Monday, March 28, 2011

Feb. Real Consumer Expenditures at Record-High

Real consumption expenditures reached a record-high of $9.459 trillion (seasonally adjusted, annual rate in 2005 dollars) in February, according to today's BEA report on Personal Income and Outlays.  Consumer spending is now 1.1% above the pre-recession level of $9.355 in December 2007, and almost 4% above the cyclical low of $9.114 trillion in April 2009 (see chart above).     

51 Comments:

At 3/28/2011 8:39 AM, Blogger morganovich said...

worth noting is that after the huge spike in jan from the tax cuts, chained disposable personal income declined in feb.

the price index assumptions are also extremely low, tracking WAY under CPI.

any "real" price comparisons are only as valid as their deflator, and this one looks pretty far off.

 
At 3/28/2011 9:22 AM, Blogger morganovich said...

Personal income increased $38.1 billion, or 0.3 percent ... Personal consumption expenditures (PCE) increased $69.1 billion, or 0.7 percent.

"Even though PCE growth was at expectations, real PCE was low - and this suggests analysts will downgrade their forecasts for Q1 GDP. Using the two month estimate for PCE growth (averaging the growth of January and February over the first two months of the previous quarter) suggests PCE growth of around 1.4% in Q1 (down sharply from 4.0% in Q4)."

 
At 3/28/2011 10:51 AM, Blogger Rufus II said...

Take out the increase in prices from "Imported" gasoline, and see what you have.

 
At 3/28/2011 11:59 AM, Blogger bix1951 said...

I believe the good news. Not only is the glass half full, it is full!
We have super abundance right now. Everyone I know is doing great, traveling to London, driving fancy cars, sending the kids to expensive private schools and universities.
It has not paid to be a bear for a long time. This expansion has a long way to run.

 
At 3/28/2011 12:12 PM, Blogger Benjamin said...

Wer are in the first leg of a bull arket. Three more long legs to go.

Yes, I would like employment figs to perk up.

And I hope the jackanapes on Wall Street are not taking undue risks with highly leveraged buillions of dollars, ala Long Term Capital Management.

But the beat on the global boom is strong. The Far East is likely entering a perma-boom era, in which the greatest creation of wealth in history will take place. The USA will look like a limp opening act compared to what happens there and in India.

 
At 3/28/2011 12:15 PM, Blogger VangelV said...

any "real" price comparisons are only as valid as their deflator, and this one looks pretty far off.

I think that Mark is accepting the reported deflator and CPI figures as gospel. After all, it was not that long ago that he was telling us that there was no food inflation even though prices for those of us who actually buy groceries and eat were exploding.

 
At 3/28/2011 12:18 PM, Blogger VangelV said...

Everyone I know is doing great, traveling to London, driving fancy cars, sending the kids to expensive private schools and universities.

Not London. My friends can't stand the airport delays and tend to go elsewhere. You are right about the abundance. Those of us who have the cash can certainly buy a lot more technology than we used to even though our grocery and gasoline bills are much higher. But that is not a problem because being bulls on commodities has certainly helped us deal with those increases.

 
At 3/28/2011 1:32 PM, Blogger Rufus II said...

The U.S. will, likely, be in recession by Winter.

 
At 3/28/2011 2:29 PM, Blogger Benjamin said...

I think oil prices will be lower in 18 months than now, and probably also in three years still lower.

The real risk is natural gas supplants oil permanently in many markets.

Read B1 today's WSJ. Money pouring into mines. The boom-glut cycle underway for many commodities.

Comodities have had a great run. But investing at the top?

 
At 3/28/2011 2:32 PM, Blogger morganovich said...

bix-

"It has not paid to be a bear for a long time. This expansion has a long way to run."

i think you are commingling 2 concepts.

you don't need real growth to have huge asset booms, just loose money.

it's quite possible to be bullish on assets and negative on GDP, it just takes loose money, currency adulteration, and inflation.

such a trend gets especially pronounced if you understate inflation and mistake it for productivity.

