Monday, October 26, 2009

This weekend in the Macro Man household was all about "savings". West Ham unexpectedly saved a draw against Arsenal after being down 0-2 at the half, which left them....err....still second bottom in the league. Then the once-mighty Steelers defense saved the team not once, but twice against The Clash by returning fourth-quarter turnovers for touchdowns (sandwiching a kickoff return TD by the Vikes.)

Then, of course, there was the daylight savings-related turning back of the clocks here in Europe, which gave us an extra hour yesterday but doesn't actually save daylight at all- quite the contrary, as we now enter the long, dark winter where it's pitch black at 5 pm. Ugh.

Anyhow, all of this focus on savings led Macro Man to consider the question of savings from an economic perspective. Ever since the financial crisis went nuclear last year, Macro Man has held the view that the US personal savings rate would approach if not breach 10%. It is for this reason that he was largely disdainful of the green shoots phenomenon for much of the summer.

Of course, in real time, that view proved to be wrong. While Macro Man's relatively pessimistic views on the labour market have proven to be accurate, Cash for Clunkers, among other things, encouraged the consumer to go back to the well, sending the savings rate from 6% to 3%.

Macro Man has a couple of thoughts on the phenomenon. First, it is pretty undesirable from a long-run perspective; US households need to spend less, from both an internal (re-balancing the composition of GDP growth) and external (re-balancing global current accounts) perspective. A swift return to the consumer's recent spendthrift ways is not encouraging.

However, if one posits that cash-for-clunkers merely brought forward future spending (which seems a reasonable proposition, given ongoing frailties in the labour market), then the bullish expectation of a V-shaped recovery, with the right side of the V just as steep and just as long as the left side, may well be misplaced. Those sorts of recoveries are engineered once pent-up demand is unleashed. From Macro Man's perch, a halving of the savings rate this early in the cycle suggests that this is unlikely to happen this time around.

Another country plagued by a savings problem is, funny enough, Japan. Over the past two decades, the household savings rate has plunged from the high teens to the low single digits. Ironically, this is exactly the policy prescription that a parade of US Treasury officials have recommended to Japan since the mid-90's (and are currently recommending to the rest of Asia.) Unfortunately, the decline in savings has come not via higher spending, but via reduced incomes.

And it's not only households that have seen their incomes reduced; the central government has been forced to drastically reduce its estimated tax take. This has led to something of a brewing crisis; the new DPJ government seems to be flirting with markedly increasing net JGB issuance, even as the Postal Savings dials down its purchases to fund withdrawals and benefit payments.

As a result, JGBs have been on something of a slippery slope recently, trending down nicely over the course of the month. At the same time, the yen has recently quit being an "anti-dollar", and seems to have latterly joined the dollar and sterling in the global currency doghouse.
Whether the downtrend in JGBs and the yen persists remains to be seen, of course. Japan certainly compares favourably to the US and UK in terms of its stock of savings. However, the government is, if anything, more profligate and in more trouble than the Anglo-Saxons; given that the yen has traded as something of an uber-currency over the last few months, one might reasonably posit that moving from a penthouse currency to an outhouse one might provoke quite a sharp move. Naturally, Mrs. Watanabe is now quite long of yen in her currency speculations; just doing her bit, no doubt, to reduce the level of savings in Japan.....

Posted by Macro Man at 9:38 AM  


Theoretical question: is it inevitable for countries' debt yields to rise as the population moves from boomerish peak savings to peak withdrawals as they age? Or could this happen in the US and is only occurring in Japan now because banks don't have all the provisioning issues they did 10-15 years ago?

Additionally, has anyone done any good academic research on these flow effects? I imagine the data is out there though I know proxies for provisioning requirements in Japan would need to be generated given that NPL provisioning numbers from officials were always utter BS.

Nemo Incognito said...
10:37 AM  

Another important piece of the puzzle for JGBs is the current outstanding gov't debt to GDP - believe it's around 2xx%. Almost de rigeur at this point, but worth a mention.

Agree with you short-term but I think the yen will roar back in a 3-5 year horizon; as someone who lived there for 7 years, there's some good stuff coming about.

Cornelius said...
10:47 AM  

Also - completely unrelated but... ceiling on AUDUSD at 93?

Cornelius said...
10:48 AM  

Macro Man

in line with your 'savings' thread I was curious to know your view vis-à-vis an income tax level of 51% and the potential of a hedge/PE fund exodus from London?

electoral rhetoric given public distain of bankers to which Brown/Cameron will happily play the demagogue card?

or the Swiss whilst motivated given their loss of private banking will only be able to capture the crumbs that fall?

or is my discourse that of a heretic and London shall forever remain for the foreseeable future the financial capital of the world despite the mobility of the financial industry?

I'm hoping given it's a Monday you may be inclined to give your .02cents on quality of life/ 51% income tax/financial future of London et cetera et cetera.

I thoroughly enjoy your blog.

Anonymous said...
11:58 AM  

The whole Asia Uber Alles trade seems to have run out of gas for the time being. Whether this is "The Top" or merely a pause that refreshes remains to be seen; perhaps it depends on whether the US consumer can hang in through Christmas, or whether he throws in the towel straight away...

