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Guest Post: The Cliff Notes
The Cliff Notes
Certainly we’ve started 2012 with a better tone to a number of economic indicators. Employment numbers have strengthened, leading economic indicator series have trended higher, and there’s even a little bit of life in housing as many former savers have now become mom and pop landlords in the effort to achieve some type of rate of return in what essentially is a Fed sponsored yield starved environment. If you’ll remember, this is very similar to the landscape seen at the outset of 2010 and 2011. What’s decidedly different at the outset of 2012 is the very much anomalistic warm winter we’ve experienced. Important as warm weather has allowed macro economic activity to be a bit more vibrant than would otherwise have been the case in the first quarter of the year. Think construction, housing activity, more money in consumer pockets saved via lower home heating energy costs in a less cold winter, etc. Moreover, most headline economic numbers have been perceptually pleasing as so many statistics are massaged by what are termed “seasonal adjustments”. Since the government and other providers of the body economic factor in seasonal weakness based on winter weather at this time of year, the very absence of cold weather can easily act to overstate the perceptual reality of overall economic tone in what continue to be seasonally adjusted numbers presentations. We’ll know soon enough as we move into Spring whether weather has been a perceptual distortion agent over the last quarter, or otherwise.
One way to attempt to see through these seasonal adjustments is to look at very simple year over year trends. Here are just a few:
We’ve tried not to “cherry pick” these data points and quite necessarily have included a few directly related to US households for a very important reason. Important issue being, there are no “seasonal adjustments” being made in these numbers. The year over year directional trajectories are clear. For now, they do not paint quite the same overall message as shorter term seasonally adjusted stats.
As we’ve written about many a time, credit is the lubricant that makes really any economy move forward. In a generational credit cycle deleveraging environment, which we believe is still the correct macro, if credit contracts in one sector of the economy, that contraction must be offset by another sector continuing to take on leverage at a rate at least equal to the sector contraction in question simply to keep macro economic growth stable. To the point, Government sector credit (debt) expansion has offset household credit contraction in the current economic cycle so far. But that may be about to change in a very meaningful way directly ahead.
So far into the current year, the markets and investors specifically have been primarily focused upon all of the “unexpected” good cyclical economic news, news that in at least some part owes its character to much warmer than usual winter weather and the perhaps overly enthusiastic message exuded by seasonally adjusted economic stats because of this anomaly. This, along with continued (and quiet) Federal Reserve balance sheet expansion, in conjunction with collectively unprecendented and simultaneous central bank money printing in China, Europe, England and Japan has raised financial market animal spirits and dulled the sense of risk. The following chart is a look at the S&P 500 set against the 13 day moving average of the VIX indicator. In popular parlance, the VIX is the “fear” indicator. In actuality it measures the implied volatility of S&P 500 index options. The lower the reading, the less concerned are investors about forward potential price volatility, and vice versa. Historically, low readings have often been associated with interim market tops just as high readings have been associated with important near term price lows. The current message is that investors are not too concerned at all about forward price volatility as this moving average of the VIX rests near five year lows. Investors are relatively complacent.
But being somewhat of a contrary indicator, we’re back to the lows in this indicator recorded since 2008. At least so far in the current cycle, each of these lows occurred very near important interim equity market highs? Will it be so again? Regardless of what lies ahead, this indicator is suggesting investors are now as little concerned about forward volatility as was the case at both the 2010 and 2011 interim equity market highs.
The reason we're bringing this up is that beyond the better than expected seasonally adjusted economic stats of the moment lies what has been termed the “fiscal cliff” for the US. To the point, you’ll remember that at year-end 2011 what have come to be known as the “Bush tax cuts” (think dividend and capital gains tax rates) were extended for one more year, as were payroll tax cuts and extended unemployment benefits. Secondly, you’ll also remember the 2011 melodrama over the US Government debt ceiling, which by the way has been violated five times to the upside since. At the time Government spending cuts under a fiscal consolidation agreement were passed, but not set to go into effect until the beginning of next year. Given that the Super Committee convened to address this spending cut issue came up empty handed last December, unless legislation is changed prior to year-end the agreed upon Government spending cuts will take effect on the first day of 2013, hence the characterization “cliff”.
As it now stands, the US economy faces a “fiscal cliff” in early 2013 – meaningful Government spending cuts AND tax increases at the household level. Nothing like a double whammy, now is there? Unquestionably this is one of the reasons why the Fed has pledged to leave short-term interest rates low for some time. So what happens if nothing is changed and both tax increases and spending cuts are allowed to materialize? Although it’s an approximation, the deadly combo could shave 1.5% plus from US GDP next year. Estimates from the Congressional Budget Office are for a more meaningful contractionary impact. And that’s before the ultimate global economic fallout influence of Europe and China slowing.
