First of all, my fellow Slope-a-Dopes, I want to sincerely apologize to everyone, for my pathetic drama queen melt down display of last week. Let's just say, I obviously snapped after I saw the market perform yet another victory lap dance, as soon as Benny Bigbucks announced that he would be handing out more free viagra laced Benjamins at "The Sniper", a famed Vegas strip joint. As you well know, 2012 has been an absolute debacle for me. I feel much like the desperate, least attractive girl with the smallest tits, sitting alone at a table in the dark smoke filled corner, who gets zero action from even the horniest customers at the club.
After a non stop 24 hour drug & alcohol induced binge, the viagra finally wore off, and I woke up exhausted in a dazed stupor Wednesday morning, surprised to see the foul smelling European smegma leaking out again & yet another missed rimshot on our own erotic goods numbers. I was then suddenly bitch slapped by my girl S&P, when I called her out for having so willingly given up all 19 of our illegitimate children conceived the previous day. It was then, that I decided I simply could no longer bare to stand by, watching idly, as the downtown express left the station without me, especially considering that the very same E train had just run me over, spray-painting my blood on the tracks, after I, a prominent Savant, had idiotically fallen off the platform at the prior stop. So you see, I just knew, in a brief moment of clarity, that I simply had to reconsidered my premature ejaculation pullout, and thus boldly declared "I jump in it".
What actually stings the most about my epic failure here, is that I had actually called for this very QE3 moon shot back on November 20th in EP 23.0.……what an Idiot!! http://slopeofhope.com/2011/11/qe3-sets-sailevil-plan-230-do-not-post.html
The odd thing is, it was this decadent, insatiable, miniature giraffe kissing, male-child of a Russian whore, that not only convinced me to "jump in it", but also, actually inspired me to write EP 49.0……..iShop Until iDrop.
Enough with my insanity, let's get to work. I must admit that I've been completely confounded, and actually amazed by the resilience of the American consumer during the past few years. Nothing seems to faze, nor suppress the almighty American consumption machine. It is often sighted, that roughly 70% of U.S. GDP is entirely driven by our nouveau riche society's unabashed & relentless consumerism. The question I constantly ask myself these days, is how can it be that the U.S. consumer continues to show such interminable vigor, in the face of what most consider to be the most challenging economic times since the Great Depression.
What gives? What am I missing here? Is this seemingly limitless consumption capacity for real, is it sustainable, will it last forever? Or, has it simply been temporarily re-booted by untenable synthetic means. Answering these critical questions, may go a long way to resolving this current puzzle, helping us finally understand where our economy may be heading, and what surprises might be in store for our ever soaring capital markets.
Question # 1, is this current consumption explosion for real?
Well, if the figures from the Bureau of Economic Analysis are to be believed, the answer is an unequivocal & resounding YES! The chart below graphs the Real U.S. Personal Consumption Expenditures in trillions of $USD from July 2007-January 2012, and it's certainly unambiguous.
The data from the World Bank, on U.S. Household Final Consumption, although not quite as current, clearly confirms the very same thing, an ever increasing slope & trajectory of unabatted consumption. It seems we just can't get enough of everything.
Whether this current consumption is excessive or not, is an entirely separate, yet equally challenging longer term question, best left for another EP, but If you're interested, I recommend you read the following Stanford University study on the matter: http://www.stanford.edu/~goulder/Ehrlich-Goulder%20Consumption%20Paper%20-%20Cons%20Biol%2021(5).pdf
Question #2, what is driving this new wave of consumption?
We all know that over the past 25 years or so, U.S. consumers and policymakers have been financed to a significant degree by borrowing from abroad, and by default, from future generations. Simply put, the U.S. economy, financed by artificially generated, and grossly undervalued excess credit, spends more than it earns. Up until the financial crisis of 2008, this was achieved in large measure by the consumer borrowing against ever increasing home values, and by the Government continuing to spend itself into oblivion, consistently encouraged by the FED's easy money mantra.
So now what? Well, in the Government's case, as can clearly be seen in the above bar chart, we all know that nothing has changed. In fact directly due to the FED's ultra easy monetary policy, which artificially drives down interest rates, our policy makers have been having a field day lately, basking in a veritable spending orgy, as they merrily increase the debt ceiling on a quarterly basis. This new spending abbondanza courtesy of our magnanimous Government, has been justified time and time again, by sighting the clear cut necessity to fiscally stimulate our flailing economy, so as to prevent it from falling over a cliff.
So what about the consumer side? How can he keep going like the energizer bunny, when the rabbit hole he was borrowing against is now completely under water? Where is he getting his spending dollars from, what is he borrowing against now?
Apparently, there are many possible explanations for the continued growth in consumer spending. Some say that it has to do with pent up demand left over from the great recession, others say that is has to do with better employment data, still other say that it's the improving consumer confidence numbers, many say that it's a direct result of increased bond & equity values, some say it's due to household balance sheet repair, others say it's due to the easing of credit standards again, still others say that we are pulling demand forward with bargain basement price incentives, some even say it's the weather.
