Sive Morten
Special Consultant to the FPA
- Messages
- 18,669
Fundamentals
This week we do not have a lot of new inputs to update economy situation. Maybe just new inflation numbers for EU and UK, although together with recent CPI numbers they have a special meaning for us that we consider below. G20 summit has totally failed, as no economy summary statement has been done, although G20 is larger version of G7 that has been created to resolve economical problems first of all. So, here is nothing to discuss. I do not know what about you, guys, but personally I'm interested and a bit surprise with some uncontrolled euphoria that spreads across the board, especially stocks. Stocks behave so as all problems are resolved already and inflation is 2%. And now it seems to me as big trap. Some big disbalance of real economy situation to markets' view or anticipation. That is what I would like to discuss today. Let's first take a look what traders talk about.
Market overview
The dollar gained slightly on Friday and remained on track for its largest weekly gain in over a month as investors eyed rising bond yields and continued to make bets on the U.S. Federal Reserve's interest rate hiking path. In the United States on Thursday, investors had reacted to hawkish policy maker comments with St. Louis Fed President James Bullard saying that even under a "generous" analysis of monetary policy, the Fed needs to keep raising rates as its tightening so far "had only limited effects on observed inflation."
Joseph Trevisani, senior analyst at FXStreet, pointed to hawkish remarks from Fed officials such as Bullard which "helped to thwart speculation that the Fed was nearing a pause" in its campaign against inflation, and set the stage for gains in the dollar along with U.S. Treasury yields. Some analysts also suggested that investors may be positioning for the year-end after the dollar's strong run for the year to date.
Global equities edged up and a key part of the Treasury yield curve inverted further on Friday, a sign the U.S. economy will stall next year and that investors hope will lead the Federal Reserve to back off its aggressive hiking of interest rates.
Surprisingly strong retail sales data this week hammered home the idea that the Fed will tighten monetary policy further even though soft consumer and producer price pressures suggested inflation has peaked and would allow for lower rates. Retail sales rose 1.3% last month after being unchanged in September. Economists polled by Reuters had forecast sales would rise 1.0%. Sales increased 8.3% on a year-on-year basis in October.
The J. Bullard remarks were a blow to investors who had wagered rates would peak at 5% or below. Futures now show the Fed funds rate at 5.05% by May, up from 3.83% now . But futures also show rates will slide to 4.66% in December 2023 on expectations the Fed will move to ease policy as the economy weakens.
Boston Fed President Susan Collins added to the Fed's hardline stance, telling CNBC that with little evidence price pressures are waning policymakers may need to deliver another 75 basis-point rate hike to get inflation under control.
Three top policymakers in Europe also said the European Central Bank must raise rates high enough to dampen growth as it too fights high inflation.
The market sees a recession next year as the yield spread between two- and 10-year Treasuries was -71 basis points, an inversion of the yield curve that has not reached such depths since at least 2000. When yields are less on the 10-year note than the two-year, a security that reflects interest rate expectations, it suggests a slowdown or worse and that the Fed will cut rates to spur the economy.
The impact of rising rates was felt in housing, where U.S. existing home sales tumbled for a record ninth straight month in October as the 30-year fixed mortgage rate hit a 20-year high.
We also would like to add that not only J. Bullard, S. Collins but N. Kashkari as well said that "It's hard to know how high the U.S. central bank will need to raise interest rates."
"I need to be convinced that inflation has at least stopped climbing, that we're not falling further behind the curve, before I would advocate stopping the progression of future rate hikes," he told the Minnesota Chamber of Commerce in an event webcast by the regional Fed bank. "We're not there yet. Recent data showing consumer and wholesale prices cooled in October provide "some evidence that inflation is at least plateauing," he said, but "we cannot be overly persuaded by one month's data."
Meantime, NY Fed warns that bank liquidity may be tighter than thought, with policy implications.