But there is a larger and very important issue beyond this, although the “cliff” is something investors will not ignore and could be very meaningful to forward economic and financial market outcomes, especially given the relative complacent market mood of the moment. Think back to comments at the outset of this discussion. For an economy to expand, overall credit acceleration in the economy is a necessary ingredient. The “cliff” ahead suggests that the Government will not be the key credit acceleration provocateur it has been since the start of the current cycle back in 2009. With household taxation set to increase and automatic Government spending cuts to take effect in January of next year, total Government borrowing needs will drop by these revenue raising initiatives. So if the Government is set to slow its borrowing, remembering the truism that total credit must expand for the overall economy to expand, just what economic sector will step up to the plate and increase its borrowing (and spending)?
Will corporations increase borrowing? Not likely. They have already partaken of the nectar of generational lows in interest rates. Although many a corporation is flush with cash, total corporate debt relative to GDP stands near an all time high. Only to be expected as corporations have already had the chance to borrow at once in a lifetime interest rate lows. So that leaves households as the only other sector that could offset the academically negative impact of the impeding Government sector driven fiscal cliff/credit contraction. Are households up to the task of taking on more debt?
This demands a bit of analytical digging given that recent superficial Wall Street as well as mainstream analysis has been suggesting household deleveraging is now over and consumers are once again borrowing. Is this really true? We’ve seen too many analysts/strategists point to the year over year growth in total consumer credit that now stands at 4.9% as proof positive households are now once again borrowing. Unfortunately, Government student loans are included in the consumer credit totals that have completely skewed the message of the headline numbers in this cycle due to the unprecedented magnitude of Government student loan grants.
The following chart looks at headline consumer credit numbers as they are reported (top clip) and the numbers adjusted for the anomaly that has been student loan growth. Two very different pictures collectively proving to us that stripped of the influence of student loans, there has been no increase in consumer credit at all. Even to this day the year over year rate of change remains in negative territory as it has over the entirety of the cycle so far. Unfortunately, you’ll never see this chart on CNBC.
If we look at the other largest component of household debt that is mortgage debt, the numbers and trend are clear in that mortgage debt has contracted each and every year since 2008. Unfortunately in the household mortgage balance numbers from the Fed there is no delineation between pay down of debt or default. Certainly the bulk of mortgage balance contraction in the current cycle has been default. To hopefully get much clearer insight into the current household psyche regarding household debt, we think the mortgage refi numbers help a lot as points of character. Specifically the levels of cash out and “cash in” refi activity. The following chart is self explanatory. As of 4Q 2011, the level of cash out refi’s resulting in 5% or higher new loan amounts fell to the lowest level in the history of the data. Moreover, the level of refi activity resulting in a lower loan balance (essentially a “cash-in” refi) rose to the highest level ever recorded very near 50% of all refi activity. It sure appears that this indeed continues to be deleveraging 101, and not the picture of a household sector all set to lever up anew. Exactly the opposite as this is direct debt pay down.
In the first table presented in this discussion, have a look at the year over year rate of change in real (household) consumption and personal disposable income. Again, these are not the numbers we’d associate with a household sector on the brink of balance sheet expansion, quite the opposite.
This is exactly why the “fiscal cliff” issue is not to be brushed off. Is this the next point of worry for investors that will send the VIX to higher ground? We’ll see. Personally, we do not expect the fiscal cliff to actually occur as per current legislative mandate. Not a chance when self preservationist concerned politicians are involved. If we had to guess, these tax increases and Government spending cuts will be phased in over a series of years in the final outcome. But we’ll suggest to you that THE key to forward financial market and economic outcomes is what happens between now and reconciliatory legislation is passed.
We need to remember that over the past two to three years, it is very fair to say that political decision making on key issues can be correctly characterized as 11th hour at best. Just in time political decision making? Something like that, but this type of behavior necessarily breeds uncertainty and anxiety. The reality is that in this election year, it’s a very good bet politicians will dither and do nothing about the fiscal cliff issue until after the elections. So will investors calmly sit by and serenely await the 11th hour political mud slinging as we approach the proverbial cliff, never raising a concern about the ongoing rhythm of economic healing, corporate earnings growth, etc.? Will business decision makers look past a key issue such as this with never a passing concern about what may be in store for their own business prospects? Or will a certain sense of anxiety begin to express itself in financial asset prices as well as real world economic decision making?