 
At 3/28/2011 2:57 PM, Blogger Ron H. said...

"We have super abundance right now. Everyone I know is doing great, traveling to London, driving fancy cars, sending the kids to expensive private schools and universities."

bix,

Where do you live? I want to move there.

 
At 3/28/2011 3:03 PM, Blogger juandos said...

"Feb. Real Consumer Expenditures at Record-High"...

I don't believe this is exactly good news here, in fact it might prelude to more bad news...

From the Christian Science Monitor:

US incomes rise, but disposable income drops. Blame oil prices

'A new report from the Department of Commerce shows average US incomes rising, but with rapidly-climbing fuel and food prices, 'real' disposable income is down'

 
At 3/28/2011 3:04 PM, Blogger Benjamin said...

BTW, page page A2, WSJ, re US export boom.

If global boom can continue, and the dollar can stay in current export-friendly trading range, expect lots and lots of good news on this front. It takes time to set up exports. My guees is we are very early in an export boom, if the dollar stays where it is, and the global recovery continues.

 
At 3/28/2011 3:10 PM, Blogger Rufus II said...

The Upper Quintile is doing/will do just fine.

The other four quintiles, however, are "taking gas" (if you'll pardon the pun) as we speak.

9% unemployment, virtually No wage growth, and $3.50 gasoline is starting to bite.

Chicken is up 20% in a couple of months, and my calculator sprung a leak when I tried to calculate beef.

When gasoline hits $4.00 we're done.

 
At 3/28/2011 3:26 PM, Blogger juandos said...

"9% unemployment, virtually No wage growth, and $3.50 gasoline is starting to bite"...

You know rufus I'm questioning what the federal government's numbers are on just about anything...

From Gallup Polling dated March 17:

Gallup Finds U.S. Unemployment at 10.2% in Mid-March - Underemployment was also unchanged from the end of February, at 19.9%

 
At 3/28/2011 3:36 PM, Blogger Rufus II said...

I have my own system, Juandos. Once a month, or so, I go to Walmart; check the prices, and talk to a few people.

Did that yesterday. I got the feeling that the wheels are coming off this puppy, FAST.

 
At 3/28/2011 3:45 PM, Blogger juandos said...

"I got the feeling that the wheels are coming off this puppy, FAST"...

You know you're not alone with that feeling rufus but maybe I'm spending to much time reading Zer0Hedge...:-)

Personally I hope I'm being excessively pessimistic but I don't think so..

 
At 3/28/2011 3:47 PM, Blogger Benjamin said...

Some of you may be confusing or conflating declines in your living standard with inflation.

The middle-class, thanks largely to Social Security taxes, pays a greater share of its income in taxes than in previous generations. Local taxes have risen too.

Believe or not, gasoline is not much more expensive today than in th 1960s (adjusted for inflation) and your income is probably higher than back then. Gasoline is not the source of your problems. Food is very cheap, by historical standards.

If you are feeling a pinch that's probably because you are paying taxes to support huge welfare and "defense" and "homeland security" programs, and also income has been shifted into the top quintile.

Remember: The War on Poverty, the War on Drugs, and the Global War on Terror have been designed to last forever.

 
At 3/28/2011 4:02 PM, Blogger VangelV said...

The U.S. will, likely, be in recession by Winter.

It already is. What you see is the effect of QE2, not sustainable real economic activity.

 
At 3/28/2011 4:06 PM, Blogger VangelV said...

I think oil prices will be lower in 18 months than now, and probably also in three years still lower.

What you are saying is that you expect a global depression that will bring down demand far faster than supply. If that is the case you better load up on gold.

The real risk is natural gas supplants oil permanently in many markets.

Natural gas is selling for less than the marginal cost of a typical shale well. That is not sustainable.

Read B1 today's WSJ. Money pouring into mines. The boom-glut cycle underway for many commodities.