As a result, overall concensus now suggest that The Federal Reserve will downshift in December to deliver a 50-basis-point interest rate hike, but economists polled by Reuters say a longer period of U.S. central bank tightening and a higher policy rate peak are the greatest risks to the current outlook. Also the latest Reuters poll shows forecasts for inflation in the coming year and into next are slightly higher than thought one month ago, suggesting it is not time yet to consider an imminent pause in the Fed's tightening campaign.
The Fed is set to raise its federal funds rate by half a percentage point to the 4.25%-4.50% range at its Dec. 13-14 policy meeting, according to 78 of 84 economists who participated in a Nov. 14-17 Reuters poll. The funds rate, which the Fed has raised from near-zero in March in one of its fastest rate-hiking campaigns ever, was widely expected to peak at a minimum of 4.75%-5.00% early next year, 25 basis points higher than seen in last month's poll. Peak rate forecasts ranged between 4.25%-4.50% and 5.75%-6.00%.
Goldman Sachs also suggests that it should be longer cycle.
Goldman economists now expect a longer hiking cycle and an even higher terminal rate, in line with the Fed. Goldman's three-month forecast calls for the euro hitting $0.94 against the dollar.
The euro area, on the other hand, still faces stiff challenges from energy shortages, while the smaller G10 economies are more sensitive to higher rates, or changes to policy rates, due in a part to the increase in variable rate mortgages. In contrast, Goldman said the U.S. economy has a brighter economic outlook and may be less sensitive to higher rates, which should support the dollar. Goldman said the eventual dollar peak should coincide with better global growth prospects and renewed capital flows abroad.
In EU situation mostly is going in the same direction. Euro zone banks are set to repay nearly 300 billion euros ($310 billion) in loans to the European Central Bank next week, the ECB said on Friday, the biggest cash withdrawal from the euro zone's financial system in the euro's 22-year history. The move is part of ECB efforts to fight record-high inflation in the euro zone by raising the cost of credit and it is its first step towards mopping up even more liquidity next year by trimming its multi-trillion-euro bond portfolio.
The euro zone's central bank said lenders would repay 296 billion euros worth of the 2.1-trillion-euros, multi-year credit they have taken under its Targeted Longer-Term Refinancing Operations (TLTRO) when they get their first chance to do so on Nov. 23.
This is the first voluntary repayment window so analysts had cautioned that some bank treasurers may choose to wait until the next one on Dec. 21 to have better visibility on the state of their balance sheet before year-end results.
The greatest impact from the repayments was likely to be seen in peripheral countries, which would see a bigger proportion of their government bonds come back on the market after being locked at the ECB as collateral for the TLTRO loans.
Euro zone banks may see a surge in soured loans as rapid inflation and rising interest rates hit household incomes, particularly among the bloc's poorest, the European Central Bank said in a fresh study on Tuesday. With inflation rising to double digit territory, households are burning through their savings with little respite in sight as income growth trails far behind, especially for the poorest who are disproportionately hit by surging food and fuel costs.
Tricky US Retail Sales
Now it becomes clear why everybody are so excited. CPI has decreased, Retail Sales have increased - so, it seems that Fed should slow down and inflation is near defeat. Bing. Indeed, Retail Sales are very important, everybody knows that they contribute around 70% to GDP value. But anybody has tried to dig it and see how and why they are growing, or at least stand stable in positive area? You get big surprise when you will know it. And we see major source of investors confusion here.
But first, let's take a look, is it really everything good with inflation? Recent EU and UK data shows that it keeps going higher and 2-digits already:
In the US although recent CPI has decreased but now consumer inflation expectations, after short-term pause has turned up again:
Thus, by looking at recent numbers of record inflation growth rates, it seems that a new wave of structural crisis is beginning. We need a bit more time to see, but perhaps it is starting particular structural inflation growth that we've talked about, which just is unavoidably has to happen due to the hiking rate policy in many countries of the world. Now what we have on the table - rates are near few decades top but this have no holding effect on inflation. This is the first important point. Structural inflation works different, as we've explained this already.
