We are living through yet another great awakening. Today’s markets and political landscape are handily dividable between believers and doubters. These are days of present and absent faith. Pain staking, boring, old fashioned investigation of events and trends has barely a seat at the great tables of decision. There are no better illustrations of this than recent developments in equity markets and the President’s ability to be approved of by multitudes of folks on both sides of every major domestic policy issue. I will address this short work toward the former and leave the latter for greater minds and history to sort out.
Things are getting better because they have in the past; we have waited a long time and spent lots of money. This is the conventional wisdom that has driven the S&P500 up 42% from 667 to 950 across the last three months. We have heard stories of China’s rebound, emerging market immunity to the business cycle, falling second derivatives of change. All of this boils down to belief. The common thread is that things get better over time because they have to, we are expecting them to, pundits see green shoots, rates of decline themselves decline. In other words, things will improve because we expect them to, need them too. We believe.
I don’t, I doubt. What follows is a doubter’s view of the present situation. I neither wish any offense nor, seek to rattle the faithful. Perhaps some should stop reading here? For those who decided to stay, let’s take a look at the 11 June 2009 data released by the Federal Reserve in the Z1 Flow of Funds Table. This data covers through the end of Q12009. Household assets declined by $1.44 trillion, 2%, across the first three months of 2009. Household liabilities declined by $144 billion. Assets fell by 3% and liabilities declined by .08%. Disposable income increased $142 billion. Household real estate value declined by 3% or, $570 billion. Mortgage liabilities increased by $1.6 billion. The period 2007 through Q12009 saw a $9 trillion decline in household financial asset holdings. Net worth fell by a staggering $1.33 trillion across the first quarter of this year. Owner’s equity in housing fell to 41.4%. I know what you are thinking, that was then, this is now. You are correct. It is also fair to say, those are some very serious blows for an economy to take. Federal largess is pouring into a giant and growing hole in state and municipal budgets. Our house is no where near in order.
Trade and resilience in emerging markets are a common source of hope and optimism. On 10 June 2009 the US Census Bureau released the April 2009 trade figures. The good news was that our trade deficit has fallen. It appears the joint influence of a declining dollar and a broke public has curbed our import appetite even more than our foreign friends have reduced their already inadequate buying of US exports. This data was seen as great news. We are on track to reduce our trade deficit to $361 billion from last year’s $700 billion. This is a significant relative improvement. However, our trade improvement is based on falling dollars and broke consumers. It is not clear how this squares with the boom times for our export dependent emerging markets or, recovery on the home front. Clearly there are many believers out there.
The latest cold front threatening green shoots is the product of the meeting of two fronts. Interest rates have risen far and fast over recent months - if from Armageddon lows. The plunging dollar has added to upward pressure on oil and commodity prices at the worst possible time. Anemic retail sales figures gloss over rising energy prices and are not adjusted for inflation. The rising credit and commodity cost fronts have merged into a cold wind that now threatens delicate buds that only the blessed are presently able to see.
The Bureau of Economic Analysis (BEA) Personal Income and Outlay Report of 01 June 2009 details a $3.3 billion increase in personal disposable income between January and April 2009. This robust and rapid improvement is made possible at the cost of plummeting tax receipts for Treasury. Between January and May of 2009 the US Treasury reports receipts $689billion less than outlays. The Federal Reserve reports a late May 2008 through late May 2009 increase of $1.18 trillion in its balance sheet. It is amazing how much imminent growth a few trillion now and few trillion promised can create.
Given poorly coordinated monetary and fiscal stimuli and the long term costs associated with them, near term sustainable growth is an article of faith. The US, Japanese and EU economies - making up more than 60% of world GDP - are reeling. Long unsustainable and structural economic problems have erupted. Massive debt overhang, gyrating commodity prices, flailing currencies and suffering populations remain real. Sustainable growth is rarely born of emergency fiscal stimulus, tanking imports and cash flow negative masses chasing deals with cheap constrained credit,