Private vs. Public: Two Different Stories [Image] • Subtracting government spending from GDP, we find that the private sector GDP is barely flat [year-over-year] • Around the world governments have taken over for the private sector, China’s stimulus package for 2008 was 14% of GDP • The US Federal Reserve’s balance sheet expanded by $1.4Tr to compensate for credit contraction • But consumer credit outstanding is still shrinking and the deleveraging process is in its early stages • The Federal Reserve’s balance sheet is expected to shrink slowly as asset purchase programs have expired
Restart Private Credit? [Image] • A strong February reading was canceled out by March, April will be crucial to tell if the consumer is back spending money she/he does not have • Small businesses are still reporting difficulty accessing credit • Lending standards have been tightened and it is preferable to stay away from what caused our downfall in the first place, GSEs now represent 90% of the MBS market [Ed: and are not addressed in the so-called 'comprehensive financial reform' bill introduced by lame duck and crisis instigator Chris Dodd] • Total US debt as a percentage of GDP is skyrocketing • The last 30 years of growth have been fueled by an expansion from 160% to 380% of the debt to GDP ratio: we simply cannot keep carrying on • The savings rate after briefly flirting with 7% is now back to 3% and headed lower; it is dramatic
Expand Public Spending? [Image] • Since 1970 federal spending has increased 7X as much as the median income • Since 1980 the 5thpercentile for household income has grown at 3 times the annual pace of the average household income • Total Public Debt Outstanding grew by $4Tr since the end of 2006 • Many worry that excessive issuance will lead to failed auctions resulting in a dangerous bear market for US Treasuries • Japan went down the path before us; 20 years later all they have is a 200% public debt to GDP ratio to show for it along with a soon-to-be negative savings rate
Between a Rock and a Hard Place • Consumer credit has not restarted meaningfully yet, and public debt is reaching worrying levels so the government cannot keep acting as the engine of growth much longer • Q2 numbers will impress because of inventory rebuilding but once that momentum abates the scrutiny on federal spending as the only engine of growth will intensify • Two possible scenarios: -- Private sector lending rises again holding growth between 2.5% and 3.5% until the inventory cycle peaks, then closer to 2% once the government progressively pulls out stimulus and the cycle peaks -- The federal government is forced to step up again as private sector growth falters again • Two scenarios for the economy yet three scenarios for the bond market: -- The economy grows enough for the federal government to pull back spending and the Federal Reserve to normalize rates in 2011 avoiding a financing crisis: 10% probability -- The economy slows and government spending keeps expanding to maintain growth in a slump that carries on for several years: 70% probability -- The US faces a refinancing crisis after other countries default due to the same problem: 20% probability
The Deflationary Case [Image] • Demographics are going to play a fundamental role in the next 20 years and it starts now • Using a distribution of the average salary as a function of age, the aging of the baby boom generation has been a major boost to GDP since the 70s contributing as much as 2% and 1.5% on average • For the next 30 years demographics will only contribute 0.65% on average • The 65-year old or older population is going to grow between 1.7% and 2.5% over the next 30 years against 1.15% on average over the last 20 years
We Are Not Alone [Image] • Aging in China will be exponentially worse due to the one child policy • Also add in the fact that there are 58% men when the “natural” observed population split is 48% men and 52% women • Currently the percentage of the Chinese population which is outside of the workforce is 43%. Starting in 2012 this number is going to move up to reach 60% in 2060 • It will reach 50% before 2020 • In the US this number is currently 35% according to the official BLS releases; it has moved up from 33% in the last 10 years Lenoir concludes with this cheery missive:
"It will all end in tears with skyrocketing interest rates but until then we are stuck in a low yield environment that can last for some time if we believe modern Japanese history."
"Ruh Roh: ICAP Says Deleveraging Process Still In "Early Stages... [and] It Will All End In Tears""
1 Comment -
"VOTE ACCORDINGLY" it has a nice ring to it!
(btw: i scooped legal insurrection on the black gop item...)
9:26 AM