Is The Inexplicable American Consumer Rebelling?

Friday, August 3rd, 2012

by Wolf Richter, www.testosteronepit.com

The strongest and toughest creatures out there that no one has been able to subdue yet, the inexplicable American consumers, are digging in their heels though the entire power structure has been pushing them relentlessly to buy more and more with money they don’t have, and borrow against future income they might never make, just so that GDP can edge up for another desperate quarter.

But it’s been tough. Despite the Fed’s insistence that inflation is “contained,” or its periodic fear-mongering about deflation, consumers have been hit with rising costs. Tuition has been ballooning—up 21% in California in 2011 alone! Student loan balances exceed $1 trillion. Some parents who are still paying for their own student loans are now watching their kids piling them up too [read.... Next: Bankruptcy for a whole Generation]. Healthcare expenses have seen a meteoric rise. And so have many other items that cut deep into the average budget.

Inflation is a special tax. It’s not that horrid if it’s small, if higher yields compensate investors and savers for it, and if higher wages compensate workers for it. But that hasn’t been the case. The Fed’s Zero Interest Rate Policy has seen to it that entire classes of investors and savers get their clocks cleaned; and wages haven’t kept up with inflation since the wage peak of 2000—with the very logical but brutal goal of bringing wages in line with those in China.

But for a welcome change, disposable income adjusted for inflation, reported earlier this week, actually rose 0.3% in June from May. So spending should have gone up as well. It didn’t. The inexplicable American consumer spent less in June than in May. And April. The decline was focused on goods, the lowest since January.

And instead of buying goods with the additional money they’d earned, they saved! What temerity! It wasn’t a one-month fluke. The savings rate reached 4.4%, after a fairly consistent uptrend from the November low of 3.2%. An unusual and courageous act of rebellion in face of the punishment the Fed inflicts on savers.

There’s other evidence: while new car and truck sales weren’t great in July at a seasonally adjusted annual rate of 14.09 million units—down from June’s 14.38 million and February’s 14.50 million, the high of the year—they concealed ominous undercurrents. Honda’s sales jumped 45.3% and Toyota’s 26.1% over July 2011. After the March 11 earthquake last year, supply-chain problems created shortages, which the flood in Thailand made worse. Brand-loyal buyers who couldn’t find the right model, option package, or color, rather than switching to other makes, delayed their purchase—thus creating pent-up demand. Now, supply problems have been resolved, and buyers are swarming all over their favorite dealerships. This specialized pent-up demand obscured a huge problem: GM’s sales dropped 6.4% and Ford’s 3.8%. The two leaders taking a simultaneous turn south! This doesn’t bode well for total vehicle sales once Honda’s and Toyota’s pent-up demand has been satisfied. Another act of rebellion by the inexplicable American consumer.

But the Commerce Department, in its press release on income and spending, had a convenient answer: blame “the economic turmoil in Europe.” For everything. And then it added what was practically a campaign ad: “Therefore, it is critical that we continue to push for policies that will grow our economy and support our middle class, such as abolishing the Fed (sorry, my screw-up) the remaining proposals in President Obama’s American Jobs Act.” And it goes on to praise Obama’s tax proposal. Priceless! Expunging the last vestiges of objectivity from our government agencies, such as the Department of Commerce whose Bureau of Economic Analysis had collected the numbers.

The cellphone in your pocket is NASA-smart, write Alex Daley and Doug Hornig. Yet it costs just a couple hundred dollars. So why is it that these rising technical capabilities are leading to drastically falling prices in tech products, but not in your medical bill? The answer may surprise you. Read…. “Why Your Health Care Is so Darn Expensive.”

Tags: American Consumers, Clocks, Disposable Income, Fear Mongering, Fluke, GDP, Healthcare Expenses, inflation, Insistence, Interest Rate Policy, Many Other Items, Meteoric Rise, Power Structure, Richter, Student Loan Balances, Student Loans, Temerity, Trillion, Wages, Zero Interest
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“Land of the Predictable”: Pimco CEO Warns U.S. Debt Default Might Have “Catastrophic” Effect; Obama’s Hypocrisy

Tuesday, June 28th, 2011

In yet another of the seemingly endless self-serving fear-mongering exercises, Pimco’s El-Erian Says U.S. Debt Default Might Have ‘Catastrophic’ Effect

Pacific Investment Management Co. LLC Chief Executive Officer Mohamed El-Erian said a short-term default by the U.S. on its debt might have “catastrophic” legal consequences.

