves on how to take a better path forward.  The standard of living expectation we were sold was based on the global hegemony lie that sustained itself on death and value theft.

Batman11's picture

It's your country that's going down the pan.

Too many are cretins like you.

ArmaG3don's picture

Are you talking about "Tight Labor Market"? In the process of disruption by A.I. Systems?

Joe A's picture

Perhaps I missed it in the article but perhaps people are also not saving because the interest is very low so there is not benefit in saving. Instead they invest in stocks and bonds.

JPegg's picture

Oh please like anyone on here looks at the obvious.

THORAX's picture

Interesting data and analysis. But with God all things are possible! 

Wise Gold's picture

So maybe god wants the markets to crash.

saldulilem's picture

My red line was when meal + drink cost more than $10. No, thanks

Wise Gold's picture

This chart work in this article  is incomplete.  Read the Stocks & Commodities magazine for the December issue.  They quote Shepwave in the article and basically steal from them in other parts.  So far from what I can gather Shepwave is the only wave analyst to call the markets right..  The rest are always making excuses. 

JPegg's picture

Most profitable traders on here already use them.   A lot of people on here are now broke after being bearish for 9 years. 

koan's picture

545 people caused this trouble, seems strange that 330 million would put up with them.

Scornd's picture

sweety. they have a monopoly on Force.

koan's picture

Yeah that's what the French monarchy thought in 1790.

Cry Baby Moe's picture

THE ZH PROPHETS HAVE SPOKEN! THE WORLD IS ENDING!

HRClinton's picture

The world never ends. Only the fortunes and lifestyles of people, companies and countries. 

Re.. "producer prices are rising, but consumer prices are not.

This simply means that consolidations (buyouts, takeovers, bankruptcies) of Producers is afoot.

When the controls and wealth have been concentrated enough, the curtain will be pulled back by the (((Owners))).