Nov 182017
 November 18, 2017  Posted by at 1:49 pm Finance Tagged with: , , , , , , , , ,

Rembrandt van Rijn The Three Crosses 1653


John Rubino recently posted a graph from Bob Prechter’s Elliot Wave that points to some ominous signs. It depicts the S&P 500, combined with consumer confidence and savings rate. As the accompanying video at Elliott Wave, What “Too Confident to Save” Means for Stocks, shows, when the gap between high confidence and low savings is at its widest, a market crash -often- follows.

In 2000, the subsequent crash was 39%, in 2007 it was 54%. We are now again witnessing just such a gap, with the S&P 500 at record levels. Here’s the graph, with John’s comments:


Consumers Are Both Confident And Broke

Elliott Wave International recently put together a chart that illustrates a recurring theme of financial bubbles: When good times have gone on for a sufficiently long time, people forget that it can be any other way and start behaving as if they’re bulletproof. They stop saving, for instance, because they’ll always have their job and their stocks will always go up. Then comes the inevitable bust. On the following chart, this delusion and its aftermath are represented by the gap between consumer confidence (our sense of how good the next year is likely to be) and the saving rate (the portion of each paycheck we keep for a rainy day). The bigger the gap the less realistic we are and the more likely to pay dearly for our hubris.



John is mostly right. But not entirely. Not that I don’t think he knows, he simply forgets to mention it. What I mean is his suggestion that people stop saving because they’re confident, bullish. To understand where and why he slightly misses, let’s turn to Lance Roberts. Before we get to the savings, Lance explains why the difference between the Producer Price Index (PPI) and Consumer Price Index (CPI) is important to note.

Summarized, producer prices are rising, but consumer prices are not.


You Have Been Warned

There is an important picture that is currently developing which, if it continues, will impact earnings and ultimately the stock market. Let’s take a look at some interesting economic numbers out this past week. On Tuesday, we saw the release of the Producer Price Index (PPI) which ROSE 0.4% for the month following a similar rise of 0.4% last month. This surge in prices was NOT surprising given the recent devastation from 3-hurricanes and massive wildfires in California which led to a temporary surge in demand for products and services.



Then on Wednesday, the Consumer Price Index (CPI) was released which showed only a small 0.1% increase falling sharply from the 0.5% increase last month.



Such differences have real life consequences. In Lance’s words:


This deflationary pressure further showed up on Thursday with a -0.3% decline in Export prices. (Exports make up about 40% of corporate profits) For all of you that continue to insist this is an “earnings-driven market,” you should pay very close attention to those three data points above. When companies have higher input costs in their production they have two choices: 1) “pass along” those price increase to their customers; or 2) absorb those costs internally.

If a company opts to “pass along” those costs then we should have seen CPI rise more strongly. Since that didn’t happen, it suggests companies are unable to “pass along” those costs which means a reduction in earnings. The other BIG report released on Wednesday tells you WHY companies have been unable to “pass along” those increased costs.

The “retail sales” report came in at just a 0.1% increase for the month. After a large jump in retail sales last month, as was expected following the hurricanes, there should have been some subsequent follow through last month. There simply wasn’t. More importantly, despite annual hopes by the National Retail Federation of surging holiday spending which is consistently over-estimated, the recent surge in consumer debt without a subsequent increase in consumer spending shows the financial distress faced by a vast majority of consumers.


That already hints at what I said above about savings. But it’s Lance’s next graph, versions of which he uses regularly, that makes it even more obvious. (NOTE: I think he means to say 2009, not 2000 below)


The first chart below shows a record gap between the standard cost of living and the debt required to finance that cost of living. Prior to 2000(?!), debt was able to support a rising standard of living, which is no longer the case currently.



The cut-off point is 2009, unless I miss something in Lance’s comment. Before that, borrowing could create the illusion of a rising standard of living. Those days are gone. And it’s very hard to see, when you take a good look, what could make them come back.

Not only are savings not down because people are too confident to save, they are down because people simply don’t have anything left to save. The American consumer is sliding ever deeper into debt. And as for the Holiday Season, we can confidently -there’s that word again- predict that spending will be disappointing, and that much of what is still spent will add to increasing Consumer Credit Per Capita, as well as the Gap Between Real Disposable Income (DPI) And Cost Of Living.

The last graph, which shows Control Purchases, i.e. what people buy most, a large part of which will be basic needs, makes this even more clear.


With a current shortfall of $18,176 between the standard of living and real disposable incomes, debt is only able to cover about 2/3rds of the difference with a net shortfall of $6,605. This explains the reason why “control purchases” by individuals (those items individuals buy most often) is running at levels more normally consistent with recessions rather than economic expansions.



If companies are unable to pass along rising production costs to consumers, export prices are falling and consumer demand remains weak, be warned of continued weakness in earnings reports in the months ahead. As I stated earlier this year, the recovery in earnings this year was solely a function of the recovering energy sector due to higher oil prices. With that tailwind now firmly behind us, the risk to earnings in the year ahead is dangerous to a market basing its current “overvaluation” on the “strong earnings” story.