Although we’ve experienced a bit of headline improvement over the last six months, the US private sector is not growing at a current magnitude sufficient to offset a potential contraction in early 2013 Government spending. Additionally, will the US employment base achieve a lift in wages enough to offset forward personal tax increase mandates? At current rates of wage growth, not likely. The important issue we want to leave you with is to be aware of the facts and anticipate potential investor and broader economic reaction to the fiscal cliff issue as the current year unfolds set against what will certainly be the volatile ongoing rhythm of political rhetoric and decision making.
For now, in historically low territory, measures such as the VIX are telling us investors do not expect many volatile ripples ahead. Alternatively, if there has been one truism in the financial market and economic cycle up to this point, it’s that we continue to be in a bull market for price volatility both on the upside and the down side. The time to contemplate investor and economic reaction to the fiscal cliff issue is while no one else seems to be currently addressing or concerned with the same. Before it hits the front page, you’ve been put on notice via the “cliff notes”.
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I am going to laugh my ass off when it finally hits the TARDS out there that the numbers that they have been basing their decisions on were 100% fabricated bullshit. Econimic indicators that things are improving? WTF? Just because everyone has a job does not paint a rosy picture, especially when they are temp, part-time and minimum wage earners. Your mild winter we soon be substituted for a wild summer...
I believe the common phrase for this summer may be "The summer of hell".
Yes this may well be the summer of hell.
"Estimates from the Congressional Budget Office are for a more meaningful contractionary impact." BTW, would this be the same CBO that, ummmm underestimated the cost of Obummercare by, say a trillion? The same Obummercare plan that Congresscritter Sessions read and has estimated will be more like 17 TRILLION, instead of the less than 1Trillion we were told? If employers and people are paying far more for healthcare there's liable to be several summers of hell, not to mention winters of discontent.
"Just because everyone has a job does not paint a rosy picture, especially when they are temp, part-time and minimum wage earners."
You forgot to mention that those jobs are being paid for with borrowed money. What happens when the money runs out, and employers/consumers can't (won't) borrow more?
Interesting. Can you clarify that statement? Are you basically saying that employers have taken loans out to pay for new workers, buying into the "turn around" bullshit? Thanks.
Simple.
All this current "growth" is artificial. It's due to government "stimulus" which is spending of borrowed money; as well as consumer spending of borrowed money at artificial, freakishly-low interest rates.
Cut off the borrowing and all those "recently-created" jobs vaporize; just like the capital at MF-Global...
Not to sound partisan (because both parties are to blame: a pox on both their houses), but:
To quote former Speaker Tip O'Neill on the Reagan recovery: "Let me write a billion dollars a day in hot checks, and I'll show you a good time too."
There would have been far fewer "hot checks" if Tip O'Neill had lived up to his part of the bargain with Reagan and actually cut spending. Democrats seem eternally to be unable to reduce spending, much like the Republican Congress in the first half of the last decade. Curiously, Obama is not showing America a good time despite spending 3 or 4 billion per day in those "hot checks". Hot checks buy a good time until they don't, I guess.
Just because everyone has a job does not paint a rosy picture, especially when they are temp, part-time and minimum wage earners.
You been smokin again?.....everyone has a job?.
12-13 million previously employed does not constitute having a job.
Since their sitting at home,with no job,collecting UE, and Food stamps.
SAY WHAT????????????
Ask the bank for a 5 year fixed and they said we are not offering that any more.
A friend went to get a loan for a new house, after selling his previous one, and he said that the process was from hell. This was a VA loan. Bank statements, current statements, where did sgnificant amounts of money go - previous accounts, paper trail for money, etc. He said it was the worst process he ever experienced, and this was not his first rodeo...
I've proven to the health care industry that I have had continious coverage for 18 months
and they are still denying me Pre- X condition clause. Today was my 4th time faxing and mailing.
God bless the USA
This is the greatest country on earth. If you don't like it feel free to leave. God bless.
LOL. Come back and see us in 5 years.
Gee, you sound just like a devout Rebublican.
Especially the "God Bless " instead of "Fuck You"!
Correction, "This was the greatest country on earth. If you don't like it feel free to leave." No sir, I don't like it and will not leave, for this is my country. Much more prefer to participate in restoration, if that is possible.
