Albert Edwards: "The Last Time This Happened Was In January 2008"

Two days ago, we were the first to point out that in a striking case of data revisionism, the Bureau of Economic Analysis, in an attempt to retroactively boost GDP, revised historical personal incomes lower, while adjusting its estimates of personal spending much higher, resulting in a sharp decline in personal savings, which as a result, was slashed from 5.5% according to the pre-revised data, to just 3.8%, in one excel calculation wiping out 30% of America's "savings", and cutting them by a quarter trillion dollars in the process, from $791 billion to $546 billion, a level last seen just before the last US recession.

Today, SocGen's grouchy bear Albert Edwards, commented on this drastic revision which disclosed that contrary to previous conventional wisdom that US consumers had been hunkering down in recent years and saving up for a rainy day, the surge in spending in late 2016 may have been the only catalyst that prevented the US from collapsing into outright contraction. Edwards also reminds us that such a dramatic savings slump last occurred in 2007, just before all hell broke loose.

As Edwards writes, "very recent data confirms slumping household saving ratios in both the US and UK. This was last seen in 2007, just before the bursting debt bubble blew the global economy and financial system to smithereens. The Fed and BoE should surely hang their heads in shame having presided over yet another impending disaster. Why will politicians and the people tolerate this incompetence? Indeed they won’t."

Away from the US, Edwards also notes that the UK has also recently published some shockingly low household SR data, showing a slump in Q1 to only 1.9% (see chart) and adds that "actually the UK’s situation is worse than it looks relative to the US SR if you measure it on the same basis (see chart below). The US measures household income and savings net of depreciation ? mainly of the housing stock. If you add this back (as the UK does), the US household gross SR is some 3% higher!"

Needless to say, all of the above is an ill omen for the US, and global, economy. Here's why, in Edwards' own words, which largely echo what we said earlier in the week:

The US Bureau of Economic Analysis has this week undertaken some revisions of the US saving ratio (SR). Actually it has revised both income (downward) and expenditure (upward). And as the SR is the difference between these two very large numbers, it can be severely affected by small changes in income or spending. The new data shows the US SR actually declined from 6% to 4% through 2016 (see chart below) and undoubtedly stopped the US economy sliding into recession in the second half of last year as real household incomes suffered a severe squeeze due to rising headline CPI inflation.

 

We have previously highlighted on these pages that we believe it will be the US corporate sector borrowing binge that will take centre stage in the next credit crisis. Until this latest SR data we had been less concerned about the situation in the household sector. US household mortgage borrowing, comprising some two-thirds of total household debt, remained subdued in the wake of the 2003-2008 boom and bust. Indeed it is only in the last six months that the Fed Z1 Flow of Funds data shows mortgage borrowing growth has managed to crawl above 3%, compared to six years of double-digit growth in the run up to the 2008 bust. By contrast it has been consumer credit that has boomed at a 6-7% growth rate for the last five years, well in excess of that seen in the run-up to the 2008 bust, led by student and auto loans.

 

But the Fed has had its way. QE has not only inflated corporate debt to grotesque levels, but finally the US SR has responded to the surge in household paper wealth that QE has produced (see chart below). Typically the SR always declines (shown as a rise in the chart below) with rising wealth. Why do you need to bother saving if interest rates are close to zero and house and stock prices are rising? (Maybe some residual caution of the household sector is apparent as the SR has not fallen to a new low despite record high net wealth).

 

Edwards believes that the collapsing savings rate may be an even greater worry for the UK, where "history suggests that when UK SR (measured gross) declines to, or below, the US SR (measured net), as we saw in 1987 and as we see now (see chart above), we in the UK are sitting on a massive credit bubble that is primed to burst with recessionary consequences. Alarm bells will be ringing all around the Bank of
England ? but it is too late. (Incidentally note the author of the 1992 FT article below is Ed Balls, who went on to become a significant figure in Tony Blair?s Labour government as Gordon Brown?s chief economic confidant. More recently he has starred in the UK Strictly Come Dancing (Dancing with the Stars to our US friends). By contrast I am still a sell-side Global Strategist and some 25 years later, still comparing the UK SR to the US! Hey ho.)"

