Savings Rate

Gluskin Sheff's David Rosenberg details the four major downside risks for US growth over the next four quarters:

1. More Adverse News Out Of Europe
2. The Sharp Run-Up In Food Prices
3. Negative Export Shock
4. The Proverbial Fiscal Cliff

A courageous act in face of the punishment the Fed inflicts on them. But it doesn't bode well for the economy.

Just when you thought it was safe to hope for more bad news being good news we complete the triumvirate of housing, manufacturing, and now confidence all beating expectations. But we Moar QE. Consumer Confidence just beat expectations for the first time in 5 months rising to its highest level since April as it appears the self-reinforcing 'Fed's got your back' belief once again becomes a self-defeating 'how can we QE when everything's peachy' scenario. To wit, 12-month inflation expectations rose from 5.3% to 5.4% - as we noted the inflation-argument for NEW QE here. This is simply remarkable levels of cognitive bias considering the savings rate just rose to a one-year high implying people are expectation deflation - dis-inflation at the least. It would appear that indeed - given the market's downward trajectory - that the stealing of one's own punchbowl realization is occurring.

Confirming that the economy continues to be on life support and that the consumer has been actively withdrawing from providing that key lifeblood so needed to regain the "virtuous circle" [RIP: XXXX-2009] is the just released revised personal consumer data, which showed even further retrenchment, as personal spending came unchanged in June on expectations of a modest 0.1% increase, while income rose 0.5% on expectations of a 0.4% increase (among other things due to "Contributions for government social insurance -- a subtraction in calculating personal income -- increased $3.5 billion in June, compared with an increase of $0.8 billion in May."). End result: the Personal Savings Rate (revised) rose from 3.6% in April, to 4.0% in May, to 4.4%, in June: the highest it has been since August 2011, just before the economy as manifested by the Fed's favorite metric, the Russell imploded. All those expecting the consumer to step up and pick up the pieces will have to defer hope and prayer for one more month. Luckily, for everything else there is the Fed's Taxpayercard.

"This market isn't real. The two percent on the ten-year, the ninety basis points on the five-year, thirty basis points on a one-year – those are medicated, pegged rates created by the Fed and which fast-money traders trade against as long as they are confident the Fed can keep the whole market rigged. Nobody in their right mind wants to own the ten-year bond at a two percent interest rate. But they're doing it because they can borrow overnight money for free, ten basis points, put it on repo, collect 190 basis points a spread, and laugh all the way to the bank. And they will keep laughing all the way to the bank on Wall Street until they lose confidence in the Fed's ability to keep the yield curve pegged where it is today. If the bond ever starts falling in price, they unwind the carry trade. Then you get a message, "Do not pass go." Sell your bonds, unwind your overnight debt, your repo positions. And the system then begins to contract... The Fed has destroyed the money market. It has destroyed the capital markets. They have something that you can see on the screen called an "interest rate." That isn't a market price of money or a market price of five-year debt capital. That is an administered price that the Fed has set and that every trader watches by the minute to make sure that he's still in a positive spread. And you can't have capitalism if the capital markets are dead, if the capital markets are simply a branch office – branch casino – of the central bank. That's essentially what we have today."

This is looking more and more like a modem-day depression. After all, last month alone, 85,000 Americans signed on for Social Security disability cheques, which exceeded the 80,000 net new jobs that were created: and a record 46 million Americans or 14.8% of the population (also a record) are in the Food Stamp program (participation averaged 7.9% from 1970 to 2000, by way of contrast) — enrollment has risen an average of over 400,000 per month over the past four years. A record share of 41% pay zero national incomes tax as well (58 million), a share that has doubled over the past two decades. Increasingly, the U.S. is following in the footsteps of Europe of becoming a nation of dependants. Meanwhile, policy stimulus, whether traditional or non-conventional, are still falling well short of generating self-sustaining economic growth.

While bad news may be good news for the market hoping that it will spur more stimulative measures from the Fed to boost asset prices - for Main Street America bad news is just bad news.  More importantly, the decline in consumer confidence continues to perpetuate the virtual economic spiral.  As the consumer retrenches the decline in aggregate end demand puts businesses on the defensive who in turn reduces employment.  The reduction in employment, and further stagnation of wages, puts the consumer further onto the defensive leading to more declines in demand.  It is a difficult cycle to break.

The latest confirmation that the US consumer is rapidly retrenching ahead of the great unknown which is the US fiscal cliff was the just released data on Personal Spending and Income, both of which came in as expected, at 0.0% and 0.2% over the prior month. This was the lowest rate of increase in the Personal Spending rate since June 2011, when spending posted a -0.2% decline. This was to be expected considering the ongoing contraction on the income side: "Private wage and salary disbursements increased $1.1 billion in May, compared with an increase of $5.3 billion in April.  Goods-producing industries' payrolls decreased $7.0 billion, in contrast to an increase of $5.6 billion; manufacturing payrolls decreased $4.5 billion, in contrast to an increase of $3.2 billion." The collapse in manufacturing wages was somewhat offset by gains in services: "Services-producing industries' payrolls increased $8.3 billion, in contrast to a decrease of $0.4 billion.  Government wage and salary disbursements increased $0.3 billion, compared with an increase of $0.4 billion." And for the best indication of just how consumers feel about the economy, one just needs to look at the savings rate: at 3.9%, this was the highest savings rate since January as any free money enters not the economy, but bank checking accounts and counterparty risk-free mattresses.

