Savings Rate

Whatever one thinks of the practical implications of the Kalecki equation (and as we pointed out a month ago, GMO's James Montier sure doesn't think much particularly when one accounts for the ever critical issue of asset depreciation), it intuitively has one important implication: every incremental dollar of debt created at the public level during a time of stagnant growth (such as Q1 2012 as already shown earlier) should offset one dollar of deleveraging in the private sector. In turn, this should facilitate the growth of private America so it can eventually take back the reins of debt creation back from the public sector (and ostensibly help it delever, although that would mean running a surplus - something America has done only once in the post-war period). This growth would manifest itself directly by the hiring of Americans by US corporations, small, medium and large, who in turn, courtesy of their newly found job safety, would proceed to spend, and slowly but surely restart the frozen velocity of money which would then spur inflation, growth, public sector deleveraging, and all those other things we learn about in Econ 101. All of the above works... in theory. In practice, not so much. Because as the WSJ demonstrates, in the period 2009-2011, America's largest multinational companies: those who benefit the most from the public sector increasing its debt/GDP to the most since WWII, or just over 100% and rapidly rising, and thus those who should return the favor by hiring American workers, have instead hired three times as many foreigners as they have hired US workers. Those among us cynically inclined could say, correctly, that the US is incurring record levels of leverage to fund foreign leverage, foreign employment, and, most importantly, foreign leverage.

Who will buy our debt in the coming months and years? Europe is saturated with debt and doesn’t have the means to purchase our debt. Japan is a train wreck waiting to happen. China’s customers aren’t buying their crap, so their economic miracle is about to go in reverse. The Federal Reserve cannot buy $1 trillion of Treasury bonds per year forever without creating more speculative bubbles and raging inflation in the things people need to live. The Minsky Moment will be the point when the U.S. Treasury begins having funding problems due to the spiraling debt incurred in financing perpetual government deficits. At this point no buyer will be found to bid at 2% to 3% yields for U.S. Treasuries; consequently, a major sell-off will ensue leading to a sudden and precipitous collapse in market clearing asset prices and a sharp drop in market liquidity. In layman terms that means – the shit will hit the fan. The Federal Reserve and Treasury will be caught in their own web of lies. The only way to attract buyers will be to dramatically increase interest rates. Doing this in a country up to its eyeballs in debt will be suicide. We will abruptly know how it feels to be Greek....The entire financial world is hopelessly entangled by the $700 trillion of derivatives that ensure mass destruction if one of the dominoes falls. This is the reason an otherwise inconsequential country like Greece had to be “saved”.

Everyone's favorite stock pitchman, Bob Pisani, who lately apparently has the capacity to learn just one line and just regurgitate it ad nauseam, was on CNBC earlier screaming how gold is down because the US is so much better than the world, when in reality gold is once again being sold to fund early margin calls (yes, institutionals are that levered right now). As for the US decoupling story, which time after time is dragged out, only to be shelved once the impact of trillions in liquidity fades, and which is never different this time, here is none other than Bank of America explaining to the likes of Pisani why "the US economy is likely to prove a faulty engine of global growth." Read - no decoupling, despite what the market may be trying to say. And yes, the market, and especially the Russell 2000 is never the economy.

What a quarter! The Dow up 8% and enjoying a record quarter in terms of points — 994 of them to be exact and in percent terms, now just 7% off attaining a new all-time high. The S&P 500 surged 12% (and 3.1% for March; 28% from the October 2011 lows), which was the best performance since 1998. It seems so strange to draw comparisons to 1998, which was the infancy of the Internet revolution; a period of fiscal stability, 5% risk-free rates, sustained 4% real growth in the economy, strong housing markets, political stability, sub-5% unemployment, a stable and predictable central bank. And look at the composition of the rally. Apple soared 48% and accounted for nearly 20% of the appreciation in the S&P 500. But outside of Apple, what led the rally were the low-quality names that got so beat up last year, such as Bank of America bouncing 72% (it was the Dow's worst performer in 2011; financials in aggregate rose 22%). Sears Holdings have skyrocketed 108% this year even though the company doesn't expect to make money this year or next. What does that tell you? What it says is that this bull run was really more about pricing out a possible financial disaster coming out of Europe than anything that could really be described as positive on the global macroeconomic front. What is most fascinating is how the private client sector simply refuses to drink from the Fed liquidity spiked punch bowl, having been burnt by two central bank-induced bubbles separated less than a decade apart leaving David Rosenberg, of Gluskin Sheff, still rightly focused on benefiting from his long-term 3-D view of deleveraging, demographics, and deflation - as he notes US data is on notably shaky ground. This appears to have been very much a trader's rally as he reminds us that liquidity is not an antidote for fundamentals.