Look at existing mines. Many are low grade that need to close down soon. There isn't enough new supply coming on line fast enough to meet projections if there is any real growth in demand. Of course, we may be saved by an economic collapse. Which means that you better load up on gold and silver.

Comodities have had a great run. But investing at the top?

A typical commodity cycle runs for about 15-20 years. This one began in 2000 and we have yet to see the mutual funds and retail investors participate. Can you really have a bull market unless the funds and retail investors come in to play the game?

I think that you need to check your assumptions.

 
At 3/28/2011 4:08 PM, Blogger VangelV said...

Where do you live? I want to move there.

I think that it was an attempt at sarcasm.

 
At 3/28/2011 4:10 PM, Blogger VangelV said...

...if the dollar stays where it is, and the global recovery continues.

How does the USD stay where it is when your government is running $1.7 trillion a year deficits and needs to rely on Fed money printing to sell its treasuries? If QE2 ends who will step up and buy the more than $400 billion a month of treasuries that are needed to refinance the old debt and finance the deficit?

 
At 3/28/2011 4:21 PM, Blogger morganovich said...

"This one began in 2000 and we have yet to see the mutual funds and retail investors participate"

i'm not so sure that's true. i have seen many, many funds dive into gold and other commodities. gold backed hedge funds in particular are now common.

it's also worth looking at the commodity based ETF's which have been growing at phenomenal rates.

i think that retail participation in this commodity boom is already quite significant.

my parents are sort of a litmus test for this sort of thing, and they started getting very serious about commodities and inflation and dollar hedges about 18 months ago.

that said, so long as the US pursues such a loose monetary policy, it's difficult to see how this sort of asset inflation (at least in dollar terms) stops in the near term even if the economy continues to stagnate.

 
At 3/28/2011 4:30 PM, Blogger morganovich said...

"If QE2 ends who will step up and buy the more than $400 billion a month of treasuries that are needed to refinance the old debt and finance the deficit?"

perhaps the more apt question is "at what price will an actual financial buyer purchase such debt?"

the hole that a spike in debt issuance costs from 2% to 5% will drill in our budgets is not insignificant.

of course, bigger deficits mean more debt to sell means even worse rates and so on. that's the death spiral you get into when you are too deeply in debt. many studies of the topic seem to conclude that federal debt > 90% of GDP tends to be where such spirals kick off. nothing is going to stop us from hitting that now.

the current proposed budget cuts are like arguing over the bar tab for table 17 on the titanic.

the only solution is to balance the budget and do it rapidly.

that's going to be painful. entitlements will have to be cut and cut deeply. SS will need to have its retirement age increased significantly and have means testing added in. even so, benefits will likely need to be reduced.

medicare will need to be pared back significantly with much more stringent limits on coverage and lifetime benefits. personally, i think we'd do better just turning it into annual cash HSA grants that can be used as people like and perhaps some very high deductible coverage for extreme events.

 
At 3/28/2011 4:30 PM, Blogger Dr. T said...

No increase in per person consumption since 2005.

Personal consumptions is just that: personal. That means it should be reported as consumption per person, not for the nation as a whole. Since 2000, our population has been increasing by ~1.3% per year. Our 2011 population is 8% higher than our 2005 population. If per person spending were unchanged since 2005, total personal consumption would be 9.4 trillion. That almost exactly matches the reported value of 9.46 trillion, which means that there has been no increase in personal consumption in six years. [Am I the only one who gets annoyed by misleading time-trend graphs that don't correct for population increases?]

 
At 3/28/2011 4:40 PM, Blogger morganovich said...

benji-

your tax rate theory has one major hole in it:

tax rates on individuals making $50k are lower now that at any time in the last 30 years.

look it up yourself:

http://www.taxfoundation.org/publications/show/151.html


the fica tax has also not moved since 1990.

that pretty much demolishes your idea that the middle class has mistaken after tax take home with inflation in the last 30 years or so.

 
At 3/28/2011 4:41 PM, Blogger Rufus II said...

