| “…This is the new frugality. As we mentioned last week, at the margin, an unprecedented number of Americans are borrowing against their 401(k)s, canceling their life insurance policies (like George Bailey did) or are foregoing their physicals — all in order to scrape by. This is a very grim development, which is why it bothers us so much to hear the bond bear inflationists complain about how their spa fees have gone up so much in the past year. That is not reality for the vast majority of the population…This is what happens in a deflationary depression — consumer attitudes undergo a radical change and it is secular in the sense that this adjustment to 'getting small' is measured in years, not months or quarters. This is the price we all pay for the asymptotic credit bubble of the prior decade and the transition to the next sustainable bull market and economic expansion will require two things: time and shared sacrifice. Good things will end up coming out of this — there is nothing wrong in learning how to live within your means.” Gluskin Sheff’s David Rosenberg in his comment yesterday (“Breakfast with Dave”).
Again, it is what story you believe, the new frugality/Pimco’s New Normal…or is the Spa time just around the corner (strong economic recovery). And lets say for the sake of argument what would the new frugality/Pimco’s New Normal mean for the global economy, Harvard University historian Niall Ferguson last week’s “short answer” rattles in my head, “If global imbalances (trade imbalances, U.S. consumer the driver of global growth) caused this crisis, the bad news is they’re back…The short answer is that nothing is going to replace the U.S. consumer in the short term.”
What’s happening in the Spa-Less World (the reality for most of us) today? Yen hits a 15 year high against the dollar. Bonds are lower this morning as there is less fear TODAY (I stress TODAY) regarding sovereign debt in the euro zone following a successful debt auction by Portugal (higher yields but all placed, 5.97% today vs. 4.17% in March for 10-year bond, and this makes us feel good?). The Treasury will sell $21 billion ten-year notes today. The Fed will release its Beige Book (the blueprint for the upcoming FOMC meeting) later today and while economic details are expected to be soft; concern remains that additional quantitative easing will not occur in the near term. Thirty-year bonds are down 31/32, yield 3.71%. Ten-year notes are down 16/32, yield 2.64%. Two-year notes are down 2/32, yield .51%.
What does this say about the consumer and the economy? David Rosenberg also pointed out in his comment yesterday, Government transfers (unemployment benefits, food stamps, welfare, social security) to households is up a mind blowing 31% since the recession began 33 months ago. 30 cents of every dollar in personal income now comes from government support. Also, he points out private sector wages are down 8.4% in real terms since the Great Recession began. Strip out government payments, real personal income is 5.5% lower today than it was in December 2007 (when the recession began).
And remember the consumer is without their housing ATM machine…now it is the albatross.
Speaking about the albatross. Frozen housing is going nowhere despite record low rates. The Mortgage Bankers Association application index fell 1.5% in the week ending September 3 and are up 35.7% year/year. Refinancing (81.9% of the index) fell 3.1% and are up 85.8% year/year. Purchases rose 6.3% for its third consecutive weekly gain but are down 38.8% year/year and remain perilously close to a 13.5 year low. The thirty -year fixed mortgage rate rose 7 basis points to 4.50%, up from the lowest level since records began in '90. Jumbo rates are at 5.37%. The one year treasury ARM rose 5 basis points to 7.0%. Housing is definitely not receiving the kick from record low mortgage rates, a commentary on the weak state of housing.
Does this make you feel good about sovereign debt/risk? “We have not seen the real documents,” Walter Radermacher, head of the European Union’s statistics agency Eurostat, said in a September 2 interview with Bloomberg News. Eurostat first requested the contracts in February. So after 4 months and €110 billion euro later, Greece has yet to reveal the tools it used to conceal debt.
Should we bank on less lending? The Basel Committee on Banking Supervision have apparently reached an agreement on increasing bank capital levels to avoid future banking crisis. While the exact details have yet to be released talk is floating that requirements may be higher than previously suspected. While the committee does not expect the new requirements to affect economic expansion, it is important to remember for every action taken by regulators there will be a resulting reaction by institutions. The new requirements are expected to be in place in a 5-10 year period beginning in '13.
Favorite global phrase (thank you Ben)…“unusual uncertainty?” “The bank now expects the economic recovery in Canada to be slightly more gradual than it had projected (in July)…Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook,” Bank of Canada statement. The Bank of Canada raised rates 25 basis points to 1.0% but indicated future hikes must be "carefully considered" as growth for its southern neighbor slows (I think that’s us).
Short answer? “Nothing (driver of global growth) is going to replace the U.S. consumer in the short term?” German exports fell 1.5% in July vs. the previous month. Not good news for an exports dependent economy.
Coming attractions. We get the Fed's Beige Book and consumer credit later today. Thursday brings data on initial jobless claims and the trade balance.
|
