Heinz B. always has some insightful and riveting comments:
Warning his comments are macro ones, talking about what
may happen over the next 2 to 5 years and not the next 2 to 4 months.
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well, there have been two alterations over the past two years to 'improve' the savings rate statistically. however, by and large the historic consistency in the measure has been left intact over the
90's, and a simple line chart shows a deep plunge in the savings rate over the duration of the boom. in a macro-economic sense it doesn't really matter which portion of the population is holding
and/or depleting savings - the fact remains that they have been depleted during the boom, with the largest drawdown coinciding with the peak of the financial asset bubble in 2000.
you say consumers are in better shape than presented by the bears - i'm not sure what you mean by that. better shape in what way? the record indebtedness of US households relative to their
income is an irrefutable fact.
i happen to disagree with the conventional wisdom that a rebuilding of the savings pool is a bad thing and that consumers should continue to spend money they don't have. on the contrary, i
believe it is a necessary precondition to ensure a sustainable economic upswing can get underway.
i also think the fiscal and monetary stimulus exercise is futile, and doing much more harm than good.
regarding the monetary stimulus, what it does is create more money out of thin air, but it sure doesn't create any wealth. it hinders a recovery insofar as it leads to not creditworthy borrowers
being kept afloat, thus diminishing the chances of viable enterprises to remain viable or come into being. it rewards the recklessness of the financial and corporate sector as well as consumers
while punishing savers. the necessary liquidation of malinvestments is delayed, and the downturn thus unnecessarily lengthened.
fiscal stimulus that involves the taking on of additional government debt is likewise useless. the government after all borrows its funds from the same pool of savings for which the private sector
also competes. by selling bonds to the public to finance its spending spree, the government simply crowds out the private sector. the main difference being that the government is not a creator of
wealth - but the private sector is.
regarding the deflation, i not only watch the CRB, but also other indicators. obviously interest rates are a pointer, but also more arcane things like the Baltic Freight Index. the price of gold is
likewise important...Wanninski has e.g. proposed that the Fed should abandon rate targeting in favor of gold price targeting to stop the deflation.
another pointer is the rate of defaults...since there is a huge credit bubble superstructure that has been built up over the course of the boom, it has always been my expectation that eventually
defaults would outrun the capacity for new credit creation. this is already the case in certain subsectors of the economy, like e.g. telecommunication. the big rise in below investment grade and
emerging market credit spreads promises more to come.
note in connection with this that credit card and mortgage delinquencies continue to hit new highs month after month. the trouble is showing up first where one would expect it to, namely at the
sub prime lenders, which tend to go from record earnings in one quarter to bankruptcy in the next (Superior Bank being a case in point).
all this is not to say that it will be all downhill from here, because that's obviously not likely. rather, i expect the deflationary supercycle to play out very similar to the manner in which it has
played out in Japan, namely in the form of several recessions interrupted by anemic (by the previous boom's standards) recoveries, and the requisite cyclical bear and bull markets anticipating
them.
regarding the current account deficit, the real hand-wringing over it has not even begun. contrary to the author of the article, i don't believe one can take comfort from the fact that foreigners are
tremendously overweight dollar denominated assets as a result of the deficit. owning 44% of the government bonds of a country representing 20% of global GDP is an imbalance that is likely to
be corrected at some point in the future. in fact, the arguments presented in the article are very similar to the arguments that were put forward in order to explain away the potential harm of the
deteriorating current accounts of the Asian Tiger states in the years pre-crisis.
but it is beset by an even bigger flaw - namely the assumption that the dollar's reserve currency status will remain forever unchallenged. i think that is highly unlikely - i expect that the world's
central banks will actually alter their reserves mix in coming years to reflect a more balanced approach once the Euro exists as a physical currency.
one thing is very much true - it's a confidence game. just as the Nasdaq bubble was one, so are the remaining bubbles in the US economy that are still extant (housing makes the top of the list).
