As we slide into the last weekend of 2013, we read several articles this week that got us thinking about where the markets and economy are likely headed in 2014. There are many high hopes going into 2014. Mid-term election years have a 67% chance of sporting positive returns, interest rates remain subdued along with inflationary pressures and the Federal Reserve is still pumping in $75 billion a month. Markets rising are not what we as investors should be thinking about. Rising stock markets are easy. What we should be pondering are the rising risks that could potentially take it all away when we least expect it. Complacency has never been a hallmark of investor success.
US Savings Rate Slides As Personal Incomes Below Expectations; Real Disposable Income Growth TumblesSubmitted by Tyler Durden on 12/23/2013 09:49 -0400
Moments ago the BEA reported the latest, November, data on Personal Income and Spending. For the second month in a row, Income, which rose a modest 0.2%, missed expectations of a 0.5% rise for the month, even as Personal Spending rose by 0.5% - driven by a 2.2% increase in spending on Durable Goods while Non-durable expenditures were unchanged on the month, in line with expectations. As a result, the US consumers dug even deeper into their meager savings, and in November the savings rate dropped once more, sliding from 4.5% to 4.2%, the lowest since January 2013, after hitting a high of 5.2% in September on "government shutdown uncertainty."
Biggest Drop In Personal Income Since Feb 2010 Can't Stop Borrowers Spending, While Savings Rate PlungesSubmitted by Tyler Durden on 12/06/2013 09:48 -0400
US personal income fell 0.1% MoM - missing the +0.3% expectations by the most since September 2011 - but that didn't stop spending which modestly beat expectations at +0.3%. The drop in incomes is the largest (absent the 2012 year-end debacle) since February 2010. Given the disparity, it is hardly surprising that the savigs rate dropped to its lowest since June. So unsaving is the route to freedom once again as borrowing helps drive durable good spending up 0.77%
If public pensions don't delay and start plugging their funding holes now, they will need to contribute just under $200 billion per year over the next 30 years, amounting to 1.2% of GDP and 8.8% of state and local tax revenues. If funds wait a decade, the impact per year explodes to $325 billion over 30 years and will "cost" 1.2% of GDP and 12.2% of tax revenues. But the most likely, and worst case scenario, is if pension funds do nothing at all, "let the machine run its course", then the economic damage is unquantifiable as low asset returns inevitably cause lower income through benefits after assets are fully depleted.
It has been a while since we heard from the rational folks over at GMO. Which is why we are happy that as every possible form of bubble in the capital markets rages, Jeremy Grantham lieutenant Ben Inkster was kind enough to put the raging Fed-induced euphoria in its proper context. To wit "the U.S. stock market is trading at levels that do not seem capable of supporting the type of returns that investors have gotten used to receiving from equities. Our additional work does nothing but confi rm our prior beliefs about the current attractiveness – or rather lack of attractiveness – of the U.S. stock market.... On the old model, fair value for the S&P 500 was about 1020 and the expected return for the next seven years was -2.0% after inflation. On the new model, fair value for the S&P 500 is about 1100 and the expected return is -1.3% per year for the next seven years after inflation. Combining the current P/E of over 19 for the S&P 500 and a return on sales about 42% over the historical average, we would get an estimate that the S&P 500 is approximately 75% overvalued."
"Debt matters... even if it is possible to pretend for many years that it doesn't," is the painful truth that, author of "Avoiding The Fall", Michael Pettis offers for the current state of most western economies. Specifically, Pettis points out that Japan never really wrote down all or even most of its investment misallocation of the 1980s and simply rolled it forward in the form of rising government debt. For a long time it was able to service this growing debt burden by keeping interest rates very low as a response to very slow growth and by effectively capitalizing interest payments, but, as Kyle Bass has previously warned, if Abenomics is 'successful', ironically, it will no longer be able to play this game. Unless Japan moves quickly to pay down debt, perhaps by privatizing government assets, Abenomics, in that case, will be derailed by its own success.
Our advice to recently graduating Millennials? Live long.
Can someone please explain this whole "Grecovery" concept to use because neither we, nor apparently the people of Greece which are not only unemployed and broke, but have negative savings, and collapsing wages, social benefits and disposable income, seem able to understand it.
Four decades ago no one had cell phones, the Internet, or personal computers; households had landlines, only offices or research centers had any kind of computer, and wireless anything wasn’t even close on the horizon. These days, of course, there is more than 1 cell phone per person in the US, laptops are standard fare, and using dial-up or wired Ethernet is like living in the Stone Age. But each of these technological advances comes with a cost; and, more specifically, a cost a family in the 1970s didn’t have to cover. The price of a cell phone plan and wireless internet is well over $1,000 per year; more if you add in the price of a $1,500 laptop or a $200 smartphone, which most of us tend to replace after a few years of wear and tear. With average post-tax income of $63,000, according to the latest Consumer Expenditure Survey, these bills might not seem like a lot to shell out – only about 4% of post-tax wages – but they’re costs that the families of 1973 avoided completely. How have the households of the 21st century managed to incorporate these added expenses?
Commodities are no longer on investors’ radar screens. Various signals, however, are pointing to a new rally within the commodities super cycle.
Our grandparents believed in the value of thrift, but many of their grandchildren don’t. That’s because cultural and economic values have changed dramatically over the last generations as political and media elites have convinced many Americans that saving is passé. So today, under the influence of Keynesian economists who champion government spending and high levels of consumption, thrift has been devalued (and is even punished). It is the government’s role, Keynes’s followers believe, to keep the boom going through spending. So it is consumption, not supply, that makes a successful economy, they say. Mainstream media rehashes the message that the consumer, not the producer, is the biggest part of the economy. Politicians agree... But, despite the Keynesian sentiments of much of our political and media elites, we owe it to our grandparents to re-learn the lessons of thrift.
There were no surprises in today's Personal Income and Spending report. At $14.188 trillion, Personal Income rose 0.4% in August, just as expected, and up from an upward revised 0.2% in July. On the spending side, US Personal Outlays were $11.94 trillion, an increase of 0.3% from July, and also higher than the upwardly revised July spending of 0.2%. The PCE Deflator came in at 0.1%, as expected, while the PCE Core rose 0.2% compared to expectations of 0.1% and up from 0.1% last month. The breakdown of components at both income and spending levels was uniformly distributed with nothing standing out. Real Disposable income rose 1.6% Y/Y but only due to a change in the current-dollar series as a result of an adjustment in the implicit price deflator which revised recent numbers to appear larger. Finally, since in nominal terms incomes rose a fraction more than spending, the implied savings rate rose by the same fraction: 4.5% to 4.6%, the highest since May.
The last time the top 10% of the US income distribution had such a large proportion of the entire nation's income was the 1920s - a period that culminated in the Great Depression and a collapse in that exuberance. As AP reports, the very wealthiest Americans earned more than 19% of the country's household income last year — their biggest share since 1928, the year before the stock market crash. And the top 10% captured a record 48.2% of total earnings last year. Analysis by Emanuael Saez shows that, based on IRS data, in 2012, the incomes of the top 1% rose nearly 20% compared with a 1% increase for the remaining 99%. Economists point to several reasons for widening income inequality including globalization and technology. However, as John Taylor explains in his recent WSJ Op-Ed, using this as a lever for Obama's "middle-out" policies - higher tax rates, more intrusive regulations, more targeted fiscal policies - will not revive the economy. More likely they will perpetuate the weak economy we have and cause real incomes—including for those in the middle—to continue to stagnate.
While the world is currently glued to the events surrounding Syria; the reality is that such an event has very little to do with the real economy. The surges in expectations by business is very interesting given the actual demand that drives the real economy. Real employment remains weak and corporate earnings are struggling given the diminishing returns of cost cutting. The recent increases in interest rates also have a very important "tightening" effect on the "Main Street" economy which will also likely suppress consumption in coming months somewhat. Also not likely factored in to current survey's is the upcoming debt ceiling debate and the onset of the Affordable Care Act (ACA). The ACA is a de facto increase in taxes and there is a potential for further tax hikes coming from the budget debate. The current NFIB survey suggests that the economy is still stuck in "struggle mode" and an acceleration above 2% real economic growth is currently unlikely. The divergence between expectations and real demand will likely converge in the next couple of months so we will see businesses follow through with their optimisitic outlooks - "Overall, the Index of Optimism says the small business sector is going nowhere and that's what it feels like."
On the surface, today's Personal Income and Savings data was not pretty: with Incomes and Spending both rising at 0.1% in July, both missed the expected growth rate of 0.2% and 0.3% respectively. This also meant that the US consumer's savings rate was unchanged at 4.4% in the month, and the downtrend from recent highs continues as more and more of the savings buffer has to be depleted. But it was once again below the headlines that the truly ugly data lay. A quick look at the components of income showed something very disturbing. After holding relatively firm for the past five months (excluding the violent swings surrounding the 2012 year end accelerated bonus payouts), compensation of employees - the core component of personal income - tumbled by $21.9 billion. This was the biggest monthly slide since May 2012, and as the chart below shows, the downtrend in sequential wage growth has now resulted in a sequential decline in wages.