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Minyan Mailbag: Middle Class Consumers Beware

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The economy is still being driven almost exclusively by zero real interest rates and speculation.

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Professor Succo...Is there a chance the bears are wrong?

All this works out well. It sure seems that way. Look at the gold stocks...up nicely yesterday, HUI up $6 and gold also up $6. Today gold starts up almost $4 and the HUI at one point was also up $4 only to close down $2.5. The dollar keeps breaking out. Is there anything I am missing here? If US investors think the Fed is done, why doesn't the world?

Are there any recession indicators that have not broken down and actually gotten stronger. I noticed that the five and ten year are 8bp away from inversion. The question is, if they invert, will anyone care?

Minyan Neal


MN,

No, things are deteriorating below the misleading statistics put out by the government. If we look at why things are happening it paints a very different picture than the "facts" put out by the BLS and supported by the broad media.

Forty-two percent of all spending is food and energy outlays. This is very high and shows that the consumer is cutting back sharply on discretionary spending by necessity. What discretionary spending there is comes mainly from luxury goods.

The middle class is in trouble. Consumers are on pace to draw $240 billion in income from real estate re-financing this year; to put that in perspective, that is over half of the total disposable income of $460 billion. There is little pressure now for companies to pass on profits to increased wages given this "source of income" as real interest rates are zero as indicated by the Japanese forward rates (the short position in the yen is a record by a large margin signifying that the world is borrowing from Japan). But this source may stop as the Japanese economy looks like it is recovering. With rates rising in Japan this will crimp the U.S. consumer's source of borrowing just at the wrong time. What is good for Japan at this stage is not good for the U.S. over-extended consumer.

I have attached for Minyans a revised diagram of the "Savings Glut" to illustrate the whole reflation process. This process will be interrupted if rates in Japan rise: that means Japan (China) will keep more capital internally instead of exporting that capital to the income starved U.S. consumer.

The fact is that the U.S. economy is still being driven almost exclusively by zero real interest rates and speculation. For those that do not want to understand why this is happening, trouble lies ahead.

Where is this rally in stocks coming from? I believe with mutual funds, hedge funds, and the like under-performing and under pressure, they are taking risk and buying just at the wrong time for performance sake. Irrational exuberance is a constant phenomenon in various degrees. Option prices are telling us that complacency is rapidly growing.


No positions in stocks mentioned.

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