Terrific New Stuff From Sprott

39
Tue, Oct 30, 2012 - 1:13pm

Please take the time to read through this piece from Sprott Asset Management. You should consider printing it and/or forwarding it, too. Succinctly stated, this presentation is readily comprehensible and extremely powerful.

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{Sections in bold italic are my personal emphasis}

Weakness Begets More Weakness
How does the US achieve a sustained recovery if “the 99%” continues to suffer perpetual decline in real income?

By: Eric Sprott & David Baker


Other than some obligatory arrests for disorderly conduct, the Occupy Wall Street movement celebrated its one year anniversary this past September with little fanfare. While the movement seems to have lost momentum, at least temporarily, it did succeed in showcasing the growing sense of unease felt among a large segment of the US population – a group the Occupy movement shrewdly referred to as “the 99%”. The 99% means different things to different people, but to us, the 99% represents the US consumer. It represents the majority of Americans who are neither wealthy nor impoverished and whose spending power makes up approximately 71% of the US economy. It is the purchasing power of this massive, amorphous group that drives the US economy forward. The problem, however, is that four years into a so-called recovery, this group is still being financially squeezed from every possible angle, making it very difficult for them to maintain their standard of living, let alone increase their levels of consumption.

One of the central themes that arose out of the Occupy movement was the growing sense of unease among the average American citizen with regard to growing imbalances in wealth within the US. The rich are getting richer while the poor get poorer. That feeling is entirely legitimate. According to the US Census Bureau, in 2011 the median income of US households, adjusted for inflation, fell to $50,054. This is 4.9% below its 2009 level, and 8.9% below its all-time peak of $54,932 in 1999. This is not encouraging data. It implies that the average American household is almost 9% poorer today than it was thirteen years ago.

The Census Bureau data is even more troubling if one acknowledges that the Consumer Price Index (CPI) inflation rate it uses to adjust annual income doesn’t properly account for food, energy or healthcare prices – all key inputs to the average US consumer, and all items that have gone up considerably in price over the last decade, particularly since the advent of quantitative easing. Under current CPI, the items pertaining to food, fuel and healthcare only make up 28% of the total basket. The average US family, however, especially among the 99%, is spending far more on these three items as a percentage of their total income. Figure 1 below compares the average price of gasoline and select food items in 1999, when the average household made $54,932 in real terms (inflation adjusted), versus 2012, when the average household made just over $50,000 in the same relative dollars. As can be seen, the increase in food and energy has grossly outpaced the official CPI inflation rate, which conveniently dropped or shifted many of the food and energy components back in the 1990’s. If the Census Bureau used a more appropriate measure of inflation to compare the median household income in 1999 to today, it would result in an even lower annual income number, implying an even worse decline in real wealth over that time period.
FIGURE 1

Sources:
https://www.dailyfinance.com/2009/12/29/then-vs-now-how-prices-have-chan... https://www.thepeoplehistory.com/pricebasket.html
https://www.dailymail.co.uk/news/article-2159624/American-children-cost-... https://answers.google.com/answers/threadview/id/757601.html
https://assets.aarp.org/rgcenter/econ/fs87_income99.pdf
https://www.davemanuel.com/median-household-income.php
https://www.census.gov/prod/2005pubs/c2kbr-36.pdf

Figure 2 below is courtesy of Shadow Government Statistics, and shows US Average Weekly Earnings adjusted for inflation using two versions of inflation measurement. It is a sobering chart. The blue line shows inflation-adjusted earnings using government CPI, and shows a small but steady increase in real earnings since the mid-1990s. The green line, however, shows what inflation adjusted earnings would be today had the US Bureau of Labour Statistics not made changes to the CPI in the early 90s, and reveals that average weekly earnings have actually been in contraction for over 17 years. Forget blaming our current woes on the hangover from 2008-2009. The average American worker has been losing income in real terms since the late 1990s. This is clearly a long-term trend which has compounded itself over the last ten years. Weakness begets more weakness.