“We would be in the land of the unpredictable” if lawmakers fail to reach an agreement to raise the $14.3 trillion debt ceiling and the U.S. misses a payment “simply because of the technical linkages,” El-Erian said in an interview on CNN’s “Fareed Zakaria GPS” program, scheduled to air today.

U.S. lawmakers are seeking a path to increasing the debt limit and to cutting at least $1 trillion from the long-term deficit before an Aug. 2 deadline. President Barack Obama plans to hold separate meetings at the White House June 27 with Senate leaders Arizona Democrat Harry Reid and Kentucky Republican Mitch McConnell in an effort to break an impasse that scuttled a seven-week negotiating effort led by Vice President Joe Biden.

“My advice is please try and get together and solve this issue in the context of a medium-term reform package,” El-Erian said. “If you can’t do that and you’re going to kick the can down the road, kick the can rather than face something that could be catastrophic in terms of legal contracts being triggered.”

“So when we look at Treasuries, we see the big buyer stepping away from the market, for certain. And we ask the question, who else is going to be buying at these levels, and we can’t identify another buyer of the size of the Fed.”

El-Erian said the U.S. fiscal problems are dwarfed by those of Greece, whose debt reached 143 percent of gross domestic product last year.

“It is inevitable that Greece would have to restructure its debt,” he said. “Greece has two problems: it has too much debt and it cannot grow. And until these problems are solved, more and more of Europe is going to become contaminated.”

“Land of the Predictable”

I mock the lame fear-mongering excuses of government officials, politicians, and in this case buyers of government and agency debt who do not want to see interest rates rise out of fear of what it would do to the short-term value of their portfolios.

Thus it was entirely predictable that Pimco would issue a “Catastrophic” warning. As for who would buy US government debt, that answer is quite easy to explain: China and Japan would as a function of trade-deficit math, and they would add to that total, as would the UK, Canada, and Europe. El-Erian knows just that (as much as anyone knows anything in the land of the unknowable).

The biggest irony in El-Erian’s statement is Pimco would be a buyer, and so would millions of others if interest rates rose high enough.

Finally, interest rates would come crashing back down as soon as an agreement was worked out and there is no doubt an agreement will be reached sooner rather than later.

The only thing “unpredictable” is the exact nature of that agreement.

Shutdowns Happened Twice Before

Please note that US government shutdowns have happened twice before, in 1995 and 1996 under president Clinton.

The United States federal government shutdown of 1995 and 1996 was the result of a conflict between Democratic President Clinton and the Republican-controlled Congress over funding for Medicare, education, the environment and public health. It took place after Clinton vetoed the spending bill which Congress sent him. Thereupon, the Federal government of the United States put non-essential government workers on furlough and suspended non-essential services from November 14 through November 19, 1995 and from December 16, 1995 to January 6, 1996. The major players were President Bill Clinton and the Speaker of the U.S. House of Representatives Newt Gingrich.

Nothing Catastrophic Happened

Amidst all this fear-mongering by president Obama, Pimco, and others, I calmly point out that nothing catastrophic happened last time, and there is no reason to believe anything catastrophic would happen this time.

President Obama’s Hypocrisy

Inquiring minds just may be interested in knowing Obama’s track record on debt ceilings when he was Senator Obama.

The Obama administration is warning of catastrophic consequences if Congress does not increase the debt ceiling, the legal limit on how much the federal government can borrow, but Barack Obama held a different view on the issue as a senator in 2006.

Five years ago, then-Sen. Obama (D-Ill.) voted against raising the debt ceiling and even spoke about it on the Senate floor before the Republican-controlled Senate voted 52-48 to increase it.

“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure,” Obama said on March 16, 2006. “Leadership means that ‘the buck stops here.’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better. I therefore intend to oppose the effort to increase America’s debt limit.”

Failure of Leadership

I remind the president “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.”

