Bill Bonner – Bill Bonner’s Diary (United States) –
Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
– W.B. Yeats, “The Second Coming”
PORTLAW, IRELAND – Yesterday, investors didn’t know what to do.
Incoming data left the falcons confused.
On the one hand, they heard that inflation was ticking up.
On the other, they heard that retail sales growth had slowed.
Consumer price inflation, as measured by the government’s bean counters, surprised to the upside with a 2.1% reading for the last 12 months.
(In financial industry jargon, it’s called a “2.1% print.”)
If the inflation growth rate from January alone continues, the CPI “print” at the end of the year will be 6.7%.
And this attack on investors’ nerves was aggravated by data from the real estate sector. Bloomberg:
Home prices jumped to all-time highs in almost two-thirds of U.S. cities in the fourth quarter as buyers battled for a record-low supply of listings.
Traders knew what to do: They hit the sell button.
Rising inflation will mean lower bond prices… and it will leave stretched consumers with less money.
But just as the Dow began to collapse, more data came in. This time, it was the report on retail spending.
Hand to Mouth
As we reported last month, consumers were credited with having rescued the fourth-quarter GDP by digging into their piggybanks and emptying them to buy gewgaws and thingamajigs.
That bit of data should have caused investors to fly to safety, too.
Instead of the 10% savings rate that was customary in the 1970s, 1980s, and 1990s, household savings dropped to a near-record low of 2.4% last year.
We pause here to remind readers that savings are the key to economic growth and prosperity. Without savings, you live hand to mouth… consuming all that you produce.
Gradually, your machines, fields, and roads degrade. They must be continually renewed… with new factories and new businesses to offer jobs, compete in the market, and create wealth.
Without savings, progress stops… and then reverses.
The difference between a rich country and a poor one is the level of savings – stored up capital – that is available for business and consumer use.
Savings are also important as insurance. You never know when mere anarchy will be loosed upon the land. You save money so you will have something to spend when it comes.
Of course, no one seems to think times will ever get rough again. And with the geniuses at the Fed, the saints in Washington, and the magicians on Wall Street – maybe, they’re right!
In any event, when the data started coming in from retail sales, it revealed that households seem to be running a little short.
“Skint,” they say on this side of the Atlantic.
First, December’s retail sales numbers were revised down. Then, January showed retail sales growth at a little more than half the expected 0.5% rate.
This was not good news, either. But when translated to modern trader talk, it came out as this: “Hey, the Fed ain’t gonna continue raising rates… not with this kind of retail sales report.”
Traders – conditioned by many years of Fed meddling to “buy the dip” – took the bad news as good news and bought more overpriced stocks. The Dow ended up up 1%.
But markets are discovering new things every day.
Yesterday, they discovered that bond prices should be lower (taking into consideration a probable, but not certain, new “quantitative tightening” program from the Fed… as well as the latest print on inflation).
As prices fell, the yield on the benchmark 10-year Treasury note hit 2.92% – a four-year high.
Investors will discover that stock prices should be lower, too. That much is a certainty, though the timing is always unpredictable.
More broadly, they will discover that the whole shebang – the entire capital structure – is rotten.
For 30 years, the Fed has systematically discouraged savings…
…while the federal government’s appetite for spending the nation’s savings has greatly increased.
You can do the math.
In January 2017, there was about $8.8 trillion in savings stashed away in depository institutions in the U.S. (some of it belongs to foreigners). Today, there is $9.09 trillion… or an increase of less than $300 billion over the year.
Even if 100% of these savings were taken this year, it would only cover a quarter of the feds’ projected $1.2 trillion deficit.
We used to count on the Republicans to push back on deficits. They believed in small government and balanced budgets. But now, most of them lack all conviction – except in getting re-elected!
And the worst are full of passionate intensity…
…eager to snatch away every penny of other people’s savings.
MARKET INSIGHT: CONSUMER DEBT AT RECORD LEVELS
By Chris Lowe, Editor at Large, Bonner & Partners
Americans are more loaded with debt than ever before…
Today’s chart looks at the growth in consumer debt, excluding mortgages and other home loans.
Much of this debt pile has financed credit card spending and auto loans.
Going back to 1971 – when Nixon took the dollar off gold and ushered in the “fiat money era” – Americans have never taken on so much non-housing debt.
That pile now stands at $3.8 trillion.
That’s almost double what it was a decade ago.
And it’s nearly triple what it was two decades ago.
– Chris Lowe