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RETAIL CRE - August Retail Sales: Post-Winter Bounce Fading Fast

August Retail Sales: Post-Winter Bounce Fading Fast 09-12-14 ALHAMBRA PARTNERS

The retail sales release for August was actually quite alarming. The track of sales pretty much confirms the end of the spring “bounce” that showed up in Gallup’s figures, but the real concern is that the “bounce” itself was never more than a minor adjustment; an absence of further erosion as it were. That is nothing like what is being presented widely as the economics profession still clings to the notion that growth is accelerating and the recovery is right around the corner.

If this is acceleration enough to qualify for a full recovery then definitions need as serious revisions as have been taken to GDP:

The great recovery idea in 2014 was in comparison tiny and miniature to that of even 2008, a dubious place to start. Much has been made of revisions to auto sales in the past few months, but absent the overwhelming need to lease (rather than sell) cars consumer spending shows nothing but trouble (still).

It appears that the peak of this “rebound” occurred in June, which is about the same point as established in the Gallup poll. Whatever the view of 2014’s ultimate path, August’s retail sales were among the worst of the recovery period, which is not something that should occur during unquestionable growth – to reiterate once more, a recovery or sustainable growth would see at least 6-9% Y/Y, with 6% as a floor. Instead, several of the retail figures were actually below 3% in August (and retail sales without food and ex autos was up only 1.96%, meaning negative when adjusting for prices) having not seen that 6% minimum since early 2012.

Part of the attempt to disavow the unbiased weakness in same store sales was the proposition that consumers are shopping more and more online. And that is certainly true, but not even close to the extent being labeled as an offset to what are clear deficiencies. The August estimate for retail sales among nonstore retailers was the third lowest Y/Y growth since 2009. It is dreadfully clear in wider context that even online shopping is faltering not bolstering. The linkage is obviously consumers themselves absent actual income growth, and not shifting preferences.

The wide similarities between what occurred after the housing bubble burst in 2006 and forward and the pattern of sales 2012 and forward is as compelling as it is worrisome. If you saw the results of 2006 until September 2008 you might be convinced that the economy, as represented by consumer spending, had undertaken a course of “muddle” growth – as it clearly downshifted but then entered a state of curious stasis whereby it seemed stuck without being able to enter a full upswing, but yet staying conspicuously out of contraction at the same time.

That the same pattern is being repeated is the opposite of reassuring, as what took place after 2006 was that slow erosion of the elongated business cycle, undoubtedly a direct corruption of monetarism and financialism. The elongation looks minor in comparison now only because the depth of the Great Recession has skewed our view of the entire cycle looking backward.

But there is no mistaking the similarities, especially when factoring price changes. What happened in late 2007 and early 2008 was that consumers were spending more and getting less, a form of erosion that does not fit within the comfortable confines of these kinds of results. Even deflating with the ill-suited and deficient CPI-U, however, shows very clearly this same type of slow erosion taking place in both the years immediately following 2006 and once again in the years immediately following 2012.

When factoring employment “growth”, particularly the narrative about such robust expansion in 2014 during this “rebound” period, it clearly is absent from retail sales. Even taking into consideration any lags in spending behavior, economists have been talking about better employment for well over a year, with Ben Bernanke speaking directly about employment gains in justifying tapering QE as early as May 2013. If there were actual payroll gains, there should at least be some trickle of the “pay” part rather than simple focus on the “rolls.”

If you adjust nominal retail sales by the number of payrolls estimated by the Establishment Survey, clearly there is something very wrong. Either consumers are not spending as much as they once were after obtaining a job, instead saving all this robust income generated by a strong jobs market, or the actual pay of these jobs is nothing like what it has been in “cycles” past. I find the latter far more compelling than the former, but there is also the very real possibility that such payroll expansion is simply a figment of statistical fancy and thus does not exist in the real economy.

Again, this is not a trend that suddenly appeared in 2014. Whatever lags to spending via new jobs would have been made up by now, and accelerating payrolls should show up in accelerating spending – it has decidedly not. The chart above could not be clearer on that point. As with the rest of retail sales, and the other hard dollar figures like those of Target (which are pretty much confirmed by these retail sales numbers), the most meaningful interpretation is that of the comparison with 2006-08. The economy may be seeing some positive numbers in some places, but it is certainly heading in the wrong direction albeit perhaps imperceptibly to those not conditioned to think outside rigid sensitivities of what a cycle “should” look like.

If we have learned anything in the age of activist central banks, it is that the business cycle itself has been transformed, but not to anything good or positive. Slow attrition is still attrition, and since compounding is the most powerful force in the universe, a la Einstein, the time component of this pattern is perhaps the most destructive feature of this elongation. It would be far better to undertake a short but even very sharp downturn than to exist perpetually in alternation between shallow contraction and nothing more than its absence.

