Americans barely increased spending in May and choose to save more money instead even as decelerating inflation gave them more bang for the buck.
Consumer spending rose 0.1% last month after back-to-back 0.4% gains in April and March, the Commerce Department reported Friday. That matched the Marketwatch forecast of economists.
The meager increase in spending took place against a backdrop of slowing inflation.
PG View: Not typically an environment where the central bank would be tightening policy.
European Central Bank President Mario Draghi intended to signal tolerance for a period of weaker inflation, not an imminent policy tightening, when his comments sent the euro higher this week, sources familiar with Draghi’s thinking said on Wednesday.
Draghi’s intention was to set up September as the earliest the bank would discuss rolling back stimulus, they said, but stressed it was by no means certain that it would come to a decision then.
“The market failed to take note of the caveats in Draghi’s speech,” one of the sources said.
The International Monetary Fund cut its outlook for the U.S. economy, removing assumptions of President Donald Trump’s plans to cut taxes and boost infrastructure spending to spur growth.
The IMF reduced its forecast for U.S. growth this year to 2.1 percent, from 2.3 percent in the fund’s April update to its world economic outlook. The Washington-based fund also cut its projection for U.S. growth next year to 2.1 percent, from 2.5 percent in April.
The world’s biggest economy will probably have a hard time hitting Trump’s target of 3 percent annual growth as it’s faced with problems ranging from an aging population to low productivity growth, and with a labor market already back at full employment, the fund said in its annual assessment of the U.S. economy released Tuesday.
Given broad uncertainty on policy, “we have removed the assumed fiscal stimulus from our forecast,” Alejandro Werner, director of the IMF’s Western Hemisphere Department, said at a press briefing in Washington.
Yahoo Finance/Julia La Roche/06-25-17
Legendary bankruptcy expert Dr. Edward Altman cautioned that this benign credit cycle — characterized by low default rates, low yields, low spreads, and lots of liquidity — could come to an abrupt end.
“It’s been a terrific market for investors for quite a long time and if anything is concerning it’s that we now are more than eight years into a benign credit cycle,” Altman, a professor at NYU Stern School of Business, told Yahoo Finance. “We’ve never had such a long benign cycle. And just that one little fact is something that we should be concerned about because if it comes to one and it could come to an end very dramatically.”
Altman, the creator of the financial-distress sniffing Altman Z-Score, warned in mid-2007 of a “Great Credit Bubble” and that there was going to be trouble in the market. He predicted that a meltdown would stem from corporate defaults. While the primary culprit of the financial crisis turned out to be mortgage-backed securities, investors who heeded Altman’s warning nevertheless avoided a lot of grief.
…Troublingly, Altman sees the reckless behavior of 2007 surfacing again.
Sears Canada filed for bankruptcy early Thursday, making it the latest casualty of the crisis among traditional brick-and-mortar retailers. It’s also another sign of trouble for the iconic retailer.
Sears Canada, which has more than 200 stores and about 17,000 employees, was spun-off as an independent company in 2012. But the filing is still bad news for Sears Holdings (SHLD), which owns both the Sears and Kmart brands in the United States. Sears Holdings still owns 12% of its shares.
…Sears and Sears Canada are hardly the only struggling retailers. In the United States, retail bankruptcies are up about 30% so far this year, according to BankruptcyData.com. Well known names including RadioShack, Gymboree, Sports Authority and Payless Shoes have all filed for bankruptcy within the last year. Total store closings across the U.S. are likely to reach record levels this year.
By some estimates, 25% of U.S. malls could close within the next five years.
PG View: Jonathan and I discussed this developing crisis in depth back in May. You can see the video HERE.
BusinessInsider/Pedro Nicolaci da Costa/06-22-17
The Federal Reserve keeps telling the bond market it wants interest rates to move higher, but traders aren’t listening.
That suggests investors don’t believe the Fed’s justification for interest rate increases, which are predicated not only on recent economic improvement but also on a continued bright outlook.
