Fed Report Shows Majority of Americans Have Not Recovered From Great Recession

by the Curmudgeon with Victor Sperandeo




We cover three very important topics in this post:   1. Analysis of a new Fed Report on the Economic Well Being of U.S. Households, 2. Sharp drop in the German (and other European) stock markets in July, and 3. U.S. Government Fiscal Gap as a credit card debt that must be repaid. Victor explains the likely outcome of the latter via Professor Kotlikoff's analysis of the real debt and a history lesson that's very relevant today.


Fed Report Indicates Economic Anxiety for Majority of Americans:


As Curmudgeon readers are well aware, we've repeatedly said that for many American's the recession never ended.   Astonishingly, this was confirmed by a new Federal Reserve Board Report on the Economic Well-Being of U.S. Households released on Thursday.  The data in the report is from the Fed’s Survey of Household Economics and Decision Making. The survey was conducted for the first time last year as part of the central bank’s effort to monitor America’s recovery from the recession and identify any risks to households’ financial stability. The new report offers a view of how households assess their own situations that is not found in other U.S. data sources.


The Fed survey found that sizable fractions of the population were displaying signs of financial stress.  One-fourth said that they were "just getting by" financially and another 13% said they were struggling to do so. The effects of the recession also continued to be felt by many households, with 34% reporting that they were somewhat worse off or much worse off financially than they had been five years earlier in 2008, while 34% reported that they were about the same.  Only 30% reported being better off to some degree.


Considering that respondents were asked to compare their incomes to 2008, during the depths of the recession, “the fact that over two-thirds of respondents reported being the same or worse off financially highlights the uneven nature of the recovery,” according to the Fed report. 


The answers on retirement were particularly depressing. Among people who haven’t retired yet, 31% had no retirement savings or pension — and 19% of those were ages 55 to 64. “Additionally, almost half of adults were not actively thinking about financial planning for retirement, with 24% saying they had given only a little thought to financial planning for their retirement and another 25% saying they had done no planning at all,” the Fed report states.  The "Great Recession" pushed back the planned date of retirement for two-fifths of those ages 45 and over who had not yet retired, and 15% of those who had retired since 2008 reported that they retired earlier than planned due to the recession, according to the report. 


Now contrast those survey results with the stupendous rise in the U.S. stock market since the recession officially ended in June 2009.  Could there possibly be a "great disconnect," as we've been saying for several years?


German Stock Market Takes 10% Hit in July:


Germany has the largest and strongest economy in Europe with a 2013 GDP of $3634.82 billion (#4 in the world) and 2013 exports totaling 1.1 trillion Euros (#3 in the world).  Its stock market, measured by the DAX index, has been in a powerful uptrend the last few years.


In late June, the DAX closed above 10,000 for the first time in history.  Yet there were many concerns facing the German economy and stock market at that time.  Those included:  intensifying tensions between Russia and Ukraine (Russia is a large export market for Germany); the sixth consecutive monthly decline in German investor confidence; falling business confidence, retail sales, and factory orders.  The German stock market shrugged off those concerns and held its ground.  


On June 20th, the DAX started a steep decline.  From its record peak, the index plunged 10%, erasing its entire gains for 2014, and ending at a 9-month low on August 8th.  There were large declines in Germany stock ETFs (EWG, FGM) and closed end funds (e.g. GF) traded in the U.S.


Chart Courtesy of Bloomberg


The breakdown in the DAX and other European stock markets is largely blamed on investors being nervous about Russia retaliating against sanctions by raising the cost of oil and gas it exports to Europe.   Geopolitical uncertainty is an impediment to economic growth, because it results in reduced trade/exports, higher energy prices, and a freeze on related capital spending.


After the ECB held borrowing costs at record lows on Thursday, ECB President Mario Draghi said:  "There is no doubt if you look at the world today that the geopolitical risks have increased.   Some of them, like the situation in Ukraine and Russia will have a greater impact on the euro area than they ... have on other parts of the world."


Alexander Nekipelov, Chairman of the Rosneft Board of Directors, said Exxon might suspend its co-operation with the Russian state owned oil company.  Gerhard Roiss, CEO of the Austrian energy company OMV, told the Financial Times that he was “concerned” about the crisis but hopeful it would ease. OMV is one of the partners of Russian state company Gazprom on the South Stream pipeline project that (when built) would enable Russia to send gas to Europe without going through Ukraine.


Last week, Russia banned imports of a wide range of agricultural and food products and threatened possible sanctions on aerospace, shipbuilding and auto sectors.  That was obviously in retaliation for western sanctions over the country’s role in the Ukraine crisis (See Victor's comment below).


However, tensions between Russia and Ukraine may be reduced now, as Russia announced on Friday (for the second or third time) that it will pull its troops back from Ukraine’s border.  Stock market "investors" assumed that the Russia -- Ukraine face-off will diminish as a result and pushed the major U.S. market averages up sharply.  European ETFs and closed end funds also rallied over 1% -- even though the DAX (which closed earlier) was down 0.3% on the day.  


We think the real reason for the market sell-off in Germany and the rest of Europe is not threats from Russia, but weak economies.  For example, first quarter GDP growth for the 18-nation Euro-zone was barely positive at 0.2%, and Germany’s growth of 0.8% was the primary driver of that.  It could be Euro-zone growth is being held back by the failure of some governments, most notably France and Italy, to overhaul their economies.  Although tensions with Russia over Ukraine are running high, the economic impact is hard to assess.  Let's now look at some recent economic reports in Germany.


Last week, factory orders in Germany plunged 3.2% in June after declining 1.6% in May.  That's the fastest pace of decline in factory orders since 2011. Germany’s incoming orders from other euro-zone countries plunged 10.4%.  Additionally, industrial production in Germany declined 0.5% in June, widely missing the consensus forecast of a gain of 0.3%.  Those dismal reports from Germany raise concerns that its economy may have been no better than flat in the 2nd quarter. 


