While Emerging Market debt has recovered somewhat from the January turmoil, EM FX remains under significant pressure, and as Michael Pettis notes in a recent note, any rebound will face the same ugly arithmetic. Ordinary households in too many countries have seen their share of total GDP plunge. Until it rebounds, the global imbalances will only remain in place, and without a global New Deal, the only alternative to weak demand will be soaring debt. Add to this continued political uncertainty, not just in the developing world but also in peripheral Europe, and it is clear that we should expect developing country woes only to get worse over the next two to three years.
Moments ago the BEA disclosed the January personal income and spending data, which surprised to the upside on both sides: Personal Income rose 0.3% in January, on expectations of a 0.2% increase, while spending roared up by 0.4% well above the 0.1% expected. Great news right? Well, not exactly. What happened in January to account for this spending spree? The chart below of spending on Services should explain it.
Everyone knows that without the German export-driven growth dynamo, the European economy would quickly wither and disappear into nothingness. Which is why today's report that the German economy grew by just 0.4% last year, its worst performance since the global financial crisis in 2009, with strong domestic demand only partially offsetting the continued negative impact of the euro crisis, should be reason for significant concern to all especially since all the artificial, goalseeked GDP readings from the periphery are just that, and are completely meaningless in the grand scheme of things - should Germany's growth falter, as it clearly has been over the past two years, may as well put the lights out.
So which is it?
On one hand, the record build up of inventory in the past year and especially in the last two quarters, is the primary reason why so many economists were fooled into believing the US economy was approaching escape velocity, as can be seen in BEA data. On the other hand, the composite of the manufacturing and non-manufacturing ISMs suggest that not only did inventory accumulation halt in the second half, but with a most recent print of 47.5, imply that inventory was already being rapidly liquidated as 2013 was ending. One thing is clear: they can't both be correct.
Americans Burned Through $46 Billion In Savings To Fund December Purchases: Savings Rate Lowest Since January 2013Submitted by Tyler Durden on 01/31/2014 09:48 -0400
If there was any confusion where the funding for what little shopping spree Americans engaged in during December, it should all go away now. While the street was expecting a 0.2% increase in both personal income and personal spending in the month of December, what it got instead was a flat print in income (i.e. unchanged from November) while spending (mostly for non-durable goods) spiked by 0.4% meaning there was a 0.4% funding hold that had to be filled somehow. That somehow we now know is personal savings, which tumbled from a revised 4.3% to 3.9% - the lowest since January 2013, only back then incomes would rise for the rest of the year driven by the 30% increase in the S&P "wealth effect." This time, with the Fed now tapering QE, the only way is down for both the "wealth effect" and Personal Incomes... and thus Personal spending, that majority component of US GDP. Finally, this data means that according to the BEA in December US consumers funded some $46 billion in spending through burning down their savings.
The topic of China's real estate bubble, its ghost cities, and its emerging middle class - who now have enough money to invest and have piled into houses not stocks - and have been dubbed "fang nu" or housing slaves (a reference to the lifetime of work needed to pay off their debts); is not a new one here but, as Bloomberg reports, the latest report from economist Gan Li shows China’s households are massively exposed to an oversupplied property market.
The ubiquitous sell-side strategist, opining from his ivory tower of market-proven recency-bias based invincibility, appears to have coalesced on the 'group-thunk' case that we have entered into a new "secular" bull market as last seen in the early 1980's. However, while the thesis is interesting, it is based on some flawed assumptions interest rates, valuations and time frames. Of course, with virtual entirety of Wall Street being extremely bullish on the markets and economy going into 2014, along with bullish sentiment at extremely high levels, it certainly brings to mind Bob Farrell's Rule #9 which states: "When all experts agree - something else is bound to happen." Hold on to your hats friends - 2014 could well turn out to be an interesting year for all the wrong reasons.
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.