One startling chart from Societe Generale’s Albert Edwards illustrates the Fed’s dilemma. Two-year notes are historically the maturity that is most responsive to moves in the official federal funds rate.
But look at what’s happened to the two-year note’s yield this year as the Fed ratcheted up its monetary tightening campaign. Absolutely nothing.
In hiking rates and, more notably, reaffirming its forward policy guidance and setting out plans for the phased contraction of its balance sheet, the Federal Reserve signalled last week that it has become less data dependent and more emboldened to normalise monetary policy. Yet, judging from asset prices, markets are failing to internalise sufficiently the shift in the policy regime. Should this discrepancy prevail in the months to come, the Fed could well be forced into the type of policy tightening process that could prove quite unpleasant for markets.
…the Fed is now more intent on gradually normalising both its interest rate structure and its balance sheet. As such, it is more willing to “look through” weak growth and inflation data.
BusinessInsider/Pedro Nicolaci da Costa/06-15-17
Larry Summers isn’t mincing words when it comes to Federal Reserve policy: he thinks it’s way off.
In a stinging new post in the Washington Post’s Wonkblog, the former Treasury Secretary and Harvard economist says the central bank has lost crediblity with financial markets because of its consistently misguided optimism about growth prospects and the Fed’s ability to raise interest rates.
“The Fed is not credible with the markets at this point,” Summers writes. “Its dots plots predict four rate increases over the next 18 months compared with the markets’ expectation of less than two.”
…”The Fed has been highly unrealistic in its forecasts for several years,” he points out.
The U.S. economy has been growing for 96 straight months, its third longest expansion on record, and if this were any previous expansion, the Federal Reserve’s decision on Wednesday would be a no-brainer: It would be time to raise interest rates. The unemployment rate, at 4.3 percent, is at its lowest level since 2001 and job growth has remained strong for this stage of the recovery. Most importantly, the Fed currently has its target rate set at just 0.75-1.00 percent, far below historic levels. After eight years of unusually low interest rates, the conditions appear ripe to bring them back up.
But one critical economic indicator is saying otherwise: inflation. Normally when the economy is humming, inflation starts to rise, but in this case, the Fed’s preferred measure of annual inflation has actually declined for three months in a row, hitting 1.7 percent in April. If you exclude volatile food and energy prices, inflation is even lower, at 1.5 percent. (The Fed’s inflation target is 2 percent.) And on Monday, the New York Federal Reserve reported that consumer inflation expectations had declined as well; expectations for inflation three years from now hit their lowest point since January, 2016.
BusinessInsider/Jacqui Frank & Kara Chin/06-09-17
Legendary investor Jim Rogers sat down with Business Insider CEO Henry Blodget on this week’s episode of “The Bottom Line.” Rogers predicts a market crash in the next few years, one that he says will rival anything he has seen in his lifetime.
It’s going to be the biggest in my lifetime and I’m older than you. No, it’s going to be serious stuff. We’ve had financial problems in America — let’s use America — every four to seven years, since the beginning of the republic. Well, it’s been over eight since the last one. This is the longest or second longest in recorded history, so it’s coming. And the next time it comes — you know, in 2008, we had a problem because of debt. Henry, the debt now — that debt is nothing compared to what’s happening now. In 2008, the Chinese had a lot of money saved for a rainy day. It started raining. They started spending the money. Now, even the Chinese have debt and the debt is much higher. The federal reserves, the central bank in America, the balance sheet is up over five times, since 2008. It’s going to be the worst in your lifetime, my lifetime too. Be worried. — Jim Rogers
PG View: Rogers sees this happening “later this year or next.” And while the Fed will attempt a rescue as they did in 2008, “this time it won’t work.”
Bloomberg/ Lauren Coleman-Lochner & Eliza Ronalds-Hannon/06-09-17
As if malls didn’t have enough problems, count one more: retailers looking to slash the duration of their leases.