That's only part of it, and it's way too slow. We need to do something Large, tomorrow.

Goodbye to Iraq, and Afghanistan. Yesterday.

Hello to Tax Increases (at least, back to Clinton era levels,) Today.

That Trillion Bucks that the Corporations have squirreled away overseas? It's Taxable, NOW.

Then, we have to do something about Foreign oil; but, we'll tackle that tomorrow.

 
At 3/28/2011 5:09 PM, Blogger Benjamin said...

Morgan Frank-

You call for a balanced budget without any cuts to any program that might benefit a Republican.

Problem: If you want to balance the budget, you are going to have to gore some R-Party sacred cows, like Defense, VA, USDA, and Commerce. A lot of Interior too.

The above programs, and debt, eat up most of our income taxes.

Socials Security is financed by payroll taxes--and most Americans pay more now in SS taxes than in income taxes.

 
At 3/28/2011 5:11 PM, Blogger Benjamin said...

Vange-

Usually, new technolopgies become cheaper with time an use. It seems to be happening in shale gas too.

The natural gas picture is lush for decades--nay, generations--to come.

Oil would be lush, but the sad fact is that oil is controlled by monkey-thug states like Venezuela, Libya, Saudi Arabia, Russia, etc.

But we have natural gas up our rear ends to the mooon.

 
At 3/28/2011 5:40 PM, Blogger Ron H. said...

"Take out the increase in prices from "Imported" gasoline, and see what you have."

As gasoline as well as crude oil are global commodities, and fungible, how can someone tell when they are buying "imported" as opposed to domestically produced gasoline? Is there a difference in price?

 
At 3/28/2011 5:42 PM, Blogger morganovich said...

benji-

i'm just pointing at 2 of the biggest drains.

you seem to be attributing a number of other positions to me that i do not hold as well as lumping me into a political party to which i do not belong.

i'd love to see military budgets cut as well and see all manner of subsidies erased including the mortgage interest tax deduction.

but if you look at what's going to sink us in the next 20 years, it's the huge unfunded liabilities.

they are many multiples of our GDP.

they dwarf anything else that will be in out budget. even if we cut the rest of federal spending to zero, they are still not payable.

thus, healthcare and social security are the two things that MUST be cut and the area on which we have to focus. the others will help, but would not be anything like enough by themselves.

 
At 3/28/2011 5:44 PM, Blogger Ron H. said...

"Where do you live? I want to move there.

I think that it was an attempt at sarcasm.
"

I'm almost certain of it. :-)

 
At 3/28/2011 6:09 PM, Blogger morganovich said...

here's a good link describing the math on SS and medi:

http://www.ncpa.org/pub/ba662

* By 2020, in addition to payroll taxes and premiums, Social Security and Medicare will require more than one in four federal income tax dollars.
* By 2030, about the midpoint of the baby boomer retirement years, the programs will require nearly half of all income tax dollars.
* By 2060, they will require nearly three out of four income tax dollars.

given that the expense levels in these projections have always been too low in the past, i suspect that the reality will be even worse.

that is why i focus on those 2 programs. unless we get a handle on them, anything else is just rearranging deck chairs on the titanic.

another way to look at it is this:

$107tn in liabilities/ us annual federal tax receipts of 2.16tn = 49.5 years of 100% of us federal taxes to pay them.

you tell me, you think we can find that money?

 
At 3/28/2011 6:36 PM, Blogger Rufus II said...

We can't find it if we've shipped it all to Saudi Arabia, and Iraq.

 
At 3/28/2011 8:36 PM, Blogger bix1951 said...

bix,

Where do you live? I want to move there.

I LIVE IN WEST LOS ANGELES

 
At 3/29/2011 8:26 AM, Blogger Paul said...

"Socials Security is financed by payroll taxes--and most Americans pay more now in SS taxes than in income taxes."

