Impact on Household Balance Sheets
Fascinating comparison from David Rosenberg, as to how the current crisis compares to 2001-02 Tech Wreck and the Great Depression:
Aggressive stimulus will only cushion the blow
So far, the impact to the household balance sheet is double what was created by the 2001-02 tech wreck, and half the loss incurred during the Great Depression.
By any measure, this hole that has been created in the household balance sheet is huge, and history shows there to be a 90% historical correlation between household wealth and the personal savings rate, which is now on a discernible uptrend.
The lagged impact from the unprecedented negative wealth shock on the personal savings rate is likely to be substantial and expectations that the Fed, Treasury or Congress have some magic wand are wholly unrealistic. At best, all the aggressive policy stimulus will do is cushion the blow.
Pretty wild stuff . . .
>
Source:
Focus is on the cure,not the patient
David A. Rosenberg
Merrill Lynch, 08 January 2009
http://tinyurl.com/8hxejm
January 8th, 2009 at 2:21 pm
WOW. The closest to being dead-on I’ve read so far. What I heard was the election and stimulus and bailout can mitigate short term, but the long term underlying fundamentals just underwent a huge shock we have not experienced in our lifetimes.
Thanks BR.
January 8th, 2009 at 2:30 pm
That’s a very depressing report from a VERY good economist.
The other issue in re: housing…there’s a very long history of real estate running in 16-18 yr cycles, so when we get a peak (2005-2006), it could take several years to finally bottom. We may have realized most of the losses we’ll take in housing, but it could be at least another 3-4 years before we start to see any solid stabilization.
Some “CNBC contributer” this afternoon was saying: “I wouldn’t be short going into the jobs report tomorrow…we’re going to spike like the last few reports.” I don’t what the reaction will be tomorrow, but if we get a bounce on tomorrow’s report I would be a SELLER. The 920-935 zone is going to be STIFF resistance. For anyone holding length, use 875 for the EJECT button….a break below 875 would be BAD.
January 8th, 2009 at 2:33 pm
“Why are we spending all this money? … We cannot solve our problem by doing exactly the same thing that got us into this mess.”…Ron Paul
January 8th, 2009 at 2:39 pm
The big difference between the losses of the tech wreck and current loses is that the tech wreck mostly hit rich people who had gotten an insane paper profit that they then lost. Some of it was on baby boomer retirement accounts but for most of them it was just that this insane increse on their predicted retirement income the past 5 years turned out to be wrong. This time the boomers are that much more close to (or already in) retirement so it is a much more real loss. Furthermore, the biggest problem is not stock marked losses but house value losses. The house value losses hits the consumer class a lot more and will, therefore, have a lot more negative impact on the economy than the fact that a bunch of paper multi-millionaires have their wealth cut in half.
January 8th, 2009 at 3:02 pm
This just makes me mad about the deregulation and black hole economics of the Bush 43 administration. Grrrraaaah!
I just watched this video playlist and it got me hopping mad, then I read this post and I’m thinking of starting my own country.
January 8th, 2009 at 3:16 pm
Barry, thanks but the report seems not to be available at the url…
January 8th, 2009 at 3:20 pm
“It is not that standards are too tough as much as the unprecedented borrowing binge over the past seven
years has left the household sector, at the margin, with a credit profile that is too risky for the banking community to justify to their shareholders.”
The term that comes to mind is “strip-mining.”
January 8th, 2009 at 3:37 pm
ode to humpty dumpty…
The United States drank like fool on a wall.
The United States stock market took a big fall.
Hopefully Paulson’s or Obama’s grand financial plan.
Can put the US back together again.
China massed produced many cheap toxic dolls.
To be sold in American malls.
Hopefully the west might still be able to tan.
If the Saudi’s discount the oil from the sand.
Many businesses are reporting income under null.
Consumers underwater have received a call.
And government’s tried a short-selling ban.
While those on UI are eating beans from a can.
Many hedge fund managers weren’t on the ball.
Nor are jumping from buildings that are tall.
I might not be part of the polly-ann clan.
But as I own T-bills… I’m a out-of-state fan.
January 8th, 2009 at 3:39 pm
I’m not worried.