Rick Davis of The Consumer Metrics Institute plays Clark Kent to Charles Biderman's Superman as the two dig into the latest GDP data. Critically, they break down the components and using inflation levels (CPI-U or The BPP) that make some sense Davis and Biderman are "really worried" that the real economy appears to be in a contractionary state if inflation is adjusted for correctly. Even the anemic BEA's 1.88% growth rate is 'very very poor' for an economy that is supposed to be 3 years into a recovery. The per-capita income (the money available to all households to spend) actually shrank - even using the BEA's inflation data. This juxtaposes shrinking household disposable income with a real economy supposedly growing (though slowly) which was driven almost exclusively by consumer spending - leaving Davis and Biderman questioning 'where this money is coming from?'. The simple answer is the savings rate has plunged, freeing up over $200bn in annual spending (and student loans have added another $100bn, refis $50bn, and strategic defaults $80bn) - all unsustainable one-time increases. Spending is not coming from income. Davis concludes that the BEA is notoriously bad at calling turning points (only getting the Great Recession 'direction' correct after 16 months and magnitude after 40 months) - leaving him of the opinion that we may well be in the first quarter of the next recession.

The employment numbers that came out Friday were very bad and caught most economists and analysts by surprise. Nothing the Fed has done has worked. Once again the ranks of the unemployed grow, wages flatten out, manufacturing weakens, GDP declines, and savings are spent to maintain lifestyles. The U.S. and much of the rest of the world is heading toward stagnation, if not recession. Yet, despite the failures of central bank policies, they will persist in doing the same wrong thing again. Here we review the data and explain why things are heading south.

The entire bogus recovery is again being driven by subprime auto loans being doled out by Ally Financial (85% owned by the U.S. government) and the other criminal Wall Street banks. The Federal Reserve and our government leaders will continue to steer the country on the same course of encouraging rampant speculation, deterring savings and investment, rewarding outrageous criminal behavior, purposefully generating inflation, and lying to the average American. It will work until we reach a tipping point. Dr. Krugman thinks another $4 trillion of debt and a debt to GDP ratio of 130% should get our economy back on track. When this charade is revealed to be the greatest fraud and theft in the history of mankind, Ben and Paul better have a backup plan, because there are going to be a few angry men looking for them.

If you want to know how weak the economy really is all you need to do is look at the 30-year bond. It is one of the best economic indicators available today. If economic conditions are robust then the yield will be rising and vice versa. What the current low levels of yield on 30 year bonds is telling you is that the underlying economy is weak. "The 30-year yield is not at these low levels DUE to the Federal Reserve; but in SPITE OF the Fed," Hunt said. The actions of the Federal Reserve have continued to undermine the economy which is reflected by the low yield of the 30 year bond. The "cancerous" side effects of nonproductive debt are being reflected in real disposable incomes. Just over the last two years real disposable incomes slid from 5% in 2010 and -0.5% in 2012 on a 3-month percentage change at an annual rate basis. This is critically important to understand. While the media remains focused on GDP it is the wrong measure by which to measure the economy. A truly growing economy leads to rises in prosperity. GDP does NOT measure prosperity — it measures spending. It is the measure of real personal incomes that measures prosperity. Prosperity MUST come from rising incomes.

In 2006, Michael Pettis (one of the best known on-the-ground academic-and-practitioner experts on China) started making a number of predictions based on what he thought was the necessary and logical development of China’s growth model. Some of these predictions seemed fairly outlandish, especially to China analysts – Chinese and foreign – who had very little knowledge of economic history or other developing countries, but many of them so far have turned out quite well. As more and more analysts are beginning to understand the constraints of the Chinese growth model he thought it might be useful to list some of these predictions to get a sense of what might be still to come. Hold on to your hard-landing hats.

Few have been as steadfast in their correct call that the US economy sugar high of the first quarter was nothing but a liquidity-driven, hot weather-facilitated uptick in the economy, which has now ended with a thud, as seen by the recent epic collapse in all high-frequency economic indicators, which have not translated into a market crash simply because the market is absolutely convinced that the worse things get, the more likely the Fed is to come in with another round of nominal value dilution. Perhaps: it is unclear if the Fed will risk a spike in inflation in Q2 especially since as one of the respondents in today's Chicago PMI warned very prudently that Chinese inflation is about to hit America in the next 60 days. That said, here are some of today's must read observations on where we stand currently, on why 1937-38 may be the next imminent calendar period deja vu, and most importantly, the fact that Rosie now too has realized that the next credit bubble is student debt as we have been warning since last summer.

While expectations for today's March Personal Income and Spending were for a rise of 0.3% and 0.4%, which if confirmed would have pushed the 3.7% savings rate to the lowest since 2007. Instead we got a reversion, with Income rising 0.4%, higher than expected, while Spending printed at 0.3%, the lowest since December 2011, just below expectations, and tumbling from February's 0.9% print, the biggest slide since August 2011. In real terms, spending was up 0.1% and income up 0.2%. The data also confirms that at every moment somewhere in the world, people are laughing at Joe LaVorgna, whose forecast of a 0.6% rise in personal spending was just 50% off. Most importantly, the surprising inversion between spending and income, pushed the savings rate from 3.7% to 3.8%, just shy of 4 year lows, and the first increase in 2012, although well below the 4.9% savings rate in March 2011, which means that increasingly the consumer is tapped out. When one takes away the impact of the record warm winter (of which March data was still part of), it becomes quite clear that unless Joe Sixpack is charging everything, then Q2 GDP will be a very big disappointment.