Macro Man said...
12:00 PM  

Anon @ 11.58, it is a real phenomenon...BH, for example, have already opened a Swiss office. With a 50% top whack tax (plus NI!!!), the only thing the UK really has going for it is that it is an English-speaking country (though it's debatable whether the argot of urban youth qualifies as English these days.) Otherwise, the weather sucks, the infrastructure sucks, and the cost of living is high.

If somewhere like Spain were clever, they would "do an Ireland" and create a favourable tax structure for the fund management industry. It might make a welcome change from the usual tattooed oiks that comprise a depressingly large percentage of Brits in Espana, by my (admittedly unscientific) count...

Macro Man said...
12:06 PM  

Cornelius, do you have time to expand upon your reasons for optimism on Japan?

PPM said...
12:28 PM  

Let me see now ...Geneva ,or Bern vis a London for social and cultural attraction ...well if I was into cryogenics as a way of life I'd plump for CHF !
I love British oiks ,they are so much more interesting than Swiss cutouts from Thunderbirds least you can tell which is actually alive.

Anonymous said...
12:37 PM  

anon at 12:37, fair enough but how about Madrid or Barcelona? No match for London culturally speaking (but then, almost nowhere is) but certainly a higher quality of life. anyway culture will follow the money...

Anonymous said...
12:45 PM  

Having lived in Geneva when I was in my mid-20's (and single), I have little appetite to repeat the experience now that I am (sigh)late 30's and with a family. While it's true that London offers more culturally than, say, Madrid or Barcelona, the other two ain't exactly chopped liver. And for those of us that live outside of central London, the whole 'cultural' thing isn't that massive a benefit anyways...

Macro Man said...
1:02 PM  

and then we hv Dubai,S'pore and HKong perhaps? Asia wanting to have much more financial action (Exchanges,clearing,etc..) in their time space...and why not? China is becoming #1 in most commods..why not the LME,Nymex and Ice there in stead of Lnd + NYC?

Anonymous said...
1:28 PM  

A JGB collapse has been on the cards forever, but the twin negatives of demographics/debt now seem extreme. If it does actually happen, which competing bond market would be the beneficiary? US Treasury bears take note that a blow-up of JGBs has been predicted for about 15 yrs. As LB knows to his cost, "early but correct" can be translated as "wrong".

Speaking of saves, Torres probably saved Rafa's job on Sunday.

leftback said...
2:01 PM  

Macro Man,

You mentioned earlier that your identity has been figured out by most people. If that is the case, are you likely to go on the record here with it? Because I haven't figured it out and I am a curious git!


Anonymous said...
2:55 PM  

"...50% top whack tax...the weather sucks, the infrastructure sucks, and the cost of living is high."

Sounds a lot like NY --- 57% effective top rate as of 2011.

Anonymous said...
3:11 PM  

Anon @ 2.55, perhaps I exaggerated; a number of people know who I am, but then again, there are many more who don't. I like the anonymity because, frankly, I don't do this to be a "media personality", and have no interest in becoming one.

Anon @ 3.11, funnily enough, I have never had any interest in living in New York, either (started my career in Chicago.)

Macro Man said...
3:18 PM  
This comment has been removed by the author.
Deniz said...
3:48 PM  

I once went to the beach in Barcelona only to find several hundred naked people, some committing unspeakable acts. Sort of like the risk on trade of 2009.

Crisis Management said...
3:59 PM  

What' up with USD? Is this a turning point or just somebody taking profits?

Anonymous said...
5:06 PM  

"unspeakable acts",was that because they had their mouths full ?

Anon...nothing wrong with USD ,it's giving people an overdue squeeze to correct it's current oversold status and whilst it's doing that stocks will work off their overbought status.

Anonymous said...
5:15 PM  

The Euro is not looking very clever today, and European bank stocks are tanking (ING, Lloyds, RBS).

So for those of us who think this Alice in Wonderland market is all driven by the EUR:USD/JPY carry trades, maybe the --- is finally in?

(LB can no longer bring himself to utter the dreaded "T-word")

leftback said...
7:11 PM  

LB, definitely silver looks like it could make a move down to 15 here pretty quickly. A few years back it was driven up by the rumor of the SLV ETF accumulating pre-launch, and then dropped around 22% in a day on the news.

Crisis Management said...
7:36 PM  

Yes, I like short silver as a trade, have a small position right now but have been in and out of this of late.

leftback said...
7:53 PM  

Hah. The "Recovery" will be 'M'-shaped or 'MMM'-shaped.

Anonymous said...
8:35 PM  

A little off topic, but can someone who was around for, say, the tech bubble, or '87, remember so many "letter shaped" recoveries?

So far we've had V, W, U, L... is this a modern phenomena or just lack of imagination?

Anonymous said...
8:51 PM  

cash for clunkers, first time buyer tax credits. These are all crazy retard policies...obamanomics! Encouraging people to make big ticket purchases and get more in debt while at the same time putting the state further into debt has nothing to do with restructuring a misaligned economy

Anonymous said...
10:41 PM  

MM -

JPY is must be one of the most (if not THE most) absurd of the anti-dollar complex. It is gratifying to see the market ponder this. Hope all is well with you.


Anonymous said...
8:22 AM  

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