Ben's selling the same old crap

The sharp drop in the personal savings rate in the month of February, which just hit to lowest level since January of 2008, is indicative of the problem.  While personal savings rates could be bled down further to sustain the current level of subpar economic growth - the world today is vastly different than prior to the last two recessions where access to credit and leverage we very easy to obtain.  It is entirely possible, that in the very short term, we could see personal consumption expenditures continue to make some gains even in the face of the obvious headwinds.  However, it is important to keep these month to month variations in context with longer term historical trends.  Personal consumption is ultimately a function of the income available from which that spending is derived.  As such, the current decline in the growth rate of incomes, without the tailwind of easy credit, poses a much greater threat to the current level of anemic economic growth than we have seen in past cycles.

Why save when one can spend (and, more importantly, why save when one has ZIRP)? This appears to have been the motto of American consumers in the past three months when the US Savings rate has plunged from 4.7% in December to a tiny 3.7% in February: the lowest since December 2007's 2.6%, and just as the recession and the market crash was about to send everyone scrambling for the safety of bank savings. The reason: in February personal spending soared by 0.8% on expectations of a 0.6% rise, while incomes barely rose by 0.2% on a consensus rise of 0.4%. Which means the balance had to be savings funded. So even as we have seen retail weakness in the past three months, we now know that it was not only credit funded, but also forced US consumers to burn through their meager savings. And all this before the gasoline price shock hit. The question then is: with the remainder of US savings about to be tapped out on gasoline purchases, just where will the money come to fund all those priced in NEW iPad acquisitions? Or will Apple finally use up its cash hoard and start a captive lending unit, giving consumers credit to purchase its products?  At the rate the US consumer is going broke it may soon have no other option.

When the world's central bankers speechified in DC, ironies abounded. But off to the side, Turkey had just floated a plan to grab its people’s gold.

In an interview with Louis James, the inimitable Doug Casey throws cold water on those celebrating the economic recovery. "Get out your mower; it's time to cut down some green shoots again, and debunk a bit of the so-called recovery."

The global economy remains on shaky ground.  China’s manufacturing activity contracted for its 5th straight month, the US recovery is still very early to call, and the euro zone debt crisis may not be finished. Eurozone PMI data is due later today which will show how the economy is doing after Greece averted default earlier this month. Thomson Reuters GFMS have said that gold at $2,000/oz is possible - possibly in late 2012 or early 2013. Thomson Reuters GFMS Global Head of metals analytics, Philip Klapwijk, featured on Insider this morning and advised investors to "buy this gold dip”.  Gold should be bought on this correction especially if we go lower still as we may need a shake-out of "less-committed investors." Klapwijk suggested that a brief dip below $1,600 is on the cards but the global macro environment still favours investment, notably zero-to-negative real interest rates and he would not rule out further easing by either the ECB or the Fed before year end.

Earlier today, Goldman's Peter Oppenheimer made the news following publication of his report "The Long Good Buy" posted here. In itself, that would be nothing spectacular - just one man's opinion. However, when taken in the entirety of Goldman's views on the world, it bears some criticism, because while on one hand we have a key Goldman strategist telling the world it is all clear in stocks, virtually at the same time Goldman's chief economic strategist, Jan Hatzius, who is German, gave the following interview to Handelsblatt, in which he lays out his "doubts about an early recovery of the U.S. economy. In this interview he explains why positive unemployment figures are deceptive, and why the real estate crisis will have lasting effect." Perhaps his most important observation, when asked if Americans have learned anything from the crisis: "I do not think there has been a big change in behavior. During the crisis, Americans simply responded to the realities. They could no longer borrow as much money. Now again a little more credit is available, and you can borrow some more money again. But I do not think there has been a fundamental change." Alas he is correct, and incidentally the reason why Goldman has such a massive credibility problem is that while on one hand one part of the firm goes ahead and pitches equities, on the other, a respected economist says that the economy is so sluggish that he gives a greater than 50% chance of more QE. Perhaps at this point it is bear reminding what a third Goldman strategist said back in October 2010: "Goldman Sachs Admits The Truth: "The Economy Is Not The Market And QE2 Is Not A Panacea." Then again, with career risk once again paramount for every money manager out there, as the bulk of hedge funds once again underperform the market, perhaps not.