After all, the tooth fairy is going to pay for all of these bailouts.
(LOL).
January 8th, 2009 at 3:43 pm
If the lending standards had been the same in the past 7 years as they are now we would not have a problem. The problem arrives when they change to fast (in either direction). That is also why we actually have to continue some of the bad things of the past decade even though we know they will be a disaster in the long run. Just like stopping a car if you do it in a split second the damage is immense. We must continue deficit spending and loose lending to a certain extend for a certain period of time, so the damage of the reversal can be absorbed without destroying the economy. Remember that every full time working person accounts for about 100K of GDP per year. So 10 million unemployed people are equal to a loss of $ 1 trillion of GDP - and that is wealth that will be lost forever. So even from a cold numbers point of view exploding unemployment is a disaster.
January 8th, 2009 at 3:44 pm
Obama needs to start listening to his own candidate for chairman of the Council of Economic Advisers.
“”Their bottom line is that “exogenous” tax cuts–that is, tax cuts not intended to offset the business cycle–have a large positive effect on gross domestic product. Specifically, a tax cut of 1% of GDP will raise GDP by about 3%.
“The Romers’ research actually undercuts the Keynesian approach in a more fundamental way. They find that tax cuts to offset a recession are ineffective, but their reasoning would also apply to government spending increases to offset a recession. In other words, if she believes her own research, Christina Romer should be a strong critic of her new boss’s policies.
http://www.forbes.com/opinions/2009/01/07/romer-obama-stimulus-oped-cx_dh_0107henderson.html
January 8th, 2009 at 3:53 pm
Good stuff, thx.
January 8th, 2009 at 4:18 pm
We seem to be following the Japanese in lockstep, from not allowing any business (no matter how inept or broken) to fail, to ZIRP, to deploying huge social safety nets that will suppress any urge to change, and kicking the household savings rate into high gear to compensate for the balance sheet wreckage.
The only difference I can see is that the Japanese were already big savers, and only increased their savings rate, while we are making the bone-jarring cataclysmic shift from a consumer society to a society of savers.
There’s prolly something to be learned from the Japanese experience, from an investing perspective, regarding areas that are likely to be better than others to invest in.
Looks like Merrill didn’t want to display the excellent work of their guy and locked down the paper (or the flood of downloads from TBP caused them some bandwidth anguish). I gotta learn to check out new blog items ASAP, so I can get a peak at the goods before the thundering herds get to it.
January 8th, 2009 at 4:21 pm
AT: I am doing what I did Tuesday, some overnight FAZ but mostly long (materials/miners) with JNK:TBT as a pair trade and cash on the side.
I observed your thoughtful comments on 920 zone and I’m very aware of XLF 12 directly overhead and SPX 890 below. If XLF breaks up through 12 the market may well follow, but I would sell it into XLF 13.
Good luck and thanks for your analysis.
January 8th, 2009 at 4:21 pm
Yes, the link is broken. If anyone has a way to find the article, I’d like to read it…
January 8th, 2009 at 4:59 pm
We’re turning Japanese…
Nihon go no wakarimasen….
January 8th, 2009 at 5:11 pm
http://www.bloomberg.com/apps/news?pid=20601087&sid=ayKBAWayUgP8&refer=worldwide
Consumer Borrowing in U.S. Falls Record $7.9 Billion
It strikes me that there are people who manage their money well, and these people are deciding not to create debt, and are in fact paying it off. Now those who got into debt over their heads, houses, credit cards, student loans, etc…they may be the folks that many expect to unload the credit card bomb this year…
If you have a job, and are conservative, your household balance sheet is probably doing all right.
I know Paulson and Mini-Me want everyone to plunge back in, but it just may not happen, even with superlow rates…
January 8th, 2009 at 5:12 pm
The market seems to be following the fractal script I presented earlier in the week. Will tomorrow provide a 90/10 day just like the March 21st 2007 rally? Then it was the Fed dropping some key language that pushed the bears over the edge. Perhaps the jobs report will provide that catalyst. Based on the shrinking weekly jobs claims it just may.
