Consumer Savings Rate Hits Lowest
Level Since Before the Recession

bear marketThe underlying problem with consumers and their lack of participation in any economic recovery can be simply narrowed down to three facts:

U.S. consumer spending increased by 0.8% in February over January (source: U.S. Commerce Department), the highest month-over-month increase in seven months. This is the good news.

But consumer incomes rose just 0.2% in February, with income growth remaining relatively flat for the last six months. This is the bad news.

As my readers know by now, I like to take consumer income after taxes and then adjust for inflation to get the real disposable income number that the Commerce Department should be reporting (what I believe is a better reflection of the average American’s true purchasing power).

Real consumer disposable income decreased—that is, fell—by 0.1% in February, the third decrease in the last four months and flat for over a year. More bad news.

To tie it all together; consumer spending rose in February, but consumer income fell in February. Hence consumers dipped into savings yet again in February, with the American consumer savings rate dropping in February to its lowest level since December 2007…before the recession hit!

How can consumer spending be maintained at this pace if real disposable income is falling? How long can consumers dip into their limited savings (or borrow) to maintain this pace of consumer spending?

In 2008, just before the crisis began, employee incomes across all of the U.S. represented 66.14% of all of the income generated in this country. By December of 2011, employee incomes across all of the U.S. were just 61.82% of total income (source: Bloomberg).

Corporations have benefited in the last few years with higher profits. Consumers on the other hand have seen their incomes drop over the three year period—and if we take inflation into consideration, consumers are really falling behind.

My bottom line is that we cannot experience a true economic recovery if consumer spending is about consumers dipping into their savings (or borrowing) to spend. Similarly, we will not experience economic growth if consumer income is declining. We are not experiencing a true economic recovery. Watch the rally in stocks—it’s a bear market trap.

Michael’s Personal Notes:

China’s appetite for gold bullion will not subside anytime soon.

I’ve been writing for some time now, dear reader, about China’s desire to see the yuan (also referred to as the renminbi) become a global currency on par with the U.S. dollar and the euro. Combined with this desire is the need to back the currency with enough gold bullion, again on par with the euro and the U.S. dollar.

The 17 countries of the euro combined hold 10,401 tons of gold bullion, while the U.S. holds 8,133 tons of gold bullion and China sits with just 1,054 tons of gold bullion. China has a long way to go to reach the level of the other two major currency blocks.

However, make no mistake about it; China holds probably close to double the amount of gold bullion the country says it does, simply because it has been accumulating so aggressively. The proof is in the recent development, which continues to point to China’s determined inroads to have its currency used internationally.

These moves are not a good sign for the U.S. dollar longer term, dear reader. These countries have made a conscious decision to trade in their own currencies, which means that, while they used the U.S. dollar as the means to settle contracts in the past, they are now going to use the yuan.

Australia views China as its most important trading partner. For the first time in its history, Australia has signed a currency agreement, initially beginning at $31.0 billion, but which will expand. The future agreements and contracts will be settled in yuan.

After the signing of the agreement on Christmas Day of 2011, Japan has initiated the first steps in buying 65 billion yuan worth of Chinese government bonds. China is Japan’s largest trading partner, but only a very small portion of their trade was settled in yuan. That is officially set to change, at the expense of the U.S. dollar.

Dubai’s Emirates NBD, the largest bank in the United Arab Emirates, has sold its first debt in Chinese yuan in its history. Although it is only for $119 million, this is the first such debt in the Arab gulf region to be denominated in yuan. The United Arab Emirates and China have signed an initial agreement of $5.5 billion as trade, debt and investments are settled in yuan, instead of the U.S. dollar.

In July 2012, the Hong Kong Mercantile Exchange is planning to launch yuan-settled gold bullion and copper futures contracts. Over the next year, the exchange is looking to offer another 12 industrial metals futures contracts denominated in yuan. This would be the first of its kind in Asia. Although they have already launched gold bullion and silver bullion futures contracts in Asia, these contracts are settled in U.S. dollars.

The above is more proof of China’s aggressive moves to make its yuan an international currency at the expense of the U.S. dollar. Since China is clearly serious about this objective, it is going to need a lot more gold bullion with which to back its yuan.

If you’re wondering who is buying gold bullion on those price dips, wonder no longer.

Where the Market Stands; Where it’s Headed:

It’s been a difficult couple of days for the stock market. After the Dow Jones Industrial Average hit a multi-year of 13,297 on Monday, April 9, 2012, almost 300 points evaporated in the two following days.

Is the market rally over? No, I do not believe it is. We are getting near a top in the bear market rally that started in March of 2009, but we are not there yet. Aside from the Internet-related stocks, we have yet to see the heavy signs of speculation or bullishness that usually accompany market tops.

What He Said:

“When I look around today, I see falling stock prices…I see falling house prices…and prices for retail goods stores declining. The media has it all wrong blaming (worrying about) inflation. In my opinion, the single biggest threat to the U.S. economy and to the Fed in 2008 is deflation. You can bet the Fed will expand the money supply and drop interest rates aggressively as deflation starts to rear its ugly head.” Michael Lombardi in PROFIT CONFIDENTIAL, December 17, 2007. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression.