Right before the Great Debt Crisis of 2006 - 10 Americans' personal saving rate had dropped to an all time low around 3.5%. After rebounding significantly to around 7.5-9% (excluding the COVID period) it has now collapsed back down to all time lows (see chart below).
Sudden Debt
It is not because things are difficult that we do not dare, it is because we do not dare that they are difficult.
Thursday, February 2, 2023
Personal Saving Rate At All Time Low
Wednesday, February 1, 2023
National Financial Conditions Index And Inflation
The Chicago Fed publishes a national financial conditions index (NFCI) which rises when conditions tighten (eg when interest rates rise and risk appetite decreases). Obviously, as financial conditions tighten the economy faces headwinds and slows down, while inflation also eases (at least theoretically).
Here's a chart of NFCI (blue line) and CPI inflation (red line).
NFCI And Inflation
An immediate conclusion here is that financial conditions are still rather loose (blue line below zero) while inflation is still near historic highs. And that's despite the Fed's rapid increase in interest rates.
If history is any guide, it will take much tighter financial conditions to bring down inflation to more manageable levels.
Tuesday, January 24, 2023
The Upcoming Debt Service Crunch For Households Will Impact Spending In A Big Way
Consumer spending accounts for 68% of US GDP, so as the consumer goes so goes the economy. In the last 10 years consumers saw their debt service payments go down very significantly as interest rates collapsed to near zero; as a percent of disposable income household debt service in 2021 fell to near 8% from a high of 13% in 2008 (see chart below - blue line).
This allowed consumers to boost spending on other items (eg streaming services) and, importantly, created a massive pool of money available to drive individual speculation in anything from meme stocks, cryptos and NFTs to index funds.
With interest rates now soaring this process is reversing. Mortgage rates have jumped from 2.5% to 7% and credit cards from 16% to 21% (see chart above - purple line and red dots). Data on debt service lag by at least a quarter, so it cannot be seen on the chart, but it is certain it will jump to at least 11-12% of disposable income. Notice how such levels were previously associated with recessions (grey areas on the chart).
Despite inflationary headwinds, overall consumer spending has remained relatively high, likely because employment is still very robust and wages are rising. Also, household debt is still pretty low compared to 10-15 years ago, so adding debt may support spending. But this can't last; the first signs of retrenchment are already visible, mostly at the loony edges of speculation. Will this transit to other, conventional areas of consumer behavior? I think so - big layoffs at Amazon, Meta, Spotify, etc. can only be explained in the light of lower household demand. Likewise for Tesla's reduced prices.
Lower consumer spending = lower GDP = recession/zero growth. After 4Q22, which may come in surprisingly higher than most think (Atlanta Fed GDPNow is projecting +3.5% vs market expectations of +1.5-2.5%), the consumer and the economy will have to deal with serious headwinds, debt service being a major issue. Markets don't seem to take this into account and are back on their "risk-on" mode. Even loony stuff is jumping - a pretty sure sign that speculators are back into action. I believe they will be proven wrong.
Monday, January 23, 2023
Beware Of Japanese Black Swans: Minister Warns About Precarious Public Finances - And He's Right!
Japan's Finance Minister just warned of increasingly precarious finances. The combination of enormous debt, rising inflation and higher interest rates will severely impact public finances in a country already struggling with a rapidly aging population and near zero economic growth.
While zero growth at a time of climate change and habitat destruction is desirable in my opinion, it is poison for debt service.
Here's a series of charts.
- Huge Debt
- Low Growth
- High Budget Deficits
- High Inflation
- Artificially Low Interest Rates
Tuesday, January 17, 2023
The Budget Deficit
In yesterday's post I suggested that the budget deficit should be eliminated, or at least sharply reduced. Here is a chart of budget surplus/deficit as percent of GDP - see below.
As we can see, the US is running deficits not seen since WWII - a highly dangerous situation that IMHO could lead to bankruptcy if not immediately and firmly addressed. May I remind readers that Greece went bankrupt during the PIIGS crisis (2010-12) when its budget deficit reached 15%.
In my previous post I suggested some tax increases, which prompted readers to suggest spending cuts, instead - without being specific, however. Therefore, here's another graphic showing sources of federal spending and revenue.
Almost two thirds (63%) of federal spending is mandatory, basically Social Security, Medicare and Medicaid. It would be political suicide to cut spending there. Another 8% is net interest on the debt, also impossible to cut without defaulting. Therefore, 71% of spending cannot be reduced, except in extremis.This leaves defense spending at 14%, which could surely be slashed - but only at the cost of ending Pax Americana. Not exactly an option at this time. Thus, we are down to the last 16% - which is everything else from NASA to FDA. It's obvious that not much can be cut there and it won't make much of a difference on the deficit, anyhow.
Moving on to the revenue side, it becomes immediately obvious that corporate income tax at 9% is very, very low. The corporate tax rate today stands at an almost all time low of 22.50%; compare this to 45% in 1984 when Ronald Reagan was President, for example. In extremis, again, yes corporate taxes should be raised sharply. And I do mean sharply - back to 45%.
Individual taxation is a huge 53% and, when combined with payroll taxes at 32% (ie social security contributions) it means that individual labor is a taxation pool where 85% of revenue comes from - and don't forget that many States impose their own individual income taxes, too. Yes, I'm all for a much higher "millionaire tax", particularly on stock options, benefits, expense accounts, etc. but mostly for social justice reasons, since it won't raise much revenue.
