Albert Edwards: “The Last Time This Happened Was In January 2008”
Two days ago, we were the first to point out that in a striking case of data revisionism, the Bureau of Economic Analysis, in an attempt to retroactively boost GDP, revised historical personal incomes lower, while adjusting its estimates of personal spending much higher, resulting in a sharp decline in personal savings, which as a result, was slashed from 5.5% according to the pre-revised data, to just 3.8%, in one excel calculation wiping out 30% of America’s “savings”, and cutting them by a quarter trillion dollars in the process, from $791 billion to $546 billion, a level last seen just before the last US recession.
Today, SocGen’s grouchy bear Albert Edwards, commented on this drastic revision which disclosed that contrary to previous conventional wisdom that US consumers had been hunkering down in recent years and saving up for a rainy day, the surge in spending in late 2016 may have been the only catalyst that prevented the US from collapsing into outright contraction. Edwards also reminds us that such a dramatic savings slump last occurred in 2007, just before all hell broke loose.
As Edwards writes, “very recent data confirms slumping household saving ratios in both the US and UK. This was last seen in 2007, just before the bursting debt bubble blew the global economy and financial system to smithereens. The Fed and BoE should surely hang their heads in shame having presided over yet another impending disaster. Why will politicians and the people tolerate this incompetence? Indeed they won’t.”
Away from the US, Edwards also notes that the UK has also recently published some shockingly low household SR data, showing a slump in Q1 to only 1.9% (see chart) and adds that “actually the UK’s situation is worse than it looks relative to the US SR if you measure it on the same basis (see chart below). The US measures household income and savings net of depreciation ? mainly of the housing stock. If you add this back (as the UK does), the US household gross SR is some 3% higher!”
Needless to say, all of the above is an ill omen for the US, and global, economy. Here’s why, in Edwards’ own words, which largely echo what we said earlier in the week:
The US Bureau of Economic Analysis has this week undertaken some revisions of the US saving ratio (SR). Actually it has revised both income (downward) and expenditure (upward). And as the SR is the difference between these two very large numbers, it can be severely affected by small changes in income or spending. The new data shows the US SR actually declined from 6% to 4% through 2016 (see chart below) and undoubtedly stopped the US economy sliding into recession in the second half of last year as real household incomes suffered a severe squeeze due to rising headline CPI inflation.
We have previously highlighted on these pages that we believe it will be the US corporate sector borrowing binge that will take centre stage in the next credit crisis. Until this latest SR data we had been less concerned about the situation in the household sector. US household mortgage borrowing, comprising some two-thirds of total household debt, remained subdued in the wake of the 2003-2008 boom and bust. Indeed it is only in the last six months that the Fed Z1 Flow of Funds data shows mortgage borrowing growth has managed to crawl above 3%, compared to six years of double-digit growth in the run up to the 2008 bust. By contrast it has been consumer credit that has boomed at a 6-7% growth rate for the last five years, well in excess of that seen in the run-up to the 2008 bust, led by student and auto loans.
But the Fed has had its way. QE has not only inflated corporate debt to grotesque levels, but finally the US SR has responded to the surge in household paper wealth that QE has produced (see chart below). Typically the SR always declines (shown as a rise in the chart below) with rising wealth. Why do you need to bother saving if interest rates are close to zero and house and stock prices are rising? (Maybe some residual caution of the household sector is apparent as the SR has not fallen to a new low despite record high net wealth).
Edwards believes that the collapsing savings rate may be an even greater worry for the UK, where “history suggests that when UK SR (measured gross) declines to, or below, the US SR (measured net), as we saw in 1987 and as we see now (see chart above), we in the UK are sitting on a massive credit bubble that is primed to burst with recessionary consequences. Alarm bells will be ringing all around the Bank of
England ? but it is too late. (Incidentally note the author of the 1992 FT article below is Ed Balls, who went on to become a significant figure in Tony Blair?s Labour government as Gordon Brown?s chief economic confidant. More recently he has starred in the UK Strictly Come Dancing (Dancing with the Stars to our US friends). By contrast I am still a sell-side Global Strategist and some 25 years later, still comparing the UK SR to the US! Hey ho.)”
For those readers who think I bang on about the same theme ad nauseam, I attach a 1992 article from the FT! It shows how the situation the UK is now in has been experienced again and again. Back then an extensive period of robust GDP growth during PM Margaret Thatcher?s tenure proved to be yet another credit boom that turned to dust.
Finally, In an amusing tangent, the SocGen strategist reveals that he is “genuinely getting tired of bashing the major central banks, but every day more evidence mounts that almost exactly the same debt excesses that caused The Global Financial Crisis (GFC) in 2008, are present today.”
The UK Bank of England and US Federal Reserve deserve particular vilification for failing to remove the monetary punchbowl quickly enough – just like the 2003-2007 period, allowing grotesque debt excesses to build.”
Ironically, the more “tired” he gets of bashing central bankers, the more he does it, which is perhaps why so many Wall Streeters – at least those who aren’t brainwashed into believing that what is going now is normal – enjoy reading his periodic missives.