It all goes into the same pot, Benji. And the taxes people pay for SS are taxes they cannot then pay for the other items. Besides,SS is running a $45 billion deficit THIS YEAR according to CBO. So you're wrong on all accounts, as usual.

Also, love how you call the USDA a Republican sacred cow. Let's hear some more about all that GOP lard in North Dakota.

 
At 3/29/2011 9:07 AM, Blogger VangelV said...

i'm not so sure that's true. i have seen many, many funds dive into gold and other commodities. gold backed hedge funds in particular are now common.

As Eric Sprott points out gold and PM holdings as a percentage of total assets sits near 1% versus the 20%+ values during the end of a typical bull market run for the precious metals.

it's also worth looking at the commodity based ETF's which have been growing at phenomenal rates.

Actually, they have grown from a very low base. And many do not hold commodities but are simply a play on the very volatile futures markets. They have serious problems and are not suitable for many people, particularly if you want to own real gold or silver. The gold and silver ETFs may not own much of the gold that they claim to have and are using counter-parties that are essentially bankrupt if proper accounting measures are used.

i think that retail participation in this commodity boom is already quite significant.

my parents are sort of a litmus test for this sort of thing, and they started getting very serious about commodities and inflation and dollar hedges about 18 months ago.


As I said, take a look at the chart that Sprott shows. I see no boom in gold and silver speculation. Do you?

 
At 3/29/2011 9:14 AM, Blogger VangelV said...

perhaps the more apt question is "at what price will an actual financial buyer purchase such debt?"

The better question is who will buy. China is stepping away and does not need an extra 2% in interest from a country that can only meet its obligations by printing money or confiscating the retirement plans of its citizens. Either way the Chinese will want no part of it. Japan will need to sell USTs so that it can rebuild its devastated infrastructure and its power generation capacity. Europe is collapsing and needs money to bail out its bankrupt banking system. I doubt that it can actually spare any of its 'cash' by buying USTs as it neglects its domestic problems. Brazil, India, and other developing nations need money to invest in their own growing economies. The Middle Eastern countries have issues of their own and may sell USTs to bribe their populations and keep them from rebelling.

I am sorry but I do not see an easy way out for the US. The two options are outright default or hyperinflation.

 
At 3/29/2011 9:59 AM, Blogger VangelV said...

that's going to be painful. entitlements will have to be cut and cut deeply. SS will need to have its retirement age increased significantly and have means testing added in. even so, benefits will likely need to be reduced.

I agree but the interesting speculation is about how we get from here to there. I argue that politicians will respond to incentives. That means that they will take the easy way out for as long as possible and resort to easy money policies until the markets force a change to happen. It is very difficult to argue for prudence and cut when your opponent promises a painless transition that will be paid for by the rich, foreigners, the evil oil companies or some other group.

Sorry but I see no way that hyperinflation will be avoided.

 
At 3/29/2011 10:04 AM, Blogger VangelV said...

Goodbye to Iraq, and Afghanistan. Yesterday.

I agree but see that Obama is actually opening up new fronts. And that when he acts in an aggressive manner abroad his approval ratings go up at home.

Hello to Tax Increases (at least, back to Clinton era levels,) Today.

Good luck on that front. It is much easier to raise tax rates than it is to raise revenue.

That Trillion Bucks that the Corporations have squirreled away overseas? It's Taxable, NOW.

What trillion bucks? And why would any company want to stay in the US if it will be better treated abroad? What you are arguing for is the total industrialization of the US.

Then, we have to do something about Foreign oil; but, we'll tackle that tomorrow.

The only thing you can do is hope that they will still sell it to you and keep taking USDs for it. If they price it in a basket of other currencies or gold you are screwed. You need to keep this in perspective. They are the bar owners and you are the drunk.

 
At 3/29/2011 10:05 AM, Blogger VangelV said...

If you want to balance the budget, you are going to have to gore some R-Party sacred cows, like Defense, VA, USDA, and Commerce. A lot of Interior too

Not a problem. See Rand Paul's proposals.