After more than a dozen bankruptcies this year contributed to thousands of store closures, visibility for the industry is so poor that retailers are pushing for lease renewals as short as a year or two — down from five to 10 years.
…Somewhere between 9,000 and 10,000 stores will close in the U.S. this year, said Garrick Brown, vice president of Americas retail research for commercial broker Cushman & Wakefield — more than twice as many as the 4,000 last year. He sees this figure rising to about 13,000 next year.
PG View: And yet we continue to add retail square footage, because money remains cheap. This is not going to end well.
The list of U.S. retailers with troubled financials that could make them potential bankruptcy risks, now totals 22, according to Moody’s Investors Service — topping the 19 recorded at the peak of the Great Recession.
Confronting a major shift to online shopping Sears Holdings, Neiman Marcus Group and others on the list face a “perfect storm,” senior Moody’s retail analyst Charles O’Shea said Thursday, as he invoked the name of the Massachusetts fishing boat lost with all hands in a 1991 tempest. The disaster, chronicled by author Sebastian Junger, was later made into a movie featuring actors George Clooney and Mark Wahlberg.
“You’re on the Andrea Gail right now, and the water’s starting to get very choppy,” O’Shea said of the financial conditions buffeting troubled retailers.
PG View: This is a real crisis in the making, as outlined in our video from last month: http://www.usagold.com/cpmforum/2017/05/15/week-in-review-special-report-a-crisis-in-the-making-and-what-it-means-for-gold/
Children’s clothing company Gymboree is anticipated to file for bankruptcy protection sooner rather than later, as the retailer struggles to manage its debt and churn a profit.
Gymboree missed an interest payment due June 1 for its outstanding 9.125 percent senior notes due 2018, according to a Thursday filing with the Securities and Exchange Commission.
…”We do not expect [Gymboree] to make this payment or any other payments on its debt obligations, and expect a general default given ongoing lender negotiations,” S&P Global Ratings wrote in a note to clients Friday.
PG View: Again, please see our video: A Crisis in the Making and What it Means for Gold
Cooler hiring may partly reflect the challenge of finding skilled and experienced workers amid a tightening job market. It may also be a sign businesses are reluctant to expand their workforce until they see more evidence the new administration’s plans are translating into legislation that’ll reduce taxes and spur growth. Even so, with the revisions, the three-month average of payroll gains was the weakest since 2012.
…Retail payrolls declined 6,100, the fourth straight drop.
PG View: If you haven’t seen our videoed discussion about the death of retail, and the far-reaching expectations, I encourage you to do so: CLICK HERE
‘THIS IS A DEATH SPIRAL’: The tsunami of store closures is doubling in size from BusinessInsider
“Store closings have accelerated, even in tier-one markets,” Credit Suisse analysts wrote in a recent research note.
Credit Suisse expects store closings to reach 8,600 before the end of the year!
The U.S. economy continued to grow “modestly” or “moderately” in nearly all regions in recent weeks, though new signs appeared that optimism has waned in some districts, a Federal Reserve survey showed.
The central bank’s Beige Book economic report, based on anecdotal information collected by the 12 regional Fed banks through May 22, said several sectors from manufacturing to housing continued to expand slowly. Consumer spending softened, however, with many districts reporting little or no change in non-auto retail sales.
“A majority of districts reported that firms expressed positive near-term outlooks; however, optimism waned somewhat in a few districts,” according to the report, released Wednesday in Washington.
Stocks have moved up based on two things—a big earnings recovery and hopes the Trump administration would cut taxes, slash regulations and build big infrastructure projects. The earnings recovery is still intact, but the Trump agenda is floundering amid Congressional gridlock and the investigation of the Trump campaign’s ties to Russia, which is sucking the oxygen from the room.
…In an economic recovery and bull market that are eight years old, there’s not much room for improvement. I think we’re in the final innings of both. And the S&P 500’s valuation, at 17.5 times projected 2017 earnings, is pretty high.