Nevertheless, the leadership of the monetary authorities of the United States and the EU, which does not recognize the structural causes of the crisis, confirmed its course to tighten monetary policy. Above we've mentioned few rather hawkish statements from Fed members. Most valuable comments are from the head of the Reserve Bank of St. Louis, James Bullard. He confirms that CPI decreasing might temporal, saying - data showing that consumer inflation slowed in October "could easily go the other way in the next report." Most important statements, that in general reflect Fed position are as follows:
"The Fed needs to keep raising interest rates given that its tightening so far "had only limited effects on observed inflation"
"Using even "dovish" assumptions, a basic monetary policy rule would require the Fed's policy rate to rise to around 5%, while stricter assumptions would recommend it climb above 7%."
"Fed's target policy needs to rise to at least a range between 5.00% and 5.25% from the current level of just below 4.00% to be "sufficiently restrictive" to curb inflation"
"The policy is not yet considered sufficiently restrictive to reduce inflation."
Federal Reserve Bank of Boston leader Susan Collins said on Friday that with little evidence price pressures are waning, the Fed may need to deliver another 75-basis point rate hike as it seeks to get inflation under control.
In other words, it is clearly stated that the Fed will keep rising the rate, and there is a strong belief that this brings the desired result, that is, a decrease in inflation. In reality, as we can see, the effect may be the opposite, ignorance of the theory often gives such serious mistakes in practice.
At the same time, not only inflation shows serious fundamental problems in the United States. For example, if you take a look at real wages and the increase in consumer loans, you could see that they show positive correlation since 2014 (the right scale is reversed on the graph). In other words, the population compensates for the decrease in real wages by taking more consumer loans. We have already paid attention to this point in terms of a card loans, but since this is an important topic, it makes sense to repeat it in a broader aspect.
At the same time, the United States is quite shamelessly robbing the European Union. Just look at the gas price. Now, the major supplier of LNG to EU is the US, but price has increased from times greater in EU rather than in US. I understand the shipping cost etc, but not as much probably...As a result, the economic situation in the EU is deteriorating faster than in the United States, just take a look at inflation rates for individual countries in the region above.
In general, it can be stated that the cycle of rate increases has not given any systemic improvement, and therefore the only question that can be asked in this situation is when the monetary authorities of the main developed countries (primarily the United States) will start to change something in their policy. So far, as we can see, they have no such plans. Moreover, there is not even the desire and/or the ability to explain to people what is really happening in the global economy.
But this is not the end of the story yet. The first country that supposedly should pull the break is UK (except Japan that is keep running the QE train and already hits 40-year inflation record). Morgan Stanley expects the Bank of England (BoE) to cut interest rates by 150 basis points in 2024 after stopping its tightening cycle in March of next year.
And I'm sure that Fed will follow shortly long after BoE or even earlier. It sounds great, but what we're going to do with 11+% inflation in UK and 9% in US?
Now let's take a look a bit deeper on Retail Sales. First is - one-time tax refunds was given in California, which saw some households receiving as much as $1,050 in stimulus checks, likely helped to underpin sales in October. The National Retail Federation is forecasting holiday sales will grow between 6% and 8% this year. While that would be a step down from the 13.5% notched in 2021, it would be well above the 4.9% average over the past 10 years.
The upbeat outlook for holiday shopping was somewhat tarnished by Target Co. forecast on Wednesday of a surprise drop in holiday-quarter sales. The retailer blamed inflation and "dramatic changes" in consumer behavior for a drop in demand for everything from toys to home furnishings.
Massive savings accumulated during the COVID-19 pandemic and strong wage gains amid a tight labor market have generally helped consumers weather higher prices and borrowing costs. That support is expected to fade next year as tighter monetary policy dampens overall demand, weighing on the labor market and the economy. Low-income households are believed to have already exhausted their pandemic savings.
Households are also borrowing to maintain spending. Data from the New York Fed on Monday showed total borrowing surged $351 billion in the third quarter. The growing debt burden could be an obstacle to spending, especially among low-income households.