are there still bubbles? well, look at some of the data from a recent Noland write-up:
<<Broad money supply (M3) increased $8.7 billion last week, failing to reverse any of the nearly $166 billion increase from the previous week. While extraordinary bank and thrift deposits
expansions were somewhat reversed with about a $94 billion decline from the previous week, money market fund assets surged an astonishing $100 billion (institutional funds $80.6 billion, retail
funds $19.7 billion). Broad money supply has increased $229 billion during the past five weeks, $609 billion over 28 weeks (15.5% annualized), and $960 billion (13.9%) during the past 52
weeks. Almost 40% of 12-month broad money supply expansion is explained by one component, institutional money market fund assets. During the past year institutional money funds have
surged $360 billion, or about 50%. It is also worth noting that outstanding asset-backed commercial paper (ABCP) has increased $28.8 billion over the past two weeks to $696.5 billion, with
year-to-date growth at 11%. There was less than $51 billion of ABCP issued as of the end of May 1994.
From Bloomberg: "Japan bought about $24.8 billion of U.S. dollars and euros last month to reverse a rise in the yen…(Japan’s) foreign reserves, the biggest in the world, have risen about $173
billion since July 1999 (to $397 billion)." The Mortgage Bankers Association reported that applications to purchase homes jumped 9%, while applications to refinance surged 27% to the highest
level since the peak of the refi boom in October 1998.
The Wall Street Journal reported (Thomson Financial Service data) that third-quarter U.S. stock and bond issuance jumped 21% to $609 billion, "the fourth busiest quarter ever…"
Year-to-date, total combined U.S. debt and equity issuance surpassed $2 trillion, up 31% from last year. Thomson Financial services reported that straight long-term debt issuance surged 60%
to $930.5 billion, while convertible bond issuance was up 97% to $70.1 billion. Equity issuance sunk 46% to $79.8 billion.
August construction spending, at an annualized rate of $845.5 billion, was up 5.5% from year ago levels. Total August construction spending was up 51% from August 1995. Spending on new
housing was up 7.7% year over year, led by a 15.4% increase in multi-family units. Private non-residential construction was down 7.8%, with spending on industrial projects down 5.5%,
hotels/motels 11.3%, and office construction sinking 15.5%. Notably, the public sector construction boom runs unabated, with a record $21 billion spent during August. This was up 8% from
July, the previous record, and 16% above year ago levels (and up 53% from August 1995!). Spending on education-related construction surged 26% (y-o-y), water supply projects 25%, and
sewer systems 12%. Public construction has been driven by state and local governments that increased spending to $19.7 billion during August, up 17% from last year. It is also worth noting
that state and local construction spending jumped 30% between 1996 and last year, driven by a 52% increase in education projects and 32% expended on highways and streets.
As one would expect, the public-sector construction boom is being driven by surging municipal debt issuance. According to CFSB, third-quarter muni issues jumped to $55.1 billion, up 13.4%
year over year. The comparison would have been even greater had it not been tempered by a 19% decline in September issuance as the market came to a standstill post September 11th.
Year-to-date, municipal issuance of $187 billion is up 29% from last year. New money (issuance less muni refinancings) raised of $136.9 billion is running up 15% from last year. It is worth
noting that almost one-half of muni issuance is insured by one of the credit insurers.>>
my point being that the issuance of new debt exceeds underlying economic growth by a huge factor - the fatal flaw in the system. combined US debt and equity issuance has been up 31% from
last year??? notably with equity issuance actually DOWN by 46%, which left us with LT debt issuance up 60% from a year ago. we get similar data from '95 onward, year after year.
incidentally, '95 was the year in which the broad monetary aggregates took off on their parabolic growth path. THAT's a bubble...there's no way around it.
the current account deficit can be seen as one of its symptoms. think the confidence in the US real estate and credit bubbles is impervious? that's what the buyers of tech stocks thought too...
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