This leaves the 6% "other" portion, which by definition won't do much to raise revenue - unless the US institutes a national sales tax/VAT scheme and raises taxes on fuels.
It is easy and popular - populist even - to suggest spending cuts like the Republicans are doing right now. But it just won't do much for the deficit. The real answer is this, again in extremis:
- Pass a "balanced budget amendment" that will reduce the deficit to zero in an organized way. It should initially focus on reducing the primary deficit (ie before interest expense) before moving on to the entire deficit.
- Raise taxes as above.
- Cut spending where it could be done.
Monday, January 16, 2023
The Debt Limit
The debt limit is almost upon us - yet again. Lots of hot air will be expelled by Republicans and Democrats alike, but they both ultimately ignore the fundamental problem: the US is under a tremendous debt burden and it should not be increased any further. In other words, in extremis, I am all for NOT raising the debt limit.
The chart below shows how the debt/debt limit has exploded upwards, particularly in the last 5 years or so, rising almost vertically.
- Impose a national sales tax
- Raise gasoline/diesel fuel taxes by $1/gallon
- Raise corporate taxes
- ... and here's a really radical one: tax capital gains as regular income, from all sources
Thursday, January 12, 2023
Corporate Debt Burden - Share Buybacks And Dividends
A period of almost 15 years of exceptionally low interest rates prompted corporations to borrow rather than issue new shares to finance themselves (in fact, many listed companies have been buying back stock in record amounts). Debt of the non-financial corporate sector presently stands at $13 trillion, a record high (see chart below).
What the chart shows is that typical financing costs are now exceeding corporate cash flow, forcing corporations to take appropriate measures - eg stop share buybacks, at the very least. Buybacks reached a lofty annualized rate of $1.1 trillion and have since eased off (see chart below - 3Q2022 latest data)
In sum: as interest costs keep rising, or even if they stay at present levels for more than a few more months, companies will be forced to cut share buybacks sharply and even reduce dividends. What this means for stock prices is pretty obvious.
Wednesday, January 11, 2023
Inflation Hits Japan. Yes, Japan!
The Japanese business establishment just got a shock: Fast Retailing Co. Ltd announced salary increases as high as 40% for its employees at retailer Uniqlo. After decades of stagnating wages, Japan's employers must now contend with a combination of sharply rising cost of living and a shrinking labor pool (sound familiar, USA?).
With 130.000 employees, Fast Retailing is a veritable giant, and its outsized wage hikes will certainly affect employment and salary patterns across the entire nation. Keep in mind, Japan is the world's third largest economy (it is sometimes easy to forget that!), so what is going on there has global significance.
Inflation is now a real concern for the Japanese. Just look at what is happening in Tokyo, considered a major indicator for the country as a whole (see chart below).
The Bank of Japan is definitely concerned. It recently raised the interest rate band for 10-year JGBs to 0.50% driving rates to the highest in 8 years (see chart below). Though BOJ was quick to deny it is abandoning its super easy monetary policy, actions speak louder than words.
Here's my bottom line thought: If even Japan is now on the inflation bandwagon, then the world has turned 180 degrees from deflation/easy money to inflation/tight money. The implication for financial markets going forward long term is profound - never mind the short term back-and-forth imbedded in CPI, etc announcements - that's just so much noise.
We have entered a New Era: there will not be any more QE's, interest rates are not going back to zero, equity valuations (P/E's mostly) will be adjusted lower, government budgets will increasingly reflect a new reality. Massive deficits will no longer be tolerated (as the UK snafu showed us a couple months ago) and if governments try to go that way they will be immediately punished.
Japan is showing us the way.
Monday, January 9, 2023
Bill Gates Walks Into A Bar...
Averages can be very misleading. Bill Gates walks into a bar so, on average, everyone is now a multimillionaire. That's why we should focus on the correct average, depending on the situation - in the case of the bar it should be the median, not the mean.
Likewise with employment cost statistics, though admittedly it's a more complex situation. Last Friday markets were cheered because average hourly earnings of all private employees grew only by 4.6%, lower than the expected 5.0% (see chart below). The Fed is supposed to take this into consideration when it decides on its rate policy going forward.
But, is the Gates/bar analogy important here? It appears so - look at the next chart.
Employees in Professional and Information industries are amongst the most highly paid (large Green and small Blue bubbles on the very left) and they were precisely the ones that got laid off, therefore skewing the averages lower. In addition, the Leisure and Hospitality (Red bubble) plus the Education and Health sectors (Purple bubble) have amongst the lowest paid employees and added the most people, further depressing average earnings. Those are means, not medians.
In the bar analogy, a bunch of bankers and IT engineers walked out and lots of housemaids and hospital attendants walked in... on average, everyone just became poorer. But does this say anything about wage inflation? Nope, nothing at all.
For a much better understanding of wage pressures, the Atlanta Fed publishes a median wage growth tracker using microdata from the Census Bureau - see chart below. Yup, as expected it is much higher. Wall Street is cheering, but the Fed itself knows better.
Thursday, January 5, 2023
History Will Rhyme Again
There are two immutable Laws Of Nature:
- Disorder always increases (Second Law Of Thermodynamics)
- History Rhymes