If we compare trends of real income, labor productivity and production value, then the retail sales has to be at least 8-10% lower! This provokes imbalances in the system, spinning up an inflation. Nominal turnover in online commerce has increased by 67% since February 2020, fuel costs have increased by 53%, retail turnover in stores +42%, sporting goods and hobby products +39%, construction materials, gardening supplies +35%, catering expenses +31%, cars and accessories +25%, for food and drinks +25%.
It is not surprising that inflation breaks all records if nominal turnover is growing, as in Zimbabwe. There is a lot of money, but there are few people willing to work.
When money printing machine is turned off, how does the population in the United States maintain an unsecured standard of living? A decrease in the savings rate and the strongest credit impulse in 26 years mentioned above.
The negative correlation between the rates of real hourly wages and the rates of lending has been particularly pronounced over the past 10 years. The relationship is reversed – if wages are declining in real terms, then lending is growing to compensate for the loss of income.
In 2020-2021, wage growth was the consequence of an imbalance in the labor market, when, due COVID restrictions and uncontrolled money supply, a significant part of the workforce didn't work because state subsidies was comparable or exceeding their possible earnings.
However, demand did not fall, but on the contrary, it grew as never before, because everything was flooded with money. Competition for labor resources led to an increase in wages, that has formed a record impulse of hourly wages in real terms. But since 2021 the trend has changed. The growth rate of nominal hourly wages slowed sharply to 5-6%, and inflation accelerated to 8% and higher, as a result, real wages are declining at a rate of 2-3%.
Previously, this kind of trends led to a decrease in consumer and credit activity, but not now. Lending on a revolving loan (mainly credit cards and consumer loans for current consumption) is growing at a rate of 15% per year – this is the maximum since 1996, and the more income decreases, the faster lending grows.
The final is is quite clear – the wave of personal bankruptcies and a decrease in long-term consumption, since debt servicing payments will increase in the structure of expenses, because the rates is gradually rising. As a result, we're going with the most insane scenario of all possible. The minimum savings rate in history (previously 3% of savings turned into a crisis in 2009) and record lending in attempt to keep consumption at habit levels...
To be continued...
This week we do not have a lot of new inputs to update economy situation. Maybe just new inflation numbers for EU and UK, although together with recent CPI numbers they have a special meaning for us that we consider below. G20 summit has totally failed, as no economy summary statement has been done, although G20 is larger version of G7 that has been created to resolve economical problems first of all. So, here is nothing to discuss. I do not know what about you, guys, but personally I'm interested and a bit surprise with some uncontrolled euphoria that spreads across the board, especially stocks. Stocks behave so as all problems are resolved already and inflation is 2%. And now it seems to me as big trap. Some big disbalance of real economy situation to markets' view or anticipation. That is what I would like to discuss today. Let's first take a look what traders talk about.
Market overview
The dollar gained slightly on Friday and remained on track for its largest weekly gain in over a month as investors eyed rising bond yields and continued to make bets on the U.S. Federal Reserve's interest rate hiking path. In the United States on Thursday, investors had reacted to hawkish policy maker comments with St. Louis Fed President James Bullard saying that even under a "generous" analysis of monetary policy, the Fed needs to keep raising rates as its tightening so far "had only limited effects on observed inflation."
Joseph Trevisani, senior analyst at FXStreet, pointed to hawkish remarks from Fed officials such as Bullard which "helped to thwart speculation that the Fed was nearing a pause" in its campaign against inflation, and set the stage for gains in the dollar along with U.S. Treasury yields. Some analysts also suggested that investors may be positioning for the year-end after the dollar's strong run for the year to date.
Global equities edged up and a key part of the Treasury yield curve inverted further on Friday, a sign the U.S. economy will stall next year and that investors hope will lead the Federal Reserve to back off its aggressive hiking of interest rates.
Surprisingly strong retail sales data this week hammered home the idea that the Fed will tighten monetary policy further even though soft consumer and producer price pressures suggested inflation has peaked and would allow for lower rates. Retail sales rose 1.3% last month after being unchanged in September. Economists polled by Reuters had forecast sales would rise 1.0%. Sales increased 8.3% on a year-on-year basis in October.