For a third year in a row mainstream economists and analysts are once again planting the seeds of hope for a return to stronger GDP growth.  The White House, if you look at their budget estimations, are banking on it as part of their long term deficit reduction plan.  Unfortunately, it is highly unlikely that we will see growth in the economy return to 4% for a very long time.   Currently, the deficit between real GDP and the CBO's estimated potential GDP, is at the greatest deviation on record.  However, that data point really doesn't tell us much other than the economy is currently operating well below its potential level.  While most economists will point to the likely culprits of employment, wages, industrial production and consumption as the problem, which is correct, those issues are byproducts of the 50-Trillion pound Gorilla that sits quietly in the corner.  That seemingly invisible Gorilla is simply - debt.

And some more bad news for the economy, as the driver of 70% of US GDP, the US consumer, continues to retrench. Today's personal spending and income data showed several things: that in January Personal Incomes did not keep pace with the rate of growth, rising 0.3% compared to 0.5% in December, and less than the 0.5% expected. Spending also missed expectations of a 0.4% rise, instead picking up just 0.2%, from 0.0% in December. More importantly, we once again see that living in a socialist state has its drawbacks when the spigot is shut off: among the biggest drivers for the weak data was a change in government handouts: "Personal current transfer receipts decreased $3.6 billion in January, in contrast to an increase of $13.8 billion in December.  Within personal current transfer receipts, “other” government social benefits to persons decreased $14.9 billion in January, in contrast to an increase of $1.5 billion in December.  The January change in “other” government social benefits to persons reflected a decrease of $13.6 billion due to the expiration of the Making Work Pay refundable tax credits." Luckily what the government takes with one hand it offsets with the other: "Government social benefits for Medicaid decreased $7.8 billion in January, in contrast to an increase of $0.2 billion in December.  Government social benefits for social security increased $20.3 billion in January, compared to an increase of $9.6 billion in December. The January change reflected 3.6-percent cost-of-living adjustments (COLAs) to social security benefits and to several other federal transfer payment programs.  Together, these COLAs added $30.2 billion to the January increase in government social benefits to persons."  Well at least somebody still does COLA in this day and age of ubiquitous 'deflation.'

"It Is completely ironic that we would be experiencing one of the most powerful cyclical upswings in the stock market since the recession ended at a time when we are clearly coming off the poorest quarter for earnings... There is this pervasive view that the U.S. economy is in better shape because a 2.2% sliver of GDP called the housing market is showing nascent signs of recovery. What about the 70% called the consumer?...Let's keep in mind that the jump in crude prices has occurred even with the Saudis producing at its fastest clip in 30 years - underscoring how tight the backdrop is... Throw in rising gasoline prices and real incomes are in a squeeze, and there is precious little room for the personal savings rate to decline from current low levels." - David Rosenberg

Greece has been the most pillaged country in Europe this Depression, among other reasons, because no one in any leadership position seems to have learned lessons from the 1930s. Plus, banks have more power now than they did then to call the shots. Despite no signs of the first bailout working – certainly not in growing the Greek economy or helping its population - but not even in being sufficient to cover speculative losses, Euro elites finalized another 130 billion Euro, ($170 billion) bailout today. This is ostensibly to avoid banks’ and credit default swap players’ wrath over the possibility of Greece defaulting on 14.5 billion Euros in bonds. Bailout promoters seem to believe (or pretend) that: bank bailout debt + more bank bailout debt + selling national assets at discount prices + oppressive unemployment = economic health. They fail to grasp that severe austerity hasn’t, and won’t, turn Greece (or any country) around. Banks, of course, just  want to protect their bets and not wait around for Greece to really stabilize for repayment.