A bit of a gamble though, since we all know that the January jobs report is notorious for subtracting quite a few from the previous monthly BLS revisions.
tradepostings.blogspot.com
January 8th, 2009 at 5:25 pm
Some folks that are looking at our current problem and saying “We can’t solve this problem by borrowing” or “how will we pay back this $1T projected deficit” are equating government to a much smaller entity. You can not use the rules of microeconomics and compare the policy of the US government to that of a corporation or household.
The bottom line, if government doesn’t intervene “Mr Market” will force 10%-15% of the population to sit on their asses every day unable to contribute economically. If the government intervenes it will enable greater level of overall economic output by putting some portion of that population to constructive uses.
The economy is in a feedback loop that causes deteriorating conditions to worsen. This death spiral will continue to accelerate unless an external force acts to stop it.
January 8th, 2009 at 5:42 pm
I thought this bit was particularly alarming: households spending a near record 14% of after tax income on interest & principle — spending more on interest than on food !!
No amount of fed stimulus is going to fix that problem.
Obama’s “new deal 2″ tease seems to benefit primarily construction and IT benefiting. The comment about jobs building solar panels and wind turbines that ‘can’t be outsourced’ was disingenuous at best. The leading tech centers for solar and wind are in Europe, China and the manufacturing capacity for both is gearing up in China. Are we going to restrict solar and wind machinery imports with tariffs, ‘buy America’ provisions, impossible certification standards and not expect a backlash?
January 8th, 2009 at 6:02 pm
I’ve never had a year when I lost 50% of my net worth and ended up with the same wife.
January 8th, 2009 at 6:16 pm
I agree. In fact, there already appears to be several holes in Obama’s stimulus plan. As to household balance sheets, paying off bills and saving is a good thing. Too bad most of the U.S. has to jump on that bandwagon ONCE it becomes popular. As to government balance sheets, another $T only adds to our mushrooming deficit with another 55-60T on the horizon. Washington believes that international governments will continue to fund our spending with impunity. I don’t. We can’t count on that. They need to take a lesson from today’s actions of the average American in this time of turmoil. After all, we are still 70% of GDP. We’re taking our medicine. They need to take their’s and let corporate America do the same. Spend less not more. Let the economy heal ITSELF.
January 8th, 2009 at 6:19 pm
Why doesn’t the government do to banks like the banks do to people these day?
“We have reviewed your interest and decided you are charging too much.”
I moved all my business from BofA when they started just arbitrarily adjusting their interest up. I didn’t have bad credit never missed a payment, I was shocked. When you call they tell you “we did a review and decided”. That is about how technical an explanation I could get. I told them I had done my own review and decided to move my business. That was all BS, they looked at profits and quarterly bonuses and decided some more money was needed from somewhere. Never again for me, but many people don’t have that option.
January 8th, 2009 at 6:28 pm
I’ve never had a year when I lost 50% of my net worth and ended up with the same wife.
JohnS 6:02
Well, here is the bright side. Get a divorce at the end of that losing year and she’ll get just 25% of the original.
January 8th, 2009 at 6:34 pm
@ Concerned American; “Why doesn’t the government do to banks like the banks do to people these day?”
Because the banks control our government like they do us.
January 8th, 2009 at 6:41 pm
MSM and Senators seems to think that the economy’s problems are rooted in the housing problems. I think this is twisted…I think the housing problem is a subset of the economy’s debt problem…until our fearless leaders see this, we are nowhere close to figuring out how to fix it.
January 8th, 2009 at 6:42 pm
JohnS @ 6:02 here’s some tips from John McCain who pimps his wife too !
John McCain: Take My Wife, Please!
http://www.youtube.com/watch?v=DjtQGAtbe04
January 8th, 2009 at 7:36 pm
Is anyone else getting a little repulsed by Pimco and Bill Gross? “Buy what the government will buy…”
That’s really nice. In other circles that might be called front running a large order I(which is illegal). But, Bill Gross is out there saying “hop on board the gravy train”…”bid it up” and then when dumb ol’ government comes in to buy, sell it out to them.
Does anyone really understand what he’s essentially talking about? He’s basically talking about front-running/ripping off the U.S.Government (us).