The J. Bullard remarks were a blow to investors who had wagered rates would peak at 5% or below. Futures now show the Fed funds rate at 5.05% by May, up from 3.83% now . But futures also show rates will slide to 4.66% in December 2023 on expectations the Fed will move to ease policy as the economy weakens.
Boston Fed President Susan Collins added to the Fed's hardline stance, telling CNBC that with little evidence price pressures are waning policymakers may need to deliver another 75 basis-point rate hike to get inflation under control.
Three top policymakers in Europe also said the European Central Bank must raise rates high enough to dampen growth as it too fights high inflation.
The market sees a recession next year as the yield spread between two- and 10-year Treasuries was -71 basis points, an inversion of the yield curve that has not reached such depths since at least 2000. When yields are less on the 10-year note than the two-year, a security that reflects interest rate expectations, it suggests a slowdown or worse and that the Fed will cut rates to spur the economy.
The impact of rising rates was felt in housing, where U.S. existing home sales tumbled for a record ninth straight month in October as the 30-year fixed mortgage rate hit a 20-year high.
We also would like to add that not only J. Bullard, S. Collins but N. Kashkari as well said that "It's hard to know how high the U.S. central bank will need to raise interest rates."
"I need to be convinced that inflation has at least stopped climbing, that we're not falling further behind the curve, before I would advocate stopping the progression of future rate hikes," he told the Minnesota Chamber of Commerce in an event webcast by the regional Fed bank. "We're not there yet. Recent data showing consumer and wholesale prices cooled in October provide "some evidence that inflation is at least plateauing," he said, but "we cannot be overly persuaded by one month's data."
Meantime, NY Fed warns that bank liquidity may be tighter than thought, with policy implications.
As a result, overall concensus now suggest that The Federal Reserve will downshift in December to deliver a 50-basis-point interest rate hike, but economists polled by Reuters say a longer period of U.S. central bank tightening and a higher policy rate peak are the greatest risks to the current outlook. Also the latest Reuters poll shows forecasts for inflation in the coming year and into next are slightly higher than thought one month ago, suggesting it is not time yet to consider an imminent pause in the Fed's tightening campaign.
The Fed is set to raise its federal funds rate by half a percentage point to the 4.25%-4.50% range at its Dec. 13-14 policy meeting, according to 78 of 84 economists who participated in a Nov. 14-17 Reuters poll. The funds rate, which the Fed has raised from near-zero in March in one of its fastest rate-hiking campaigns ever, was widely expected to peak at a minimum of 4.75%-5.00% early next year, 25 basis points higher than seen in last month's poll. Peak rate forecasts ranged between 4.25%-4.50% and 5.75%-6.00%.
Goldman Sachs also suggests that it should be longer cycle.
Goldman economists now expect a longer hiking cycle and an even higher terminal rate, in line with the Fed. Goldman's three-month forecast calls for the euro hitting $0.94 against the dollar.
The euro area, on the other hand, still faces stiff challenges from energy shortages, while the smaller G10 economies are more sensitive to higher rates, or changes to policy rates, due in a part to the increase in variable rate mortgages. In contrast, Goldman said the U.S. economy has a brighter economic outlook and may be less sensitive to higher rates, which should support the dollar. Goldman said the eventual dollar peak should coincide with better global growth prospects and renewed capital flows abroad.
In EU situation mostly is going in the same direction. Euro zone banks are set to repay nearly 300 billion euros ($310 billion) in loans to the European Central Bank next week, the ECB said on Friday, the biggest cash withdrawal from the euro zone's financial system in the euro's 22-year history. The move is part of ECB efforts to fight record-high inflation in the euro zone by raising the cost of credit and it is its first step towards mopping up even more liquidity next year by trimming its multi-trillion-euro bond portfolio.
The euro zone's central bank said lenders would repay 296 billion euros worth of the 2.1-trillion-euros, multi-year credit they have taken under its Targeted Longer-Term Refinancing Operations (TLTRO) when they get their first chance to do so on Nov. 23.