I urge Congress to disregard the self-serving fear-mongering of president Obama and Pimco CEO El-Erian because we have a debt problem and a failure of leadership to do anything about it. Americans deserve better, and the way to do that is to act responsibly on a deficit-reduction package, now, not 10 years from now.

Mike “Mish” Shedlock

http://globaleconomicanalysis.blogspot.com

Tags: Barack Obama, Canadian Market, Chief Executive Officer, Cnn, Co Llc, Debt Ceiling, Debt Default, Debt Limit, Fareed Zakaria, Fear Mongering, Fiscal Problems, Harry Reid, Joe Biden, Legal Consequences, Legal Contracts, Mitch Mcconnell, Mohamed El Erian, Pacific Investment Management Co, PIMCO, President Joe, Senate Leaders
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Raising Lazarus From The Dead?

Sunday, April 17th, 2011

by Leo Kolivakis, Pension Pulse

Via Pension Pulse.

Today is Palm Sunday, marking the beginning of Holy Week for the Orthodox Church. I’m not particularly religious but decided to stop off St-George church this afternoon to light a candle. Nobody was there; it was so peaceful and serene, just the way I like it when praying.

This morning I watched the American political shows, and then reflected on how mainstream media presents certain topics on the economy. Bear with me as I take you through some topics.

First, ABC’s this Week discussed the Ryan budget, proposing $6 trillion in federal government spending cuts. I think Republicans are dreaming if they think they can pass these cuts. As far as all the fear mongering on raising the debt ceiling, I will bet with all the doomsayers out there that the US won’t ever default on its debt.

And as far as raising US government revenues, there is any easy solution, it’s called a value-added tax, better know as a goods and services tax (GST). Canadians and Europeans know all about it. It hasn’t crimped Canada or Germany’s growth. It’s a fair tax because it’s a consumption tax, therefore non-regressive. The rich are back, spending more than ever on luxury goods, so it’s easier to tax what they’re spending on than introduce more income taxes. (The smartest thing the Conservatives did in Canada was tax free savings accounts, TFSAs, and the dumbest was cut the GST by 2%).

I then watched Indra Nooyi, whom Fortune Magazine has listed as the most powerful businesswoman in the world for several years running, discuss her thoughts on a “blueprint” that brings manufacturing jobs back to the United States:

“We need to start somewhere. I think the first step is, create a blueprint for the country,” Nooyi told CNN’s “Fareed Zakaria GPS” in an interview that aired Sunday.

“I don’t think worrying about the re-industrialization of America is a Republican issue or a Democratic issue. It’s the country’s issue,” she added.

“There is an extremely qualified cadre of recently retired CEOs and C-suite (top-level) executives who can all be co-opted to help author this blueprint for the future.”

Obama’s Democrats have been sparring with opposition Republicans over how much government spending to slash this fiscal year, as part of a broader budget war and debate over how to rein in a runaway deficit.

The president, Nooyi said, should “forge these coalitions” that would lay out an economic framework for the coming decades that would highlight energy efficiency.

“I don’t know if they can do it with an election year coming up (in 2012), but I think people can put their differences aside and worry about the country.”

She acknowledged that such a project would take years, but said there were several short-term measures that could revitalize job creation in America, including slashing taxes on US subsidiaries that bring foreign profits back to the United States.

Some US firms are “trapped in overseas countries, because the tax rate to bring them back is extremely high,” Nooyi said.

She suggested taxing repatriated money at 15 percent, compared to the top corporate rate of 35 percent — a move she described as “a creative way to address unemployment without adding to the deficit.”

In a report this year, the Association for Financial Professionals estimated that US firms had a total of $1 trillion in overseas cash and investments.

Should Washington lower the tax on repatriated profits, “the likely inflow of capital into the US would stimulate capital investment and hiring, contributing to economic recovery in the short run and economic growth in the long-term,” according to the association.

I don’t buy the argument that US corporate taxes are too high “trapping” profits abroad. As far as those retired CEOs and C-suite executives, bring them on, anything is better that that shameless self-promoter called Donald Trump (if he runs for office, it will be a gift to Obama).