FUNDAMENTALS - Coming Shift in Expectations

FLOWS - Liquidity, Credit & Debt

World Recession 09-12-14 Richard Duncan

The global economy is sick and getting sicker. No one would suspect this based on what is being reported in the mainstream media. The financial cheerleaders there would have you believe that all is well and getting better. It’s not. Here are the facts.

Yes, the US economy grew by 4.2% during the second quarter. But it shrank by 2.1% in the first quarter. If you go to the website of the Bureau of Economic Analysis you will find that, during the first half of the year, the economy grew by only $78 billion, or by 0.5%. That means the economy expanded by only 1% on an annualized basis. That is pathetically weak considering that during those six months, the government borrowed and spent $201 billion more than its income, while the Fed created $350 billion and injected it into the economy by acquiring financial assets. Nor does the economy appear particularly strong thus far in the third quarter. At the end of last week, it was reported that personal spending, which makes up 70% of the economy, contracted by 0.1% during July.

The US economy is weak. Most of the rest of the world is weaker. Japan’s economy has barely grown over the past 12 months despite money creation on a truly extraordinary scale by the Bank of Japan. Last week it was reported that economic growth in the Eurozone came to a near standstill during the second quarter, increasing just 0.2% compared with the first quarter and by just 0.7% compared with one year earlier. Quarter on quarter, the German and Italian economies both contracted by 0.2%, while the French economy was flat. Only the UK economy reported solid growth of 3.2% compared with one year earlier. Even still, the UK economy has only now just surpassed its pre-crisis peak size, which it reached in early 2008. The Eurozone unemployment rate is 11.5% and deflation is a growing threat. In August, prices rose by only 0.3% year on year.

As for the BRICS, three out of the five are in or near recession. During the second quarter (compared with one year earlier), Brazil’s economy shrank by 0.9%, while Russia’s expanded by only 0.8% and South Africa’s by only 1.0%. Judging by reported data, China’s economy is still booming at an annual rate of 7.5%. However, maintaining such high rates of growth through credit-fuelled, government-induced malinvestment may eventually come at the price of an all-out depression there in the not too distant future. Of all the BRICS, India appears to be in the strongest position, with 5.7% growth. However, it is very dependent on foreign capital, which may soon dry up.

Very low and falling government bond yields are also telling us that something is terribly wrong with the global economy. The yield on the 10-year Japanese government bond is 0.5%. Ten-year German government bond yields fell to a record low of 0.87% this week. US 10-year Treasury bonds now yield only 2.34%. Spain’s economy is in crisis, but the yield on 10-year Spanish government bonds is only 2.23%, 11 basis points less than US government bond yields. The Italian government can sell ten-year debt at a yield that is only slightly more, 2.45%. The world has never before seen such low interest rates.

Interest rates are low because the supply of money is greater than the demand for money. As I have written many times before, since we stopped backing money with gold, there is no longer any difference between money and credit. After the collapse of the quasi-gold standard Bretton Woods System, credit grew very rapidly for decades. That credit created a great global economic boom characterized by asset price inflation and an extraordinary expansion of industrial output. However, globalization depressed wages in the developed nations. Therefore, income and purchasing power did not keep pace with the expansion of output. Capacity across all industries became excessive relative to effective demand. Now, there are very few viable investment opportunities left. That is why the demand for money/credit is so weak and why interest rates are so low. The continuing decline in interest rates on government bonds is a clear sign that this situation is becoming worse.

The global economy is entering a new downturn. The end of the third round of Quantitative Easing in October is very likely to make matters worse.

Wealth taxes and Financial Repression as a solution to over-indebtedness?

“There is only one way to kill capitalism - by taxes, taxes, and more taxes."
Karl Marx

Financial repression always consists of a combination of different measures, which lead to a significant narrowing of the universe of investable assets for investors. Money which in a more liberal investment environment would have flowed into other asset classes, is channeled in a different direction.

The goal of financial repression is an indirect reduction of government debt by means of the targeted manipulation of the cost of government debt, most of the time accompanied by steady inflation.

Financial repression is ultimately a government-imposed transfer of wealth.

A preferably “quiet debt reduction” is supposed to be achieved by the following measures:

• Direct or indirect capping of interest rates (especially on government bonds)
• Measures such as forcing domestic investors to invest in domestic capital markets, such as capital controls and regulations forcing institutional investors to hold portfolios with a “home bias”
• Taxes that make alternative investments more expensive (e.g. transaction taxes)
• measures that imply a direct or indirect influence of government on financial institutions (macro-prudential regulation)
• Negative deposit interest rates, which increase the incentive for banks to invest in relatively risk-free assets. Banks are thus encouraged to monetize government debt – something that can rightly be called an inflation policy.
  

“If a policy is pursued over a long period which postpones and delays necessary
movements, the result must be that what ought to have been a gradual process of change becomes in the end a problem of the necessity of mass transfers within a short period.”
Friedrich August von Hayek

One of the most important goals of financial repression is to hold nominal interest rates below the rate of price inflation. This lowers the government's interest expenses and contributes to a reduction in the real value of the debt burden. Finders keepers, losers weepers: Worldwide savers thus lose approx. EUR 100 bn. per year. Savings are, however, extremely important for capital formation and future growth, especially in times of crisis.