And hey, I’m a true-blue libertarian, even during a financial crisis. So I say, do whatever you want Pimco, but please have the decency to just keep it quiet. When you’re screwing someone it’s not proper etiquette to brag about the screw job before and during the screwing.
January 8th, 2009 at 7:39 pm
“. . . personal savings rate, which is now on a discernible uptrend.”
I don’t get it. A few months ago, debt service accounted for well over 100% of the average American’s discretionary income. That’s a debt spiral/default scenario. Now, all of a sudden, and in light of burgeoning unemployment, we’re saving?
Is the American consumer “saving”, in the sense that they can buy a GM vehicle on credit and “save” $6000?
Fiat currency is good for one thing, and one thing only - inflation. Our economy is driven by one thing, and one thing only: consumption. The biggest problem we face is indebted consumers. We can inflate our way out of this, but only if the extra “wealth” created is applied to the consumer class (I’d say, the lower 95% of Americans), either in the form of wages, or as outright grants from the government. Allowing deflation, and or bailing out the wealthy will not help us (inflation won’t really help much more, but we will be able to bring account balances to 0 very quickly and increase demand for the products we no longer make).
To see what fiat currency does, check inflation since the decoupling of gold from the dollar, here:
http://inflationdata.com/Inflation/images/charts/Annual_Inflation/inflation_Cumulative.htm
January 8th, 2009 at 7:58 pm
Did you hear the news?
No more blogging today!
Financial blogger arrested in South Korea
By Christian Oliver in Seoul
Published: January 8 2009 17:54 | Last updated: January 8 2009 17:54
South Korea said on Thursday it had arrested an elusive blogger accused of undermining the country’s financial markets with his doom-mongering, ending a case that has illustrated government unease with the growing influence of online gossip in the world’s most-wired economy.
The case comes amid government efforts to combat negative comments on South Korea’s ailing economy in the media and from private sector economists. The export-dependent economy has been among the hardest hit in Asia by the global financial crisis.
January 8th, 2009 at 8:25 pm
Did anyone find a good link to that article? From the comments I’ve read it sounds like a good one.
January 8th, 2009 at 9:01 pm
Andy, did you see this?
In general, bond investors should be “vigilant” on inflation, but “that is a battle to be fought in the Treasury market where low yields offer little reward and increasing risk,” Gross wrote.
The U.S. credit crisis results from the housing market, bond insurers, American International Group Inc., Fannie Mae and Freddie Mac, automakers, hedge funds, and governments all acting like “Ponzi schemes, whose ultimate payoffs were dependent on the inclusion of more and more players and the production of more and more paper. Bernie Madoff?”
Gross wrote that “we have met Mr. Ponzi and he is us –all of us.”
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aNM5WziLKoSs
January 8th, 2009 at 9:01 pm
Just getting caught up from being out on the beach with the wife over the past few days in South Beach, Miami. Am already wishing we stayed down there…….
Lot of empty condos down there. Beach was darn pretty quiet, especially since the NCAA National Title game is down there tonight. The calm before the storm.
Weather was perfect though. There’s a silver lining for you.
January 8th, 2009 at 9:26 pm
This guy is on it, and he has been for a while. I read his stuff regularly and wonder how the other thinkers, strategists and economists can find such rosey prognostications.
How does a place like Merrill Lynch not make a mint with a guy like this on their team?? And by making a mint, I am not meaning in retail–I understand he’s highly respected on the retail side… Is he just considered a sideshow elsewhere?
BR-you’ve highlighted his research numerous times over the years—what is up with the street and this guy? Or some of the other great thinkers that don’t have optimistic views? What is it on Wall Street? Is it the opposite of the evening news where only bad news sells? Are only perpetual optimists loved?
I read this report and want some Maalox…
January 8th, 2009 at 9:39 pm
Jeff, It hasn’t been the same without you, but i’m happy to learn you were on a quiet beach in a warm, sunny place. You don’t owe me a case of “expensive” wine yet, either…
January 8th, 2009 at 9:49 pm
@karen: To get my fix on the beach, I did have my blackberry handy but decided to only check up on things every hour or so between chapters in my book. Didn’t do any trading or blog posting, although I did read TBP from time to time from my beach chair. I couldn’t totally unplug from reality but that was as close as I get and it felt good. A good reminder that things aren’t all bad………..yet.