Irish, contact your states Bureau or Dept. of Insurance - they usually have consumer complaint forms on their website for download. They tend to have attorneys on staff, and here in Maine over 80% of complaints are resolved in the consumers favor - insurance companies tend to get to the bottom of the problem when the Ins. Dept. is on the phone.
thank you
Reply to Praetorian Guard,
This is probably because your friend had not financed in the last 4 years. Most people that just sold and are now re-entering the market bought during the 2001-2007 era when all you needed was your social to get a loan. Now we require everything Bank Statements, papertrail for large deposits, tax returns, w2's, paystubs, etc.
Banks arent asking for this stuff because they are out of money, they require this informaiton because Fannie Mae, Freddie Mac, FHA, and VA are the only secondary market purchasers out there. These guys always required this informaiton. During the housing boom Wall Street was the secondary market and they didnt require anything but your SSn.
The current strickter guidelines have a default rate of nearly 0%. I wish they were always this strict.
It doesnt matter the markets are going up on good news and spinning bad news
Phoenix called Jan 2013 as his "beginning of the end" which corelates with the numbers. But as we know, the Fed can have ways of kicking the can down the road.
How fucked would it be if the biggest DOW loss comes on the week of Dec 21?
The "Recovery" seems forced, doesn't it? Plus, what if those companies have debt by a TBTF that goes under? What happens then?
I mean, the news tells us things are better, the President acknowledges it as a recovery, but look at the true actions of TPTB. More liquidity and central bank printing. Jobs exist, but wages stagnant, gas/oil/food/rent all up. Marriage down, fertility rates down, savings rates down. Laws like SOPA (they'll get it through), Health Care Mandate, NDAA. No houses being bought. A shitload of debt. Growing rift between Baby Boomers and Millenials. Iran and Israel. Snooki having a kid.
I mean, it all smells like a recipe for disaster, doesn't it?
I wasn't concerned until your post about Snooki. God help us. The Mayans were right.
SHIZ
TBTF can't 'goes under'...it is in the definition!!!
Know this, the plan has always been to screw around until that does not work then hyperinflate. Deflation is simply too painful and will NOT be tolerated. The Fed was created to backstop the BIG banks when JP Morgan himself would not be around to do it. Saving the big banks is what America is all about. All we can do as little folk is be under the table when the crumbs fall. Knowing there will be crumbs and where they might fall could be HUGE for us, unnoticed by them.
Also, perhaps someone can answer a question that keeps nagging me:
Why are builders building new homes if literally millions of homes exist in the wind via foreclosure, etc (bank books)? ...and where are the builders getting the money from? Who would loan money to builders to build a widget where there is currently a market glut? I see new homes popping up and when you go in to talk to the sales rep they won't even budge on price, eventhough the subdivision may have several homes barely lived in for sale or short sale/foreclosure that are a fraction of the cost...
All the builders are publicly traded corporations. They can't stop building. That would be like Apple saying, "There are too many iPads on the market so we are going to stop making them for a year."
Apple stock would go from $630 to $5 in days. Same with the homebuilders. If they stop building it would be admitting they can't make money anymore.
Question answered?
Yes. Thanks. However, how do they pay their obligations or notes if no one is really buying their product? Sell more stock?
Remember, they are mostly building multi-family units for rentals, so they don't so much have to sell, but rather, beat the aging competition.
The real losers are those who own said aging properties who see a diminished revenue stream.
Good point. Now another question- Why do Americans adopt Chinese kids? Do they think their own kind is dumb or simply no future?
So that they don't need to remember to take a calculator with them when grocery shopping?
The same reason China builds ghost cities.
http://www.secretnews-compact.com/index.php?option=com_content&view=article&id=391:new-al-qaeda-graphic-warns-of-another-attack-in-new-york&catid=1:latest-news&Itemid=50
Alright! More precidence for suppression.
Pretty soon owning Photoshop will be a terrorist indicator.
Think you'll find it already is. Check out the latest booga booga from the american gestapo (with apologies to the Gestapo) on what bodily / facial expressions denote probable terrorist intent . . . . think it works out as "if ya don't work for the govt you're probably a terrorist"
Ryan plan is about to cut retirement health care benefits big. Your retirement golfing money? Re-assigned to your rising share of healthcare premiums.
It's austerity time. Tighten your belt, America
Not in the USSA. Cannot have auterity. More food stamps and more TV is what is needed. Forgot, Iphones and IPADS.
Caviar you are not serious are you? There will be no cuts. You got the memo no? We are printing our way out of this mess baby.
I'm looking forward to the end of the world Dec 21 2012. Tired of the can kicking. Actually I think I'm just tired. Worked last 32 days in row with no day off in sight. Got to love the money but dying to go fly fishing. Ah well. Can't have it all I guess.