 
At 3/29/2011 10:31 AM, Blogger VangelV said...

Usually, new technolopgies become cheaper with time an use. It seems to be happening in shale gas too.

But that is not true. We have used horizontal drilling for more than a decade and the cost to drill a well today is not lower than it was two years ago. You also have a serious financing problem because the very high upfront costs make it impossible to finance drilling out of current cash flows. This is why many of the shale players have increased their debt levels to dangerous levels or issued equity even as the price levels needed to break even are higher than the actual spot and hedged prices.

The natural gas picture is lush for decades--nay, generations--to come.

Actually, it isn't. The shale players have used the SEC rules to paint a picture that is not accurate and the bigger players have acquired shale assets because they allow them to make their reserve numbers appear more positive than they are. You are falling for the shale scam just as most people fell for the housing scam. Instead of listening to hype I suggest that you look to the details and pay attention to what the companies are doing.

Oil would be lush, but the sad fact is that oil is controlled by monkey-thug states like Venezuela, Libya, Saudi Arabia, Russia, etc.

Nonsense. The producers are desperate for cash flow and have mismanaged their valuable resources because they are run by thugs who care more about short term profits than long term optimization of returns. All of the countries you listed are well past their peak production capacity and cannot ever reach the old levels.

But we have natural gas up our rear ends to the mooon.

That would only be true if you make assumptions that no rational individual would make. Of course, when we look around the investment sphere rationality about fundamentals is not exactly in vogue.

 
At 3/29/2011 10:42 AM, Blogger VangelV said...

I'm almost certain of it. :-)

That said, our friend may have made an unintended valid point. A lot of what you see depends on where you live. I just took the kids on a cruise to the Bahamas. We stayed in NY for three days and got on a boat that took us around on various stops. When I got in the elevator the first day I found one of my son's friends. His family was going on a cruise the day before us. He told us that they had run into someone else from his class who was on another boat. On the boat I ran into a friend of my mom's, who was taking out her son and his family for a nice vacation. When we docked in the Bahamas we ran into a student of my wife's who was on another cruise line that had docked a few hours after we did. A friend of my wife's accompanied us on the trip as did the family of two girls who used to go to the same private school as my own kids.

If you go to the schools in my area and asked where kids went for vacation you will see that about half went to a warm vacation spot (mostly cruises, Mexico, Cuba, Jamaica, or some other Caribbean islands) or went skiing. The people in this area seem to be doing all right. But that does not mean that the average family is doing OK. I had to laugh when my kids actually asked a cab driver why there were so many poor people in Manhattan. He told them that if they wanted to see poor the Bronx may be a better place for them to go.

 
At 3/29/2011 11:45 AM, Blogger morganovich said...

v-

just the physical gold etfs own around 3% of the market. add in amount controlled by futures based etfs and you are likely at 2-3X that.

that's starting to be pretty significant retail participation.

"
As I said, take a look at the chart that Sprott shows. I see no boom in gold and silver speculation. Do you?"

yes, i do. i see it everyday. people who never cared about gold are talking about it all the time now. the internet is inundated with ads for gold. the number of people who ask me my views on it is not as high as net stocks in 1999, but it's getting up there.

 
At 3/29/2011 11:50 AM, Blogger morganovich said...

regarding treasuries, the question is always "who will buy and at what price". if the chinese and japanese back away, yields will spike. that will bring in new buyers because interest real rates would likely become positive again.

if US 5 years were yielding 15%, you'd have a ton of willing buyers.

the problem with the current situation is that we have become accustomed to having large buyers who are not driven by the return on the asset.

this has led to horrible governmental profligacy.

it's double edged for the chinese though. sure, they can stop buying our bonds and sink us fiscally, but that will destroy their biggest market and spike their currency, sinking them too. we are like a codependent drug addled couple addicted to this irrational behavior but unable to stop.