So when the soft data say buy, buy, buy, and the hard data say not so fast, I’ll trust the hard data. I’m not yet ready to bail on this market, but it’s surely time for caution.
WSJ/Andrew Peaple & Peter Landers/05-24-17
Some economists have long warned that China faces the same fate as Japan, with a debt-fueled boom followed by years of stagnation as the country works its way through the hangover.
After Moody’s decision to downgrade China on Wednesday, the two countries at least now have sovereign credit ratings, at A1, to match.
…Concerns about China’s economy voiced by the likes of Moody’s have some echoes of the problems Japan faced by the early 1990s. As with Japan, heavy capital-spending levels have been central to China’s growth—investment accounted for nearly half of China’s annual growth by 2010, up from a third in 1990.
Moody’s Investors Service on Wednesday downgraded China’s credit rating to A1 from Aa3, changing its outlook to stable from negative, citing concerns efforts to support growth will spur debt growth across the economy.
Marie Diron, senior vice president for Moody’s soverign rating group, told CNBC’s “Street Signs” on Wednesday that the catalyst for the downgrade was a combination of factors, including expectations that potential growth would fall to 5 percent by the end of the decade. It was Moody’s first downgrade for the country since 1989, according to Reuters.
“Official growth targets are also moving down, but probably more slowly. So the economy is increasingly reliant on policy stimulus,” she said, adding that was likely to spur increasing debt levels for the government.
Washington Post/Damian Paletta & Robert Costa/05-22-17
President Trump on Tuesday will propose cutting federal spending by $3.6 trillion over 10 years, a historic budget contraction that would severely ratchet back spending across dozens of programs and could completely reshape government assistance to the poor.
…Mick Mulvaney, director of the Office of Management and Budget, said the spending plan, titled “A New Foundation for American Greatness,” is focused on protecting taxpayer money and cutting spending on programs that are ineffective or encourage people not to work.
…The proposed budget refocuses decades of U.S. spending — both foreign and domestic — to reflect Trump’s belief that too much taxpayer money is simply given away.
CNBC/Berkeley Lovelace Jr./05-23-17
President Donald Trump’s budget proposal is likely to help produce 1.9 percent economic growth, not 3 percent, former Office of Management and Budget Director Jim Nussle told CNBC on Tuesday.
Nussle’s comment came the morning after Trump’s proposed fiscal 2018 budget became public. The White House said it is a key component in pushing economic growth to 3 percent.
The Congressional Budget Office currently estimates, however, growth at about 1.9 percent and the Federal Reserve projects the economy will expand at a 1.8 percent annual rate.
The good times are back in the eurozone.
A measure of consumer confidence has hit a pre-financial crisis peak this month, reaching its best level in a a decade as the continent has shrugged off populist political risks in 2017.
The European Commission’s monthly sentiment gauge gained 0.3 points to hit -3.3 in May – its best level since July 2007.
PG View: Aside from the negative number itself, this article fails to mention that consumer confidence hasn’t been positive since the euro launched nearly 20-years ago.
Politico/Nancy Cook & Burgess Everett/05-18-17
Republicans’ long-held dreams of tweaking Medicaid, repealing Obamacare and overhauling the tax code appear in more jeopardy than ever as scandal and investigations beset President Donald Trump’s White House.
Some Republicans fear that subpoenas and congressional inquiries will swamp the time they need to pass a health care or tax bill in 2017 — not to mention renegotiate NAFTA, unify behind a $1 trillion infrastructure plan or build that border wall.
“Everything affects our work right now. The more controversy we have the more difficult it is to do things,” said Senate Finance Chairman Orrin Hatch (R-Utah). “But this place is filled with controversy, so if you don’t understand that, you’re in the wrong job.”
BusinessInsider/Pedro Nicolaci da Costa/05-16-17
Goldman Sachs chief economist Jan Hatzius has become distinctly less confident in his expectation that the Federal Reserve will raise interest rates twice more this year and make a major announcement about reducing its bond holdings.
