Counting on Zombie Consumers

US consumers thirsting for more products?

Today's FT sports an article about the still over indebted US consumer by Morgan Stanley's fabulous Stephen Roach.
Debt had its peak 130% of disposable income in 2007 and decreased to 115%, still well above of the average of 75% of the period between 1975 to 2000. The savings rate low of 1.2% in 2005 has increased to 4.9% also below its 8% long term average .Obviously, the US is not in a position to enter in a consumer driven growth path with so much need to save anytime soon. Mr Roach then critizes the Keynesian stimulus policy for encouragement for renewed reckless consumer spending. He reckons that the US needs 3 to 5 years to fix the household debt problem, and hence, there is no quick fix!
I completely agree with his projection of 3- to 5 years to "fix" the US consumer. However, Mr Roach forgets the savings paradoxon (or paradox of thrift) usually taught in 101 economics, which basically states that in an economy with high spare capacity (i.e. high unemployment as in the US today) increased savings lead to a further contraction of the economy. Also, keep in mind that according to US laws states and municipalities have to balance spending with income (taxes), which leads to a decreased budget in a recession! Hence,  increased spending on federal level has to implemented to avoid this contraction, although I wouldn't give the funds to Wall Street banks with the expectation that it trickles down to Main Street eventually!

Fergusson on European debt crisis

Niall Fergusson has been interviewed on  Bloomberg TV on the looming debt crisis. In short, Fergusson sees a massive crisis coming due to failing politcal resolve to master the debt crisis: PIIGS debtor are not ready to take on any more austerity measures whereas northern European politicians do not see any urgency to act quickly. The Greek economy is not big, but it has the potential to draw in bigger economies like Spain or Italy. As a result, the crises will get messier to resolve only because politicians are behind the curve.



Greek needs to restructure debts soon (before they run out of money). An exit of the EMU will be the ugliest of all possible solutions.

Goldman email "Utopia: I Think I Found A White Elephant, Flying Pig & Unicorn All At Once"

Matt Taibbi of the Rolling Stone magazine sports in his blog a CNN video about a new investigation by New York State Attorney General Eric Schneiderman. The investigation is focused on the pre-crisis mortgage securitization process of Morgan Stanley, Bank of America, und Goldman Sachs. The quote in the title was written by a Goldmanite when finding an idiot/sucker to buy USD 100 millions their toxic CDO "Timberwolf" in 2007 and is mentioned in US senator Levin's report. The problem is not that we wouldn't know about the causes of the banking crisis, but that there is enough evidence around to get Wall Street banks for scheming fraud which in turn will drown them  in massive liabilities. Goldman's stock plunged 7% in the last few days only.

Taibbi's blog just rocks although he seems to be obsessed by Goldman! For a less funny but more serious coverage of the issue read the the FT article.

Geopolitics in the Middle East

Marc Fabers writes in the May issue of "The Gloom, Boom & Doom Report" about the current uprisings in the Middle East. The fact, that Russia has been negotiating with Libya since 2008 to build a naval base at its shores must have slipped mainstream media in the western hemisphere. The nuclear powered heavy missile cruiser "Pyotr Velikhiy" below visited Libya in 2008.


In the mean time the violent suppression of the uprising in the Kingdom of Bahrain, which is the headquarters of the U.S. Navy's Fifth Fleet, received little response by western governments. The Situation in Syria is also complex since Russia has already a naval  base in Syria, and would certainly not tolerate a direct attack by any western country.
A big Russian military base is not in the interest of any European nation which explains the eagerness to attack Qaddafi's regime.  Hence, the grab for oil resources by China, Russia, USA and Europe seems to be in a high gear. As a consequence we can expect an increasing wave of refugees and increasing US debt due to elevated military spending.
Marc Faber concludes that US Treasury bonds will go down in the long term but reckons that they could rally in the short term. He expects more money printing after QE2 which should be positive for equities. He especially likes oil and gold mining stocks.

Keynes vs Hayek

Music video found here made by economists:

Round 1




Round 2



Although, Joseph Stiglitz called Obamas approach to tackle the recession in his book "Freefall" "Muddle Through" and not Keynesian. He is still missing effective regulation for financial institutions and critizes lax monetary policies as "pushing on a string" (famous liquidity trap).

Gold measured in wheat or oil is expensive

The Economist published on the 26.04.2011 an interesting chart measuring gold in oil and wheat:

 

Although wheat and oil has surged substantially for the last year (i.e. the latest drop of the graphs), gold is still above the red line, which symbolizes the purchasing power of wheat and gold at prices of 1986 to buy gold.

Gold has experienced a fabulous bull market for the last decade surging from $ 250.- to over 1500.- (+600%) per ounce.

High Profit Margins Could Depress Stock when Reverting to the Mean

Vitaliy Katsenelson argues that stock valuation measured by PE or dividend yields in comparison to bond yields is not that cheap if you consider that corporate profit margins are close to the pre-crisis all-time-highs. The chart plots pre-tax corporate profits from 1945 until mid-2010 is clearly displaying the high margins in relation to the last 60 years. 

Although after WWII profit margins were shrinking when equities were soaring, we had a massive growth of GDP, which we cannot expect when consumers and governments need to deleverage and housing will be soft for years to come.
BCA Research's chart below paints a similar picture.

The weakened US Dollar could give US business a boost due to lower production costs in the short term as the low Euro gave a boost to German manufacturing in 2010.
To sum up, short term environment might be positive for equities although the end of QE2 is a drag. Long term, profits might shrink due to decreasing margins.