Savings Rate

The inevitable shuttering of at least 3 billion square feet of retail space is a certainty. The aging demographics of the U.S. population, dire economic situation of both young and old, and sheer lunacy of the retail expansion since 2000, guarantee a future of ghost malls, decaying weed infested empty parking lots, retailer bankruptcies, real estate developer bankruptcies, massive loan losses for the banking industry, and the loss of millions of retail jobs. Since we always look for a silver lining in a black cloud, we predict a bright future for the SPACE AVAILABLE and GOING OUT OF BUSINESS sign making companies.

Here is the spin: tapped out US consumers simply did not have money to go out and splurge after the March spending bonanza, which sadly fell in a quarter which as we already know, will have a negative GDP print and thus is a wash (due to weather, remember). However, as a result of the blamy (sic) spring weather, US consumers didn't spend online either, as they were forced to go outside and enjoy the lovely weather... where as already noted they didn't spend any money either.

There was good and bad news in today's personal spending report. First the good: US consumers saw their personal income rise by 0.5%, or $78 billion, in March to a $14.5 trillion SAAR, driven mostly by a $32 billion increase in service wages, as well as $16 billion from government transfer receipts. Now the bad (or, if one is a Keynesian, doubly good) news: personal spending more than offset the increase in income, rising by 0.9% or the most since August 2009, which rose to $12.3 trillion SAAR, driven roughly equally by an increase in spending on Goods ($53 billion) and Services ($54 billion). Curiously the increase in goods spending was the single biggest monthly increase also since August 2009. As for services, the systematic increase on spending over the past several months is unmistakable as far more money is allocated toward healthcare, that one major spending category which rescued Q1 GDP.

Meanwhile, we are still puzzling over the miracle produced by the Fed. Uri Geller could bend spoons. The Fed bends the entire economy. Hardly a single price is unaffected. Hardly a single business plan or investment strategy goes forward without an eye on the central bank. Jesus turned water into wine and multiplied loaves and fishes. But the Fed make Him seem like a two-bit shell game hustler. The loaves and the fishes couldn’t have had a market value of more than a few thousand shekels! Every year, more resources must be drawn from the future and enjoyed in the present. Every year, the claims on future earnings increase… and every year the debt becomes even more unsupportable. Somehow. Someday. Those claims on the future will be marked down.

We are now entering the fifth season of head-fakes about “escape velocity” acceleration in as many years. Yet the Wall Street stock peddlers and their financial media echo boxes are so fixated on the latest “delta”—that is, ultra short-term “high frequency” data releases—that time and again they serve up noise, not meaningful economic signal. The larger point here is that the Kool-Aid drinkers keep torturing the high frequency data because they are desperate for any sign that the Fed’s $3.5 trillion of QE has favorably impacted the Main Street economy. And that’s important not because it might mean some sorely needed income and job gains for middle America, but because its utterly necessary to validate the Fed’s financial bubble.

The world’s official economic institutions are run by people who believe in monetary fairy tales. The 70 words of wisdom below from IMF head Christine Lagarde are par for the course. She asserts that a new jabberwocky expression called “low-flation” is the main obstacle to higher economic growth in Europe and the DM areas generally and that it can be cured by more central bank money printing.

Moments ago the BEA reported February personal income and spending which were expected to show a modest pick up following what all economists have classified as the "polar vortex" winter doldrums. While it remains to be seen whether and if spending, and income, will indeed pick up considering the deplorable state of the US household's earnings prospects, both metrics came precisely in line with consensus estimates at 0.3% (if not those of DB's always amusing permabull Joe LaVorgna who expected a 0.6% increase in spending).

Today we’re going to look at the most important part of the economy – the US labor markets.

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.

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.