This is the first voluntary repayment window so analysts had cautioned that some bank treasurers may choose to wait until the next one on Dec. 21 to have better visibility on the state of their balance sheet before year-end results.
The greatest impact from the repayments was likely to be seen in peripheral countries, which would see a bigger proportion of their government bonds come back on the market after being locked at the ECB as collateral for the TLTRO loans.
Euro zone banks may see a surge in soured loans as rapid inflation and rising interest rates hit household incomes, particularly among the bloc's poorest, the European Central Bank said in a fresh study on Tuesday. With inflation rising to double digit territory, households are burning through their savings with little respite in sight as income growth trails far behind, especially for the poorest who are disproportionately hit by surging food and fuel costs.
Tricky US Retail Sales
Now it becomes clear why everybody are so excited. CPI has decreased, Retail Sales have increased - so, it seems that Fed should slow down and inflation is near defeat. Bing. Indeed, Retail Sales are very important, everybody knows that they contribute around 70% to GDP value. But anybody has tried to dig it and see how and why they are growing, or at least stand stable in positive area? You get big surprise when you will know it. And we see major source of investors confusion here.
But first, let's take a look, is it really everything good with inflation? Recent EU and UK data shows that it keeps going higher and 2-digits already:
In the US although recent CPI has decreased but now consumer inflation expectations, after short-term pause has turned up again:
Thus, by looking at recent numbers of record inflation growth rates, it seems that a new wave of structural crisis is beginning. We need a bit more time to see, but perhaps it is starting particular structural inflation growth that we've talked about, which just is unavoidably has to happen due to the hiking rate policy in many countries of the world. Now what we have on the table - rates are near few decades top but this have no holding effect on inflation. This is the first important point. Structural inflation works different, as we've explained this already.
Nevertheless, the leadership of the monetary authorities of the United States and the EU, which does not recognize the structural causes of the crisis, confirmed its course to tighten monetary policy. Above we've mentioned few rather hawkish statements from Fed members. Most valuable comments are from the head of the Reserve Bank of St. Louis, James Bullard. He confirms that CPI decreasing might temporal, saying - data showing that consumer inflation slowed in October "could easily go the other way in the next report." Most important statements, that in general reflect Fed position are as follows:
"The Fed needs to keep raising interest rates given that its tightening so far "had only limited effects on observed inflation"
"Using even "dovish" assumptions, a basic monetary policy rule would require the Fed's policy rate to rise to around 5%, while stricter assumptions would recommend it climb above 7%."
"Fed's target policy needs to rise to at least a range between 5.00% and 5.25% from the current level of just below 4.00% to be "sufficiently restrictive" to curb inflation"
"The policy is not yet considered sufficiently restrictive to reduce inflation."
Federal Reserve Bank of Boston leader Susan Collins said on Friday that with little evidence price pressures are waning, the Fed may need to deliver another 75-basis point rate hike as it seeks to get inflation under control.
In other words, it is clearly stated that the Fed will keep rising the rate, and there is a strong belief that this brings the desired result, that is, a decrease in inflation. In reality, as we can see, the effect may be the opposite, ignorance of the theory often gives such serious mistakes in practice.
At the same time, not only inflation shows serious fundamental problems in the United States. For example, if you take a look at real wages and the increase in consumer loans, you could see that they show positive correlation since 2014 (the right scale is reversed on the graph). In other words, the population compensates for the decrease in real wages by taking more consumer loans. We have already paid attention to this point in terms of a card loans, but since this is an important topic, it makes sense to repeat it in a broader aspect.
At the same time, the United States is quite shamelessly robbing the European Union. Just look at the gas price. Now, the major supplier of LNG to EU is the US, but price has increased from times greater in EU rather than in US. I understand the shipping cost etc, but not as much probably...As a result, the economic situation in the EU is deteriorating faster than in the United States, just take a look at inflation rates for individual countries in the region above.