Hatzius’ skepticism is due to US inflation, which has been undershooting the Fed’s 2% official target for most of this economic recovery, and continues to lag despite constant warnings to the contrary.
…”We have shaved our subjective odds of a June rate hike to 80%, from 90% earlier, and have also become a bit less confident in a September hike,” Hatzius added. “If the outlook deteriorates significantly, the committee might simply delay any further tightening steps.
Greece has fallen back into recession for the first time since 2012, official figures from Eurostat show.
The country’s gross domestic product (GDP) fell by 0.1% in the first three months of the year after shrinking by 1.2% in the final quarter of 2016.
The figures come as Greek unions begin two days of industrial action against cuts to pensions and tax rises insisted on by creditors.
Greece is still struggling to secure a new bailout from international lenders.
A “noticeable softening” in US inflation over the past two months ratchets up the pressure on the Federal Reserve to defend its rate rise plans, Pimco said on Monday as it reduced its target for price growth this year.
A disappointing reading on consumer price growth in March may have seemed like a one-time blip, but a repeat performance the following month raised eyebrows at the big US bond manager.
“…unlike in March – when weakness was primarily attributable to the largest-ever monthly decline in wireless services – April’s weakness was broad-based, reflecting softness in a range of core goods and services,” said chief US economist Tiffany Wilding.
Daily Reckoning/David Stockman/05-11-17
…Washington will soon become a three-ring circus of investigations of Russia-gate and the “hidden” reasons for Trump’s action. The Imperial City will get embroiled in bitter partisan warfare and the splintering of the GOP between its populist and establishment wings.
In that context, what passes for “governance” will be reduced to a moveable Fiscal Bloodbath that cycles between debt ceiling showdowns and short-term continuing resolution extensions.
Progress on Obamacare “repeal and replace” or on a 2018 budget resolution that would enable consideration of tax reform will be nearly impossible.
Apparently, that’s not yet dawned on the Wall Street shills who are in the business of justifying a market that never stops rising.
…To use a storm metaphor, I have never been in the eye of a hurricane. But I do reside only a few blocks from Wall Street. And I can feel the financial barometric pressure plummeting by the hour.
In fact, others than the five FAANG stocks (Facebook, Amazon, Apple, Netflix and Goggle), the market has been silently collapsing since March 1st.
PG View: Stockman warms that the lack of breadth in the stock market portends that “a crash is just around the corner.”
For the 3rd month in a row, US Producer Prices have risen at a faster rate than The Fed’s mandate. April healdine PPI rose 2.5% YoY – the most since Feb 2012, and well above the highest anayst estimate, despite disinflationary credit impulse pressures from China being seen in industrial metals. The biggest driver is surging costs for investment advice!
…So Q1 saw The Fed hike as GDP growth plummeted (weakest quarterly growth for a rate hike since 1980) and inflation surged… this won’t end well.
Commerce Secretary Wilbur Ross is conceding a point that economists have been making for a while — the 3% growth rate the Trump administration has promised isn’t realistic anytime soon.
In an interview with Reuters on Tuesday, Ross said President Trump’s growth target “is certainly not achievable this year,” marking the first time a White House official has acknowledged that the figure is a less-than-feasible goal in the near-term.
PG View: No real surprise here . . .
Within minutes of U.S. crude-oil futures tumbling through $45 a barrel, signs of a broader risk-off swing started to emerge in markets, exacerbating what was already brewing as a worrying week for commodities.
Oil’s retreat to a level not seen since OPEC forged its landmark agreement to cut output last November stoked declines from iron ore to industrial metals and losses that many commentators had been putting down to individual supply and demand factors.
…Iron ore has lost about 12 percent this week in Singapore, the most since November, as the material used in steelmaking fails to shake concerns about supply and the outlook for Chinese demand.