Ms. Nooyi also talked about how Pepsico is now focusing on health conscious food. While I welcome this shift, it’s too little too late. There will be a revolution in health conscious diets over the next decade in the US and elsewhere and if the Pepsicos and Coca Colas of this world aren’t part of it, they will lose big.

But Ms. Nooyi is an impressive woman and she didn’t get to where she is by being behind the curve. She is in a minority among Fortune 500 CEOs. She told Fareed Zakaria that she worked “her tail off” to get to where she is and her accomplishments should be a source of inspiration for all women.

On the economy, she said that “Bill Sixpack” is back, saying things are better but too many Americans feel uneasy with their economic prospects. As I stated above, things are great for the rich invested in stocks, not so great for the millions of unemployed or underemployed struggling to get by as food and energy prices keep creeping up.

This brings me to my other topic, inflation. Zero Hedge posted an interview with Jim Grant saying “there will be a lot of it suddenly”. I got blasted for commenting that I don’t see how inflation can take hold without wage inflation.

In an environment where corporate America has destroyed unions, kept wages low, cut jobs in America to shift them abroad, it’s hard to see major inflation “all of a sudden”. I know that inflation is rising in emerging markets, spurred by the Fed’s aggressive policies, but let me share with you a comment from one of the smartest pension fund managers I know (we were discussing the Shadowstats figure pegging inflation in the US at 10%):

The guy from shadowstats may have some micro points, but he’s just plain nuts on the CPI. He added up every single potential adjustment to CPI, and says that all of them add up to a 6% (?) understatement. Thus his “True CPI” is (reported CPI + 6%).

Unfortunately, if CPI is “really” 8% per year for the past 10 years, vs. 2%, that compounds up to a huge gap. For example, that roughly implies that if you deflate nominal GDP by CPI, it’s been falling in “real terms”. Also, consumption would have to be contracting 3—4% on average over that period. But that flies in the face of actual volume data, which rose over the period. The only way his numbers make sense it that every other stat is being manipulated in a consistent manner to be in line with the CPI.

I have no worries about imported inflation, other than on oil/gasoline/food prices, but that’s still a relative price story. Oil prices fell in nominal terms from 1980-1998, but that did not stop inflation from rising steadily over the period. You cannot ignore wages, which are 70% of the cost of production. Unless wages rise, you can’t see price hikes sticking – by definition, volumes fall, and that will crush the price hikes. The only places you see imported inflation are countries like Iceland, where they import practically everything other than cod.

This pension fund manager is a sharp cookie. He reminded me in the late 1990s, everyone was short JGBs, waiting for the implosion of the Japanese bond market. There were back-up in yields, but over the next decade, JGBs beat out not only the Japanese stock market but the S&P 500 too. In other words, just because yields are low, doesn’t mean that Treasuries can’t outperform stocks on a risk-adjusted basis over the next decade.

The Fed is doing everything it can to reflate risk assets and introduce inflation back in the system. I’ve been writing about this ever since Operation AIG (“All In Goddammit”). There is only one thing that petrifies corporate America and bankers, a long protracted period of deflation. Demographics are terrible in Europe and Japan, and while growth is strong in emerging markets, the risks of deflation have not subsided. That’s why I expect more liquidity to be pumped into the system. And with more liquidity will come more warning from the Inflationistas that we are doomed but all that will happen is more volatility in the financial markets which will benefit the financial oligarchs and the ultra wealthy. Hopefully some of that “wealth” will trickle down and start sustaining job growth.

That’s the Fed’s game plan and it hasn’t changed. The big question is will the Fed succeed? Will it “raise Lazarus from the dead” and resuscitate the US economy? I honestly don’t know, but I will tell you this much, they’ll do whatever it takes to avoid debt deflation. That much I can guarantee you. Below, part of Fareed Zakaria’s interview with Indra Nooyi.

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Tags: Brazil, Businesswoman, Canadian, Canadian Market, Cnn, Consumption Tax, Debt Ceiling, Democratic Issue, Doomsayers, Easy Solution, Fareed Zakaria, Fear Mongering, Federal Government Spending, Fortune Magazine, Free Savings Accounts, Goods And Services Tax, Government Revenues, Holy Week, Industrialization Of America, Luxury Goods, Manufacturing Jobs, oil, Palm Sunday, Raising Lazarus
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