In general, it can be stated that the cycle of rate increases has not given any systemic improvement, and therefore the only question that can be asked in this situation is when the monetary authorities of the main developed countries (primarily the United States) will start to change something in their policy. So far, as we can see, they have no such plans. Moreover, there is not even the desire and/or the ability to explain to people what is really happening in the global economy.
But this is not the end of the story yet. The first country that supposedly should pull the break is UK (except Japan that is keep running the QE train and already hits 40-year inflation record). Morgan Stanley expects the Bank of England (BoE) to cut interest rates by 150 basis points in 2024 after stopping its tightening cycle in March of next year.
And I'm sure that Fed will follow shortly long after BoE or even earlier. It sounds great, but what we're going to do with 11+% inflation in UK and 9% in US?
Now let's take a look a bit deeper on Retail Sales. First is - one-time tax refunds was given in California, which saw some households receiving as much as $1,050 in stimulus checks, likely helped to underpin sales in October. The National Retail Federation is forecasting holiday sales will grow between 6% and 8% this year. While that would be a step down from the 13.5% notched in 2021, it would be well above the 4.9% average over the past 10 years.
The upbeat outlook for holiday shopping was somewhat tarnished by Target Co. forecast on Wednesday of a surprise drop in holiday-quarter sales. The retailer blamed inflation and "dramatic changes" in consumer behavior for a drop in demand for everything from toys to home furnishings.
Massive savings accumulated during the COVID-19 pandemic and strong wage gains amid a tight labor market have generally helped consumers weather higher prices and borrowing costs. That support is expected to fade next year as tighter monetary policy dampens overall demand, weighing on the labor market and the economy. Low-income households are believed to have already exhausted their pandemic savings.
Households are also borrowing to maintain spending. Data from the New York Fed on Monday showed total borrowing surged $351 billion in the third quarter. The growing debt burden could be an obstacle to spending, especially among low-income households.
If we compare trends of real income, labor productivity and production value, then the retail sales has to be at least 8-10% lower! This provokes imbalances in the system, spinning up an inflation. Nominal turnover in online commerce has increased by 67% since February 2020, fuel costs have increased by 53%, retail turnover in stores +42%, sporting goods and hobby products +39%, construction materials, gardening supplies +35%, catering expenses +31%, cars and accessories +25%, for food and drinks +25%.
It is not surprising that inflation breaks all records if nominal turnover is growing, as in Zimbabwe. There is a lot of money, but there are few people willing to work.
When money printing machine is turned off, how does the population in the United States maintain an unsecured standard of living? A decrease in the savings rate and the strongest credit impulse in 26 years mentioned above.
The negative correlation between the rates of real hourly wages and the rates of lending has been particularly pronounced over the past 10 years. The relationship is reversed – if wages are declining in real terms, then lending is growing to compensate for the loss of income.
In 2020-2021, wage growth was the consequence of an imbalance in the labor market, when, due COVID restrictions and uncontrolled money supply, a significant part of the workforce didn't work because state subsidies was comparable or exceeding their possible earnings.
However, demand did not fall, but on the contrary, it grew as never before, because everything was flooded with money. Competition for labor resources led to an increase in wages, that has formed a record impulse of hourly wages in real terms. But since 2021 the trend has changed. The growth rate of nominal hourly wages slowed sharply to 5-6%, and inflation accelerated to 8% and higher, as a result, real wages are declining at a rate of 2-3%.
Previously, this kind of trends led to a decrease in consumer and credit activity, but not now. Lending on a revolving loan (mainly credit cards and consumer loans for current consumption) is growing at a rate of 15% per year – this is the maximum since 1996, and the more income decreases, the faster lending grows.
The final is is quite clear – the wave of personal bankruptcies and a decrease in long-term consumption, since debt servicing payments will increase in the structure of expenses, because the rates is gradually rising. As a result, we're going with the most insane scenario of all possible. The minimum savings rate in history (previously 3% of savings turned into a crisis in 2009) and record lending in attempt to keep consumption at habit levels...
To be continued...