For those readers who think I bang on about the same theme ad nauseam, I attach a 1992 article from the FT! It shows how the situation the UK is now in has been experienced again and again. Back then an extensive period of robust GDP growth during PM Margaret Thatcher?s tenure proved to be yet another credit boom that turned to dust.

Finally, In an amusing tangent, the SocGen strategist reveals that he is "genuinely getting tired of bashing the major central banks, but every day more evidence mounts that almost exactly the same debt excesses that caused The Global Financial Crisis (GFC) in 2008, are present today."

The UK Bank of England and US Federal Reserve deserve particular vilification for failing to remove the monetary punchbowl quickly enough - just like the 2003-2007 period, allowing grotesque debt excesses to build."

Ironically, the more "tired" he gets of bashing central bankers, the more he does it, which is perhaps why so many Wall Streeters - at least those who aren't brainwashed into believing that what is going now is normal - enjoy reading his periodic missives.

Comments

J J Pettigrew Thu, 08/03/2017 - 08:56 Permalink

When Central Bankers force rates below reality, when rates are pegged below the inflation rate for 9 years and all you hear is that we need more inflation.....when Central Planners decide to hurt one group (savers) and reward risk and leveraging....you get less savings and more risk and leveraging.......Free markets are not decided by committee.  Therefore, there is nothing "free" about these evaluations or the resultant misallocation of resources.

LawsofPhysics J J Pettigrew Thu, 08/03/2017 - 09:03 Permalink

^^^this. In a world with an exponentially growing population competing for a finite amount of real resources and technology that is required to maintain a decent standard of living, there is no such thing as "inflation", in anything fucking real. Now, may I interest you in a bullshit financial "product"?  Plenty of inflation in paper/digital bullshit but who really gives a fuck? "Full Faith and Credit" better RAISE THOSE RATES Mr. Yellen you criminal cunt!!!!!

In reply to by J J Pettigrew

LawsofPhysics Thu, 08/03/2017 - 08:57 Permalink

LMFAO!!!!! This time is indeed different as in this time the "global elite" are behind the ongoing fraud/theft.  Specifically this time it will be a global currency collapse...considering the demographics of planet earth, it could be a while, in the meantime..."Full Faith and Credit"

EhKnowKneeMass LawsofPhysics Thu, 08/03/2017 - 09:06 Permalink

Exactly, how long has this guy been bearish. Decades?

There isn't going to be a collapse folks. The CBs are not going to allow this to happen. Too much at stake. There may be a "controlled demolition" of a few thousand points. That's it. Nothing more. All the CBs wet their knickers in 2008-2009. That was their wake up call. "Never again."

Wasn't the market supposed to collapse when the QE ended? It didn't.
Wasn't it supposed to collapse when the interest rate was hike? It didn't.
Wasn't is supposed to collapse when [add text here]? It didn't and it will not.

If you don't get it by now, then, you'll probably never. They are in total control of this market. Only some form of Nucular (sic) war will probably lead to a market armageddon. Or an alien invasion.

In reply to by LawsofPhysics

Hammer823 EhKnowKneeMass Thu, 08/03/2017 - 10:19 Permalink

100% correct.  The stock market is a completely manipualted system since 2008/2009.Tens of Trillions of dollars in wealth are determined by the value of stocks.And the value of stocks can be whatever we want them to be.Why else do you think the stock market has gone straight up for 9 years?It has to go up, for every state and federal budget, 401k, ira, pension, etc, to succeed.The powers that be will make it so. 

In reply to by EhKnowKneeMass

fattail EhKnowKneeMass Thu, 08/03/2017 - 11:09 Permalink

Oh well, I feel much better now.  As long as the masters of the universe vow to "never" let it happen again, it will remain unpossible.  However, given their only true ability is to misallocate capital, if "It" does happen again, will that mean it was intentional?What's different now?  US and World debt levels are substanially higher.  The dollar is perched in a much more precarious position.  There are alternatives to the dollar system.  BRICS.  More chaos in the world.  A weaker europe.2008 won't happen again, it will be a different iteration of CB Hubris, but worse.

