Wednesday, September 09, 2009

A Rude Interruption

Theme d'anne ou theme du jour? The jury remains out. Yesterday's "everything goes up" strategy worked swimmingly until the London market marked its sheets, after which there was a rather rude interruption. First, gold interrupted its Buzz Lightyear-esque trajectory by correcting back below 1000, and then a piece of really quite fugly data was released.

Consumer credit fell by $21.6 billion in July, by far the worst reading on record. While the apogee of "cash for clunkers" stimulus will have occurred in August, it nevertheless underscore the belief, widely held in macro circles, that the consumer will continue to rebuild balance sheets for the foreseeable future.

And small wonder, too! Even as househeld spending has fallen modestly over the past couple of years, it has reached a new high as a percentage of GDP. Not good. So if and as stimulus income is saved rather than spent, and spending growth remains subpar by the standards of the past quarter-century, it will be mathematically very difficult for GDP growth to be anything but pretty blah over the next couple of years.
So while H2 might see a bounce in GDP growth (though in a period of price or debt deflation, as we are currently observing, nominal GDP growth trumps real growth), it remains difficult to get excited about the permanance of the rebound. Plus ca change, indeed.
What it means for equity prices, or indeed any other prices, is of course anyone's guess. But it provided a timely reminder to Macro Man that while it's OK to swim in the sea of "everything goes up", when the tide goes out it's best not to drink the Kool-Aid on the beach.

20 comments:

Anonymous said...

you wonder how much more "fugly" deflationary data it will take...

The Other Kamo Kid said...

Hey MM. You got any thoughts on the mighty RBNZ tom? Few pundits calling a cheeky -25. Rec' some 6m6m OIS at these levels might not be a bad idea....

Macro Man said...

I have seen those forecasts...frankly, I don't see how they can cut given the improvement in the data. Then again, I don;t see how they can hike given their hatred for current NZD TWI levels. So I suppose I expect them to acknowledge the imprvement in the data while remaining dovish and noting the unwarranted strength of the currency.

Not sure what that outcome does for mkts, though I know where my hope lies....

Anonymous said...

Was it something other that credit growth that drove the bubble? If so, why is everyone so bullish now. Might it be because 'everyone' works for an agent of the system that has exercised its free put and realises there are no more puts left in the cupboard with all the turds (assets).

Anonymous said...

market timing indicators suggest gold could be set-up for a correction in the next few sessions. could be worth selling euro up here. Although in this mkt its tough to have any real conviction.

Gary said...

Since when is an increase in indebtedness (consumer credit) "good" and a decrease in debt "bad"?

And a huge amount of debt gets paid back (which is the highest return savings vehicle in the markets now) -- and that is described as the "worst reading on record"???

I worry MM is taking advice on debt from that video of Congressman Pete Stark ("The more debt we owe, the wealthier we are")

The "new norm" is for consumers and companies (but not banks) to have levels of debt they can actually afford

Its a good thing if we want a sustainable long term recovery, instead of a short term bubble built on accounting nonsense

Gary said...

This video (Congressman Pete Stark, Dem-California) explains why the finances of California and the US are such a disaster...

Congressman Pete Stark on debt and wealth

Obviously, the interviewer is a bit of a tool -- but he didn't put that ignorant comment about debt into Stark's mouth

Anonymous said...

The other thing is that all that deleveraging and paying off consumer debt/increasing savings rates fuel dollar deposits - hence capital flowing back into treasuries. Another reason not to totally write off USD? That short USD trade is looking mightily crowded

Macro Man said...

Gary, how does the consumer paying down debt increase either near-term economic growth (over say a 2 year horizon) or the level of earnings implicit in SPX 1020?

The comments were written in the context of the 'everything goes up' thesis, not the 'what's in the long term interest of the country' context. I've gone on record a number of tiems suggesting that the savings rate will and should continue to rise. Please don't put words in my mouth or compare me to that twat Stark...it's really quite offensive.

Gary said...

Anon 3:54 -- delevering / paying back debt doesn't necessarily mean there is "new" cash to invest...

Its just as likely (more likely IMHO) that the delevering results in a lower "money multiplier" -- since in many cases the lender didn't actually have real funds to lend in the first place.

The financing company borrowed money to lend. Or the prime broker lent money to the hedge fund that bought the ABS bonds. etc

Since there is no reserve requirement for money market funds or non-bank banks (entities like GMAC and GE Capital to name two) -- the money multiplier was theoretically infinite.

Now the pyramid of debt is coming down, and the amount of "base money" in the system is WAY less than the amount of debt being paid off.

Why any real money investor would dump that base money into an asset paying < 1% (3yr or shorter Trsy paper) is a complete mystery to me.

Of course there is risk of loss buying other paper -- but there is a guaranteed loss (after taxes and inflation) of losing wealth buying Trsy debt.