"I am sorry but I do not see an easy way out for the US. The two options are outright default or hyperinflation."

sadly, i agree with you. we COULD recover if we took drastic action on entitlements etc, but as you say, we likely lack the political will. "vote for me and you'll get stuff free" seems to consistently trump "take you medicine now or you'll die later".

having recently gone through the process of getting dual citizenship in a zero income tax country, i can tell you that they are seeing a huge spike in interest. when things start to get nasty, the top 0.1% of taxpayers are likely to demonstrate just how mobile they have become.

the giant sucking sound will be the wealthy fleeing confiscatory taxes.

 
At 3/29/2011 12:15 PM, Blogger VangelV said...

just the physical gold etfs own around 3% of the market. add in amount controlled by futures based etfs and you are likely at 2-3X that.

that's starting to be pretty significant retail participation.


But it isn't. You have to look at the total value of PM holdings as a percentage of all assets and compare them to previous tops. We now sit around 1-2% versus more than 20% at tops. Few people that I know own bullion or gold shares and few mutual funds have more than a percent or two of their holdings allocated to PMs. Compare that to the holdings during the IT and housing bubbles and you will see why we have a long time to go until the primary trend tops out.

By no means am I saying that the short term is positive. I do not pay all that much attention to TA so I ignore what most of the degenerate gamblers are doing other than to note that you see the futures suppressed during expiration week, something that is so blatant that even my 12-year old has noticed.

yes, i do. i see it everyday. people who never cared about gold are talking about it all the time now. the internet is inundated with ads for gold. the number of people who ask me my views on it is not as high as net stocks in 1999, but it's getting up there.

Talking is one thing. Buying PM stocks and bullion is another. When ownership becomes more widespread and the value of PM holdings goes over 10% of total assets or when the Dow/Gold ratio gets to less than 3 you can start to speculate about the time that the end will be near. But we are a long time from that point.

For the record, I have had the same argument that we are having at least a dozen times since 2004. As long as people like you are fearful and you get gold being trashed in the financial press as it is now you will be confident that the bull market is far from ending. What you are also missing is the fact that the price increases have come even as the IMF and CBs around the world were selling off their gold reserves. Imagine what happens when they reverse that trend and become net buyers.

 
At 3/29/2011 12:23 PM, Blogger VangelV said...

regarding treasuries, the question is always "who will buy and at what price". if the chinese and japanese back away, yields will spike. that will bring in new buyers because interest real rates would likely become positive again.

Really? Why would you buy treasuries when the currency declines will eat away at your TAXABLE returns? It is not as if the USD is under-owned. You are assuming that an economic collapse will make the USD strong because the Fed and Treasury will stand aside and let the adjustments take place. Most investors won't. They will see the incentive to use the printing presses to save indebted Americans, who are the majority of voters, and will use any opportunity to diversify away from the dollar.

if US 5 years were yielding 15%, you'd have a ton of willing buyers.

No. That would mean that the USD were collapsing and that the Fed were desperate. At a yield of 15% you would see a collapse of Medicare and SS and would see most savings (which are in the form of bonds) become worthless. There would be riots in the American street and the US would resemble Greece because it is a lot like Greece.

You can't live in make believe land as many of the posters on this thread do. We are in the real world where serious thoughts are required to justify the actions taken by investors looking to control the risks. High rates will only be useful after the correction takes place and the USD is replaced by a new version that cannot be created out of thin air by politicians and bureaucrats.

 
At 3/29/2011 1:09 PM, Blogger VangelV said...

the problem with the current situation is that we have become accustomed to having large buyers who are not driven by the return on the asset.

The USD has lost a great deal of purchasing power and the buyers of USTs have experienced losses, not gains. Most of the buyers of USTs over the past few years have been governments and government-controlled institutions, not rational private individuals.

it's double edged for the chinese though. sure, they can stop buying our bonds and sink us fiscally, but that will destroy their biggest market and spike their currency, sinking them too. we are like a codependent drug addled couple addicted to this irrational behavior but unable to stop.