Was hoping the news would get better when I returned to reality earlier this evening but it’s still not looking so good. Neither one of us may get that case of wine for quiet a while, as we appear to be pretty range-bound these days.
January 8th, 2009 at 9:58 pm
karen@9.01
First, I hope that you really are a woman and not some dude with a female online handle…because that would be most disappointing.
I missed that article, but heard about his proclamations all day long. It confirms my view about Pimco. On a much larger scale they remind me of ol’ T.Boone talking his book every few weeks on the oil markets. It’s incredible that media outlets allow these folks to talk their positions in such ways. Astounding.
In re: the Treasuries….I have to agree with the guy. The 10 yr Note achieved all of my wildest objectives to the upside and now looks mighty wobbly. I would not be long any long dated treasuries of ANY kind at this point. It would be very nice to see the 10 yr note take another leg down tomorrow or Monday and set a new recent low, because then it would then look VERY MUCH like a five wave structure lower from the all time highs….which would be HUGELY BEARISH.
Regards,
AT.
January 9th, 2009 at 12:32 am
Link doesn’t work for me either. If anyone has an alternate link would appreciate it. Or all of you just pretending you read it?
January 9th, 2009 at 1:19 am
Discussion of debt-to-GDP ratio and adverse consequences with respect thereto:
http://www.comstockfunds.com/index.cfm?act=Newsletter.cfm&CFID=46900191&CFTOKEN=72778978&category=SpecialReport&newsletterid=1432&menugroup=Home
Following are excerpts:
“…it took $1.50 of debt to generate $1 of GDP for the two decades of the 1960s and 1970s, and then it averaged $2.50 to generate $1 of GDP in the period from 1982 to 1997. Starting in 1997 the debt really took off and this economy wound up taking a little more than $3.50 to generate just $1 of GDP in 2008… … The composition of the debt is $25 trillion in Corporate debt-both financial and non financial, $14 trillion in Household debt, and $13 trillion of Government debt-Federal and State & Local) and the GDP is $14.4 trillion”.
January 9th, 2009 at 6:46 am
I googled the name of the report pdf and found a copy of it here:
http://www.mainstreetmonroe.com/voice/topic.asp?topic_id=12743
January 9th, 2009 at 9:09 am
The current increase in savings rate is forced. A lot of people with to much debt find that they are forced to pay it down because they cannot find anybody that will let them borrow any more money.
DL, the debt to GDP ratio has nothing to do with how much debt it takes to “generate” GDP. The old debt that Reagan gave us in the 80′ies is not generating any of todays GDP (if anything it is restricting todays GDP), but it is still part of our government debt. The debt that can generate GDP is the new (increase in) debt. That is why the loss of debt in the private and corporate sector is bad news for the GDP, and why the government has to try to pump loans and money into corporations and households to put a brake on the reduction in debt. We do not want to slide into a deflationary depression.
January 9th, 2009 at 11:14 am
DeDude @ 9:09
O.K., so debt doesn’t matter, and debt service payments don’t matter.
The more debt, the better.
We don’t need to produce anything; we can just keep borrowing.
January 9th, 2009 at 1:51 pm
DL, oh yes debt matters and you cannot just keep adding to debt without ever paying it down. However, there is a right time and a wrong time to be concerned with reducing debt. At this point in time we are in a severe ressesion and the worst thing we can do is to add wood to that fire by reducing debt.
The time to reduce debt was in early 2003 when a bunch of neocon fools had just taken power in all branches of government. They looked at some curves of deficits that, if extrapolated, seem to indicate that we within a decade would have payed the whole national debt off and started to save up for a rainy day. For some reason they considered that prospect so bad that they immediately had to make a bunch of reckless taxcuts for the wealthy (because as their supreme leader said “deficits doesn’t matter, and we (the rich) have earned it”). At the same time a neocon moron was in charge of the Fed and he decided that this was also a great time to have private and corporate debt explode. Those people did the exact opposite of what would be prudent to do after the economy had recovered from a shallow ressecion (which is to pay down debt, so you are ready for some deficit spending when the next ressesion comes at you).