While many of these reasons may be very well be valid, the one reason that resonates the most with me has to do with the ever increasing bifurcation of the U.S. consumer. A notable development in which high-end and low-end stores have both been steadily growing their profits as customers diverge into two totally separate groups, the economic haves and have-nots. Nowhere is this dichotomy more apparent than in the food business. Over the last 6 years, two of the best grocery retailers have been Whole Foods Market and Dollar Tree, posting nearly equal record revenue growth. Vividly depicted in the below chart courtesy of the Motley Fools:
Question #3, will this new consumption orgy be sustainable?
As outlined above in question #2, the Government seems to find a good excuse to spend tons of funds on nearly everything under the sun. Which Includes paying vast numbers of public employees whom consume just like the rest of us in the private sector. The real question is, what will happen when the rubber meets the road during the next budget debate/cuts? I suppose we will soon find out on that score, but one thing is for certain, the out of control spending can't last much longer. Just go check on my cousins over in Europe, if you still need any further explanation on this particular issue.
According to the WSJ, in February, transfer payments accounted for 17.7% of all personal income. Before the recession, the share hovered around 15%. "Government transfer payments continue to rise this year, pushed up by demographic shifts in the U.S. population and by some unemployed workers filing for disability or opting for early retirement. Social security, Medicare and Medicaid are hitting new records. Veteran’s benefits are also increasing, as troops return from combat." This continued increase in transfer payments despite jobless payments falling, as the unemployed max out their benefits or find work, is alarming to say the least. What will happen when the coming austerity kicks in?
As far as the much ballyhooed re-birth of the U.S. consumer, rising like a giant plastic sphinx out of the wasteland that is the Nevada desert, not so fast, cool down, don't deceive yourselves. Today's consumption is almost entirely driven by debt financing once again. Consumers and households are still dangerously in debt. Incredibly, even after the catastrophic financial crisis of 2008, it seems in 2012 lessons from past mistakes have still not been learned.
The Federal Reserve is looking at $2.7 trillion in unsecured debt. The numbers just keep rising.
Here are some interesting consumer debt tidbits:
1) 33 % of that debt is revolving debt (such as credit card debt).
2) 67% comes from loans (such as car loans, student loans, mortgages and the like).
3) 1 in 10 consumers has more than 10 credit cards.
4) 1 in 30 households carry more than $20,000 in credit card debt.
5) 10 percent of cardholders are 45 or more days late in their payments.
While many consumers made efforts to reduce debt during and after the recent recession, many have been tempted to start borrowing on credit cards again, and experts believe this may be leading to significant financial difficulties ahead. The final quarter of 2011 saw an increase in the amount of credit risk consumers faced, and much of that was the result of borrowers falling behind on their mortgage payments, according to a report from Your Money Matters. Some experts believe this is a consequence of sub-prime borrowers once again having access to credit cards that they had been locked out of in the past, as lenders have made an effort to extend credit to riskier consumers once again.
And this from the St. Louis FED; "the Personal Income and Outlay report shows people spent more than they earned in February. Consumer spending increased 0.8% from last month, but after taking price increases into account, increased by 0.5%. While disposable income increased by 0.2%, when adjusted for inflation, disposable income actually dropped, -0.1%. Personal income increased 0.2% in February. The personal income & outlays report is seasonally adjusted and annualized and covers individual income, consumption and savings."
While consumers were shelling out more money in February, they weren’t bringing quite as much home. Personal income increased $28.2 billion, or 0.2% after rising the same percentage in January. The boost was lower than what analysts had expected. Americans are also saving less, with the personal savings rate down to 3.7%, a 2.5-year low. That comes out to a $438.7 billion annual rate from $509.5 billion in January.
Generally income isn't keeping up with spending, consumer spending in 2011, increased faster than disposable income or even overall income when adjusted for inflation. As you can see in the above chart, the savings rate is not heading in the right direction, and this does not bode well for the future performance of the American consumer, that our economy so heavily depends on.
Yet another significant head wind for the U.S. consumer, which will most certainly adversely effect discretionary consumption, is the elevated price of petrol. The summer driving season is nearly upon us, and that means even higher prices at the gas station. Rising oil and gasoline prices will once again threaten the U.S. economic recovery. As higher oil prices manifest themselves in downstream prices of gasoline, diesel and other refined petroleum products, they force consumers to shift discretionary spending away from big-ticket purchases of autos, furniture and appliances. Higher oil prices also crimp consumer purchases of non-durables. If you're paying more at the pump, you've got less to spend on shoes, dining out and going to the movies. In many respects, higher oil prices act as a tax on consumers, and most of those dollars move out of the United States.
So you see my fellow dopes, the fearless American super sized consumer may end up down for the count after all……………..behold: Evil Plan 49.0…….iShop until iDrop.
Keep in mind that the BDI is still bouncing along the ocean's bottom, and Asia's new order flow is sinking like a rickety Chinese Junk taking on water………Spain is circling the drain of the Portu-potty, while France is turning gauche, as Greece is about to fall off the planet….and the leprechauns continue to search for their lost pot of gold………….
p.s. Don't forget to load the boat with DOOMs on the XRT!
BDI SOH's Idiot Savant