Off topic but what is this noise? Is there any bite to this story, I watched the entire clip and it seem's to be real but who know's............
March 31, 2012, Sun City West, AZ: Lead Investigator Mike Zullo, of Sheriff Joe Arpaio's Cold Case Posse, presents interim results of the investigation into Barack Obama's alleged birth certificate and Selective Service documents http://www.youtube.com/watch?v=ETy88NZLh4g
The MSM will try their best to ignore any of the documents relating to Obama's past. I know 12-yr-olds who could have done a better job faking that certificate of live birth or whatever it is. Not that the birth certificate matters aside from the question of why he's not releasing the real one. Even the Social Security number he uses is bogus. At least we know that he wasn't a draft dodger, since the draft ended before he became old enough. Wow, I think that's the first good thing I've ever said about him!
The information the Cold Case Posse is bringing out in the open appear's to be very credible. 5 year's and 250,000.00 per offense. Not to mention a little piece of paper called the Constitution.
Not good............but I'm sure Barry will just keep on, keepin on. Just unreal. I didn't think these shit bag's could shock me any longer, I was dead bang wrong.
I am going to go outside a throw the fuck up now.
Team
the document/file presented by the Whitehouse is clearly a forgery. Anyone who has used the Adobe Suite of products will be forced to admit it. All we can do is support efforts for a truthful outcome....and hope Sherriff Arpaio doesn't catch a 'Breitbart'...
This post is brought to you by the letter 'b'.
'B' is the second letter in the English alphabet.
Some words that start with the letter 'b' include "bitches", "broker", "boner", and my old, personal favorite - "BULLISH".
http://motori.corriere.it/motori/attualita/12_aprile_02/mercato-tracollo-marzo_bc462482-7cdd-11e1-b9fa-a64885bf1529.shtml
Talking about a cliff.
In Italy car sales are 27% less in March YoY - now think and take a breath -27%, worst in 32 years.
FIAT car sales number is 35% less - gap....breathe---hah hah hah............
Cliff, cliff, clifff.............................................
http://www.corriere.it/politica/12_aprile_02/monti-crisi-boao_f86f866c-7c86-11e1-b9fa-a64885bf1529.shtml
On the same front page of Corriere.it. Mr. Monti is saying that "the crisis is over" and "italy is solid", verbatim.
Same freaking front page. I want vomit.
I suspect that Ferrari and Lamborghini are not having problems with sales. Maybe Fiat should just raise their prices a lot.
Very correct. I can't find the link but right after QE1 Ferrari sales went through the room since people that would receive the freshly printed money first would buy these cars as an inflation hedge.
Ferrari cars sometimes are like art pieces. The older they are the more they cost.
Obuma is an ?. and the FBI, CIA NSA have not reacted..also a ?. draw your own conclusions..I have seen enough to say the republic has had a coup and those that know are part of it or are too afraid to come forward.
Call them Elite, NWO what ever..the MSM is controlled (as most on ZH realize)..don't expect a front line story on any of the corruption of courts and law..it is so massive that there is little we can do.
Sheriff Joe in AZ is an honest man and has taken the conspirators on..a brave man. the biggest story in our political history is right here right now and is not reported except with lies..
DHS seems to think they need millions of rounds of small arm ammo..that should tell you alot. here is Obuma today:
US President Barack Obama on Monday challenged the "unelected" Supreme Court not to take the "extraordinary" and "unprecedented" step of overturning his landmark health reform law.
if the NY times does not print it or the cbs nbc abc nightly news never report it ..then it never happened to America
overthrow the Fed gov and tell no one what a plan sheriff Joe is a fly in the ointment.
Bout time we get a date. Ok I've marked it as April 1, 2013 on the calendar just to give a few extra months if need be.
Hadn't had a chance to see if Moscow was still burning. Only saw a couple happy fireman making jokes before I left. I'm going to check it out. I think the firemen did it.
Bout time we get a date. Ok I've marked it as April 1, 2013 on the calendar just to give a few extra months if need be.
Hadn't had a chance to see if Moscow was still burning. Only saw a couple happy fireman making jokes before I left. I'm going to check it out. I think the firemen did it.
Ok checked it out. The fire did not occur in US media like CNN or CNBC only on RT.com
I still think the firemen did it. The one was wearing a very expensive parka and hat.
the credit cycle went off the cliff years ago, i thought
something to do w/ the housing and mortgage markets being gutted by crime just b4 the Treasury was looted as completely as would be humanly possible
those last two charts show where housing "assets" absolutely failed on the re-fi end, after that hit, eh?