I think that you are not reading the situation properly.

I guess I forgot to mention my very informative trip visit to the PDAC. While I was taking friends to talk to the many mining CEOs who were there and noting who seemed to be interested in which acquisitions I noticed something interesting. Some of the booths were occupied by companies that had no listings, not only on the TSX or the NYSE but on any exchange. And there were more than the usual Chinese participants with the words capital on their business cards.

Because I am not shy I did quite a bit of digging, first by chatting up the booth babes and then by moving on up the food chain searching for information that would be very useful. Finally, I got lucky and ran into a beautiful young lady who works in an office a few blocks from my old place in Xi'an. One of my pals, who is a very famous performer in China, took over and asked a few interesting questions.

After getting some interesting information we moved on to another location and ran into an old friend of mine who had cornered the CEO of one of China national gold companies for a chat. More answers were provided and eventually a bigger picture emerged.

The Chinese were at the PDAC in full force. They weren't just promoting local projects in need of money. They were taking their USDs and using them to buy explorers, producers, or near producers in North America and elsewhere.

And from the answers it was clear that they were not just interested in buying reserves. They were talking about loading up the acquired companies with debt that they would guarantee and using the loans to build mines and infrastructure that would take the products to foreign markets, including their own.

The Chinese seemed to be diversifying their reserves in two ways. The first was using USDs to directly buy assets. The second was using loaned funds to purchase reserves and build mines. While the balance sheets of the companies would be impaired by the high debt loads that would not be much of a problem.

The plan is to hedge for the time when the USD crashed and the value of USD based reserves fell by having the liability side of their balance sheets evaporate as the debt that was used to buy the reserves and build the mines, roads, railways, and ports become worthless.

When the dust cleared the reserves would be gone but China would have all those assets to back their own currency, which would probably be linked to gold or a basket of commodities. That stronger currency would allow them to bid for the materials and goods that they would need to keep their economy healthy even as the American economy was in collapse and American citizens were no longer rich enough to bid for the limited amount of oil, wheat, corn, and other products that consumers demanded.

 
At 3/29/2011 1:15 PM, Blogger VangelV said...

sadly, i agree with you. we COULD recover if we took drastic action on entitlements etc, but as you say, we likely lack the political will. "vote for me and you'll get stuff free" seems to consistently trump "take you medicine now or you'll die later".

I think that there is a huge opportunity for ambitious young scholars to apply Mises' praxeology to areas other than economics. We have already seen Paul Cantor use a synthesis of Mises and Strauss to shed some light in the cultural sphere. I see no reason why someone can not take praxeology and demonstrate how it can be applied to the field of politics because anyone who understands Mises should be able to predict political evens far more accurately than those idiots that we see on the news channels.

Sadly, such an application would tell us that the best that we can do is kick the can down the road for a while. But that there is no way to avoid the day of reckoning.

 
At 3/29/2011 5:24 PM, Blogger juandos said...

MEANWHILE BACK IN THE REAL WORLD

Inflation worries push consumer confidence lower
Soaring gas prices and soured outlook on income push consumer confidence down in Marc


The index fell more than expected to 63.4 from a revised 72.0 in February. Economists expected 65.4, according to FactSet.

The drop was the steepest since the 10.1-point plunge from January 2010 to February 2010, when the U.S. stock market was hammered by worries about Greece's national debt...

Gee! How often have we seen the word, "revised" when it comes to government reporting on just about anything?!?!

 
At 3/29/2011 6:25 PM, Blogger juandos said...

Unmanipulated US "Misery Index" Hits All Time High

While everyone knows that the CPI in the US is manipulated beyond repair (a topic far too broad to be discussed here suffice to say that as disclosed previously true inflation in the US is currently runrating at over 8%), inflation as actually represented by US consumers and reported by Zero Hedge earlier, in the form of the 1 year inflation expectation index of the Conference Board lack of confidence index, is near all time highs.

 

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