There are also deflationary risks.   Euro zone inflation fell to a 0.4% annual rate in July; it’s lowest for four years and well below the ECB's ~ 2% target.  German economic weakness has caused inflation expectations to weaken.  As of Friday's close, 2 year German yields are zero and flirting with turning negative; the 5 year is at 0.26%; and 10 year yields at 1.05% are lower even than during the sovereign-debt crisis. 


Germany’s 10 year "break-even" rate, which strips out the difference in yield on its bunds and index-linked securities to gauge inflation expectations, fell to 1.27% this Wednesday.  Euro-area five-year inflation swaps, derivatives tied to consumer prices, were at 1.145% -- a level last seen on a closing-market basis in 2008.  Rates that low are a sign of perceived economic weakness- not strength- and don't augur well for European equity markets.


"Investors" are clearly concerned about the negative economic effects of escalating sanctions imposed on Russia, retaliatory sanctions and more expensive energy imports from Russia.  Some think that will be enough to push Germany and the entire Eurozone into recession (Italy is already in recession now).   


Victor's comment:  "The events in Europe have been discussed along with the other geopolitical risks in several previous Curmudgeon posts. Some of these problems are now showing up and will continue to grow as the factions egos are further causing a "tit for tat" acceleration of conflicts between Russia and western countries."


One analyst is very bullish on the DAX:  "I think quite frankly if you buy the DAX at its low point in the second half of the year and then you sell it at the high point next year I think the difference will be 50%," Beat Wittmann, CEO of TCMG Asset Management, told CNBC in a TV interview.


The recent drop in European stock markets puts them below their 50-day moving averages.  Hence, we might expect at least a short-term rally attempt next week.  But the longer term picture continues to be worrisome.


Victor Sperandeo:  U.S. Government Fiscal Gap Much Higher than Reported Debt


Debt continues to be covered up all over the world with phony accounting, which will reveal itself to all (like the Enron accounting fiasco did in 2001-2002) when a serious economic slowdown or recession is apparent.  To this end we owe Laurence Kotlikoff, Professor of Economics at Boston University, a great deal of gratitude for his New York Times editorial of August 1, 2014 (print edition) titled "America's Hidden Credit Card Bill." 


I have been familiar with the Professor's work since 2009.  It's about time the truth of the "real debt and deficits" was presented to the readers of the NY Times.  Prof. Kotlikoff wrote:


"The fiscal gap — the difference between our government’s projected financial obligations and the present value of all projected future tax and other receipts — is, effectively, our nation’s credit card bill. Eliminating it, would require an immediate, permanent 59 percent increase in federal tax revenue. An immediate, permanent 38% cut in federal spending would also suffice. The longer we wait, the worse the pain. If, for example, we do nothing for 20 years, the requisite federal tax increase would be 70%, or the requisite spending cut, 43%."


The bottom line is that U.S. government unfunded liabilities now amount to $210 trillion. The deficit (according to GAAP accounting) was actually $5 trillion last fiscal year -- not $670 billion...using government "cash accounting" method.  I think the key words in the Professor's editorial are:


"What we confront is not just an economics problem. It’s a moral issue. Will we continue to hide most of the bills we are bequeathing our children? Or will we, at long last, systematically measure all the bills and set about reducing them?"


Prof. Kotlikoff followed up and clarified his NY Times op-ed in a Forbes blog post.   He states that the Congressional Budget Office (CBO) has two forecasts.  One is the Extended Budget Baseline, which makes very strong assumptions that the CBO feels are highly unrealistic. The other is the Alternative Fiscal Scenario, which the CBO views as realistic.  According to the Alternative Fiscal Forecast, the fiscal gap over the infinite horizon is not 1.2% or 1.8%, but 10.5% of GDP!  Kotlikoff wrote, "If you download the CBO’s Excel spreadsheet you will find the Alternative Fiscal Scenario in one of the tabs.  It’s a simple matter to form the infinite horizon fiscal gap."


There is far too much fooling of the people by politicians (and the press for not reporting the truth), which is really fooling themselves as the U.S. is headed for a debt or hyperinflation crises.  The secrets that the U.S. government keeps are far more unknown than is understood.


After the Great Depression of the 1930's, the "maestro man" of finance was Beardsley Ruml who was Director of the Federal Reserve Bank of New York (1937-1947) and its Chairman from 1941-1946.  He was also an advisor to Presidents Hoover and Roosevelt and was the key person at the Bretton Woods agreement in 1944. Ruml is most famous for being the architect of the personal income tax payroll withholding process, which became effective in 1943.


Mr. Ruml's "Opus" came in a speech before the American Bar Association in January 1946, which was published in American Affairs Quarterly vol.VIII No. 1:  "Taxes for Revenue Are Obsolete."  He listed the real reasons (his opinion, of course) why taxes are levied.  The essential point Ruml made is that when the government is off the gold standard and can print money, taxes are primarily to be used for political purposes.  [Note that Ruml did not like the corporate income tax!]


However, the majority of our Congressional representatives do not care very much about the amount of debt, but rather in taking "the people's" money in taxes to redistribute to their special interest campaign contributors in order to get re-elected.  


When you take Professor Kotlikoff's analysis together with Ruml's expose' you can understand the mentality of our representatives in Congress.  They never worry about the debt, because they know the Fed can simply print the payments to cover it.    As a result, expect the outcome to be (as Ruml forecast) accelerating inflation, which will erode the repayment of the debt.


Perhaps the very insightful and telling mind of Vladimir Lenin may be of help in understanding this agenda: "The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation."


Till next time........................


The Curmudgeon

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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