In reply to by EhKnowKneeMass

adr EhKnowKneeMass Thu, 08/03/2017 - 11:21 Permalink

But there is a collapse. The market is collapsing upwards as the individual components of the index are overtaking by a handful of megacaps. What makes the economy run, a plurality of individual corporations vying for consumers, is being replaced by monopolistic monstrosities that have destabilized the entire production chain and income streams for the population.One fuck Bezos becoming the worls'd "richest" man isn't good for anyone other than him.

In reply to by EhKnowKneeMass

TBT or not TBT adr Thu, 08/03/2017 - 13:48 Permalink

Well at least the collapse will be softened by the convenience of Amazon Prime free 2 day delivery.   Like, already before the collapse I don't like burning time and fuel and mixing with the general population of the closest Lowe's here in So Cal to hunt down some odd part.   Amazon sent me in two days the other day a weird spec of meter long all-thread rod for just over $7.    At the stores, if they even had it, it would have been double that.   

In reply to by adr

Maestro Maestro EhKnowKneeMass Thu, 08/03/2017 - 17:24 Permalink

Because QE never stopped.

The only thing the bankers are holding up is the level of the Dow Jones.

Life is unlivable for most Westerners. A lonely, boring and miserable existence devoid of love, hope and meaning.

That's why Europeans are enamored with Muslim rapefugees because the torment they inflict on gender-confused euro snowflakes gives structure to their empty lives.

Americans are no longer human beings. So it's not even worth it to talk about them except to point out that their continued existence puts that of the human race in jeopardy.

If you want to live, you must sterilize North America.

In reply to by EhKnowKneeMass

bshirley1968 Bill of Rights Thu, 08/03/2017 - 09:22 Permalink

Tisk, tisk.  Such anger.  I have never been a democrat and have told you multiple time......you hard headed dipshit......that I too voted for Trump.   It is obvious my ability to grasp and come to reality is better than yours.Drop the chip on your shoulder and grow up.  Trump isn't going t fix anything.  The man is a Kool-aid drinking idiot....from way back.  He is done.  He had his chance and blew it.

In reply to by Bill of Rights

East Indian Thu, 08/03/2017 - 08:58 Permalink

Depressions are the result of too much money getting accumulated in too few hands. They are generally resolved by wars, mass slavery, abandoning the currency, confiscating the capital or flight of the population, or a combination of these. 

Batman11 Thu, 08/03/2017 - 09:24 Permalink

We can solve every problem with debt.I am a banker and my only product is debt, the interest on that debt yields my profit.Central Bankers tried to solve a debt problem with more debt, it’s all they know.Neo-liberalisms success was debt fuelled and interest rate rises have become almost impossible.The UK:https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.53.09.pngIts economics doesn’t look at private debt in the economy, letting real estate booms rip globally. If you were looking at private debt in the economy, you wouldn’t let them happen.https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.52.41.png1929 and 2008 stick out like sore thumbs; bank credit going into financial speculation and stocks (1929) or real estate (2008).Leveraged financial speculation with bank credit.If the FED has been looking in the right place, and knew about Minsky Moments, they wouldn’t have let the US go through one in 2008 if they had been interested in financial stability.The global private debt load rises as its mainstream neoclassical economists are oblivious to the problem. The West had saturated in private debt by 2008 and China and the emerging markets are catching up.Probably the greatest failure of economics in the history of mankind, its first global disaster.The bankers always think you can solve a problem with debt, it’s the only real product they have and the interest yields their profits.  

Batman11 Batman11 Thu, 08/03/2017 - 09:25 Permalink

How about some more debt?The sham of Central Banks controlling the economy with interest rates began when they let economies saturate with debt.The interest rate tool becomes useless as it has been in Japan since 1989.Richard Koo studied 1929, Japan 1989 and 2008 and has the data to show why interest rates and QE won’t help now.https://www.youtube.com/watch?v=8YTyJzmiHGkCentral banker’s trained in neoclassical economics were always going to make themselves redundant.There are people who have worked out what is going on outside the mainstream:Steve Keen - Minsky moments and affects of debt on the economyRichard Werner - Money and debt, bank credit and how it must be allocated for economic success, studying Japan around 1989Michael Hudson - The history of economics, what has been forgotten but is still trueRichard Koo - After the Minsky Moment, studied 1929, Japan 1989 and 2008.

In reply to by Batman11