SAFE is buying 1-3yr Trsy debt to control the yuan forex rate / encourage trade (they are not an profit motivated buyer of Trsy debt). Even they are starting to have reservations...

Gary said...

MM -- I was trying to poke fun at some established (but flawed IMHO) Wall Street thinking about consumer debt. My sense of humor doesn't always translate into written word -- apologies if I offended

As for lower debt levels fueling short term growth: I think the whole concept of short term growth is flawed. You can't build a real building on top of a mud foundation - which is what many CBs seem to be advocating. The building will just fall down.

Debt "growth" isn't real, its just the appearance of growth. After 30 years of "fake growth" (debt), consumers who don't have a PhD or even an MBA seem to be grasping this

If we can just get Bernanke, Trichet and the rest to catch up...

spagetti said...

re saving rate.. in the popular press now, the bulls using the higher savings ratio to justify the 'all is well' point of view.

many dont seem to understand that the savings ratio is a 'flow' type data and the household debt level is a 'stock' type one. you need the savings rate to stay high for years to pay back the debt. the saving rate up here doesnt mean things have adjusted. im sure most people here understand this, im just voicing my frustration over useless commentary i come across elsewhere

also.. to me it looks like gold rolling over, and not breaking out upwards.. at least at 11:20 new york time, thats how it looks to me..

Anonymous said...

I may just be a naive armchair punter (well I am in fact) but re. comments @3.54 and the subsequent debate re USD - shouldn't it be the case (in a pure macro sense) that savings rates (ie banks increasing deposits) and consumer deleveraging ought to support a bid for USD to some extent? I see that as a separate argument to the one about equities/growth - the point is surely that USD is looking oversold in relation to the potential size of a) the recovery and b) the amount of cash flowing back into less risky assets...and sorry, I just don't see hyperinflation. I see deflation cos even with (in heavy inverted commas) 'recovery' demand is so anaemic. What little cash people have they are using to deleverage and save...

gary said...

Anon 5:04 -- why would delevering create a USD bid? If the USD was a funding currency in the past (it wasn't), then the delevering might cause those loans to be paid back, requiring the borrower/lender to buy back the USD. but since the USD was not a funding currency in the past...

More likely that spageti is right that delevering will take place over a period of years, resulting in "blah" returns on US assets and thus "blah" demand for USD with which to buy those assets?

As for deflation... the US hasn't had any long period of deflation since we left the gold standard in 1933. With a 100% fiat currency, deflation is theoretically "impossible" (well, impossible unless Bernanke is more stupid than a banana republic dictator). As even Bernanke explained, deflation is easily avoided if you can "print" money at the speed of a computer and throw it from helicopters.

For a net debtor like the US government, any long term bout of deflation would be devastating. Deflation is a GREAT thing if you are a creditor, but it is crippling for a debtor. If the debtor happens to control the money supply -- said debtor would have to be suicidal to allow deflation to take hold.

Did we have deflation over the last 12 months? Debatable. Financial asset bubble clearly popped (not sure that is deflation) -- but my household bills (the cost of living) clearly went up.

Will we have long term deflation? Not a snowflake's chance in hell. It would mean the end of the US government (and all large debtors).

Like all the earlier banana republics, Uncle Sam knows how to print money and create inflation.

If you really believe deflation will stay long term, you would be foolish to buy the debt of any large scale debtor, especially a shop-a-holic like Uncle Sam. If deflation did take hold, net debtors would be wiped out.

Yes, I know. The Roman/ Spanish/ French/ British empire can never fall. Chinese dynasties will never end. The Myans will rule Latin America forever. The US government will reign supreme no matter how indebted it gets. Read my lips. I didn't have sex with my intern. The subprime contagion is well contained. These CDOs are AAA!

Plus ca change...

DontWanttoCapitulate said...

Gawd this mkt is a pain... Everything MM is saying makes perfect sense to me but my shorts keep getting stopped out! Is the dreaded "weight of money" really stupid enough to ignore the shrinking consumer paying off debts / saving more etc etc etc (anecdotally, I don't know of one person not doing that). Not only that, but non-market mates are now asking me what stocks they should be buying "coz it's all gone up a bit"...!!! If there ever was a signal...

Nemo Incognito said...

DontWantToCapitulate, either go with the flow like moi and in the event you get stopped out chill out and do some research. Its much better than watching screens which don't want to do what they logically should.

Anonymous said...

re: Consumer Credit - SPX < 1000 => XLI vs XLU. Upside momentum certainly seems to be waning.

George from the UK said...

If you know where the stock markets will stop, go check out the FTSE futures....you will find a monster gap on them around 5100.

Nemo Incognito said...

Japan machinery orders... wow. Cash for cranes anyone?

byronical said...

Well that explains the AUD & NZD dump about an hour ago.