The post-war period in the US is often cited as the standard example for the “history of success” of financial repression. At the time, liquid bonds with short maturities were exchanged for illiquid long-term bonds. One can see a parallel to the present in this, as the increase of maturities of outstanding bonds is a major component of financial repression.95 This can also be seen in the following charts.

Debts can never erase debts.
Debts erase wealth, or wealth erases debts.

“The decline of the value of each dollar is in exact proportion to the gain in the number of them.”
Keith Weiner

The maturity profile of the Fed's balance sheet has been dramatically expanded in recent years. Obviously, an increase of a bond portfolio's maturity profile vastly increases its interest rate sensitivity. Should interest rates increase quickly, exorbitant accounting losses would immediately accrue to central banks and their equity capital would turn negative.

Specific examples of repression measures imposed over the last year:

 Federal Reserve officials are already discussing whether regulators should impose exit fees on bond funds to avert a potential run by investors. This underlines their concern about the vulnerability of the USD 10 trillion corporate bond markets.
 retroactively to 1 February, Italy taxes incoming cross-border money transfers at a rate of 20%. Only if one can prove that one has not engaged in money laundering does one get one's money back. The onus of proof is thus with taxpayers.
 In Poland, a radical step was taken. In order to lower the debt-to-GDP ratio by 8 percentage points, the expropriation of private pension funds was enacted. The background is that upon reaching a debt-to-GDP ratio of 55%, consolidation measures are automatically implemented. By expropriating AXA, ING and Generali, the debt-to-GDP ratio was lowered by 8 percent. According to finance minister Jacek, this creates the potential for the government to run up additional debt.

A revenue source for government that is currently one of the most popular debates, consists of more direct measures, including compulsory levies on all savings, securities and/or real estate. This debate has intensified following a publication by the IMF, an excerpt of which we provide below:

“The sharp deterioration of the public finances in many countries has revived interest in a “capital levy” - a one-off tax on private wealth - as an exceptional measure to restore debt sustainability. The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be repeated, does not distort behavior (and may be seen by some as fair).”

Germany's Bundesbank jumped on the bandwagon as well and said:

“With this special context in mind, the following outlines the various aspects of a one-off levy on domestic private net wealth, in other words, a levy on assets after liabilities have been deducted. From a macroeconomic perspective, a capital levy – and even more so a permanent tax on wealth – is, in principle, beset with considerable problems, and the necessary administrative outlay involved as well as the associated risks for an economy’s growth path are high. In the exceptional situation of a looming sovereign default, however, a one-off capital levy could prove more favorable than the other available alternatives......If the levy is referenced to wealth accumulated in the past and it is believed that it will never be repeated again, it is difficult for taxpayers to evade it in the short term, and its detrimental impact on employment and saving incentives will be limited – unlike that of a permanent tax on wealth.”

US economist Barry Eichengreen outlined already in a 1989 study entitled “The Capital levy in Theory and Practice” how such a compulsory levy must be implemented to be successful: without political debate, fast and above all the surprise factor is essential. Otherwise, capital flees across the border or into different asset classes.

“Capital will always go where it’s welcome and stay where it’s well treated.”
Wriston’s Law of Capital

The road toward wealth taxes is thus already being paved.

Even though the compulsory levy is often called a “millionaire's tax”, caution is advisable. Such a levy on wealth would have massive effects on saving behavior and thus also long term negative consequences for capital formation. The capital structure will be distorted and capital accumulation will become more difficult. When in the past, savings were invested in the capital markets, other ways will now be sought in order to evade the levy.

Since these new ways will only be sought as a result of the new wealth tax, they represent more inefficient forms of capital formation, as they would otherwise already have been used previously.

Conclusion
We expect that financial repression as well as wealth taxes in various facets will increasingly gain in importance in coming years.

We believe this to be a disastrous strategy, as the redistribution will merely buy time, while the structural problems remain unsolved.

“Either the State ends public debt, or public debt will end the State”
David Hume

A NATION IN DECLINE

.. and Running Out of RUNWAY!

After..

$6 Trillion of Budget Deficits

Fed Funds Rate at 0% for nearly 6 Years

$3.5 Trillion of Fiat Money Creation

$25 Trillion Expansion of Household Net Worth (thanks to QE)

We have managed to achieve this....

THE POWERS TO BE ARE GETTING DESPERATE!

Expect FINANCIAL REPRESSION to accelerate & become more aggressive.

Read Yellen Speech - Fisher's Speech

SEE: Financial Repression Archives - 07-20-14

Keynesians See FINANCIAL REPRESSION

as the only option.

Wal-Mart Can't Match Government's

Rate of FINANCIAL REPRESSION

Guess where most of the new mothers below shop??

Any Correlations Here?