“Prior to 2009, debt was able to support a rising standard of living..” Less than a decade later, it can’t even maintain the status quo. That’s what you call a breaking point.

To put that in numbers, there’s a current shortfall of $18,176 between the standard of living and real disposable incomes. In other words, no matter how much people are borrowing, their standard of living is in decline.

Something else we can glean from the graphs is that after the Great Recession (or GFC) of 2008-9, the economy never recovered. The S&P may have, and the banks are back to profitable ways and big bonuses, but that has nothing to do with real Americans in their own real economy. 2009 was a turning point and the crisis never looked back.

Are the American people actually paying for the so-called recovery? One might be inclined to say so. There is no recovery, there’s whatever the opposite of that is, terminal decline?!. It’s just, where does that consumer confidence level come from? Is that the media? Is The Conference Board pulling our leg? Is it that people think things cannot possibly get worse?

What is by now crystal clear is that Americans don’t choose to not save, they have nothing left to save. And that will have its own nasty consequences down the road. Let’s raise some rates, shall we? And see what happens?!

One consolation: Europe, Japan, China are in the same debt-driven decline that Americans are. We’re all going down together. Or rather, the question is who’s going to go first. That is the only hard call left. America’s a prime candidate.



Home Forums America is in Terminal Decline

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    Rembrandt van Rijn The Three Crosses 1653   John Rubino recently posted a graph from Bob Prechter’s Elliot Wave that points to some ominous signs
    [See the full post at: America is in Terminal Decline]


    Any thoughts or plans at this point (now that the pre-TSHTF, preparation-period window is closing) on shifting the focus of this site to some form of positive action–or at least direction/suggestion for action, Ilargi? Maybe some targeted revisiting of the Primer piece(s)?

    V. Arnold

    If one can clearly understand the problem/s and views the present accurately; then solutions should be obvious.
    IMO, very few have the mental dexterity to act in meaningful ways…
    I think Ilargi has done a spendid job of covering a wide range of today’s myriad problems. Certainly enough to have some idea of how to act.


    What will the 0.01% do when they are the only survivors?
    They cannot do any of the survival tasks that they really on to survive.

    Then …..
    The earth will heal itself and only those willing to live and let live will prosper.


    The terminal decline is also caused by a lack of honesty. Lying to the public about pretty well everything guarantees an expedited trip to the bottom.

    Here is an example:

    Revelations of a High-Profile Qatari Official Reveal a Wider anti-Syria Conspiracy

    This guy is one of the richest people in the world. He was prime minister of Qatar – an ostensible ally of the USA – and is obviously saying what the Qatari government wants him to make known. His older brother is the ruler.

    He is saying that ISIS, al-Qaeda and all the other terrorists in Syria were created, trained, equipped and paid for by the USA and its allies – including Qatar. This is not some journalist based in Jakarta writing an opinion piece. Of course, everyone in that region has known that was the case a long time ago – but not the Financial Times, NYT, Washington Post, CNN, NBC, BBC etc.

    I did a Google News search for this man and there was not a single publication repeating the incandescent contents of this interview. Not one. The most recent article that mentioned him was all about the vast property investments that he makes.

    Qatari royal HBJ bought the mortgage on the Plaza Hotel
    Sheikh Hamad Bin Jassim Bin Jaber al-Thani is also the main equity behind 1 Wall Street, 432 Park retail

    The lying is directed solely at those living in the West – including Australia, Japan etc. No serious attempt is made to fool people elsewhere.

    V. Arnold

    This from ZH is hugely important to understand;
    It delineates the difference between capital consumption and consumer consumption; most important to understand each, and how it applies to us.

    Dr. D

    I was just looking at that excellent article myself.

    How will they survive? In their bunkers or in mountain chalets. They’ve never paid yet in a world war, why worry now? Who will provide for them? Why do you think they put 40 years and trillions of dollars into automation and a robot army? Even food production, picking strawberries, all humanless, all sci-fi. This is why at the last hurdle here, they have billions a year to unemploy drivers, billions for A.I. Stephen Hawking says will kill everyone, billions of subsidies and oversights to bankrupt retail using Amazon, and nothing for 99% of citizens. And the two pillars to insure this automation will happen and ruin humankind are 1) an artificially high labor rate via unproductive insurance and regulation, (Obamacare and the 30h week anyone?) and 2) an artificially low interest rate that makes purchasing human-replacing equipment literally free. This language speaks to 100% of companies, bankrupting anyone who dares continue to employ humans. In the meantime, until we get rid of 4B pesky humans — as advertised regularly, e.g. by Deagal — we give them UBI that requires them to be obedient on pain of bankruptcy and certain starvation. It’s not like they’re hiding it: you can read their white papers on what and how all day long, or the pop versions in “Wired” or articles on the latest from Boston Dynamics. Apparently people love it. They’re happy to support it and participate.

    So not to worry: they’ve got it all worked out. …Unless you’re a human, that is. In that case their plan is not so good.

    V. Arnold

    Dr. D
    And your point is?
    I could’nt weave my way through your comment; a salad of many ingredients…

    V. Arnold

    Dr. D
    Your posts are usually good, so, I re-read your above and was able to stay with it; point taken.
    Sorry for the brain fart…

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