FIGURE 2: REAL AVERAGE WEEKLY EARNINGS PRODUCTION AND NONSUPERVISORY EMPLOYEES
Deflated by CPI-W versus SGS-Alternate (1990-Base)
To September 2012, Seasonally Ajusted (ShadowStatus.com, BLS)

Source: Shadow Government Statistics, October 16, 2012

Meanwhile, as the Occupy movement also repeatedly highlighted, the increase in wealth inequality within the US has grown steadily over the past thirteen years. Figure 3 below shows the “Gini Ratio” of US household income, which statistically captures income inequality within the country. A Gini Ratio coefficient of 0 corresponds with perfect equality, while a coefficient of 1 describes a situation where one person has all the income, and everyone else has nothing. As can be seen, a clear trend towards inequality has been in place since the late 1960s, and that trend appears to be accelerating today. Just as weakness begets weakness, strength begets strength for those with the most wealth.

FIGURE 3 : INCOME GINI RATIO FOR US HOUSEHOLDS

Source: US Department of Commerce: Census Bureau

These two central tenets of the Occupy movement – that the rich are getting richer while the poor are getting poorer, are the same tenets that are hindering a real recovery within the US. We simply cannot expect the US economy to grow if the 99% are not generating more wealth and disposable income over time. Any discussion of a US recovery that doesn’t acknowledge the deteriorating reality of this group is not an honest discussion in our opinion. And it’s only getting worse. On top of consistently losing purchasing power to inflation over the past decade, the 99% is faced with a pronounced deterioration in job quality (in terms of average salary), chronic youth underemployment, an inability of retirees to generate income from savings, and a steady increase in outright poverty. Market pundits can get excited about a 1.1% increase in September retail sales, but they can’t expect that increase to be sustainable unless we see some relief for the core consumptive engine that ultimately drives those sales.

In this vein, it was very interesting to watch the reaction to the most recent US Bureau of Labor Statistics (BLS) unemployment release on October 4, 2012, which optimistically reported US unemployment falling to 7.8% – representing the lowest level of unemployment since January 2009. Rather than elicit jubilation, the report prompted cynicism, most notably from the former General Electric CEO, Jack Welch, who famously tweeted, “Unbelievable jobs numbers… these Chicago guys will do anything… can’t debate so change numbers,” immediately after the release. Welch’s tweet elicited a torrent of defensive responses, most notably by the BLS who were outraged that anyone would question their methodology. But it’s not the methodology that should cause concern (it is just a survey, after all, although continually lowering the “participation rate” of the US labour force does deserve some eye-rolling), it’s the fact that the jobs numbers are shrouding the painful reality of the post-2008 US labour market: that the jobs lost tend to be higher-paying, while the jobs gained tend to be lower-paying.

It doesn’t take much to see this trend evolving. A cursory review of the most recent layoff announcements makes it fairly clear what type of workers are being laid off in 2012:

  • “Bank of America slashing 16,000 jobs before December”
  • “Pharmaceutical giant Merck to cut nearly 12,000 jobs”
  • “Computer giant Hewlett Packard to slash 27,000 jobs by October 2014”
  • “AMD Announces 15% Cut in Workforce”
  • Meanwhile, the new jobs allegedly responsible for lowering the unemployment rate tend to be coming from companies seeking part-time workers, like Amazon.com, which announced that it will be hiring 50,000 part-time workers for the holiday season. This is also reflected in the latest BLS report, which accounted for 582,000 of the reported 873,000 new jobs gained in September as “part-time for economic reasons”. The reality is that were it not for those part-time jobs gains, US unemployment would look dismal. Public hiring announcements by US companies have totaled a mere 84,937 workers for the first eight months of 2012, which is significantly lower than the 224,243 workers that were announced for the same period in 2011. The BLS labour surveys don’t account for the difference between a Bank of America job cut vs. an Amazon.com hire, but that’s the difference that has the biggest impact on the disposable income netted by the job loss/gain.

    The trend of high-salary job losses offset by low-salary job gains is increasingly evident among the youngest participants of the 99% – recent college graduates. Figures analyzed by Northeastern University’s Center for Labour Market studies stated that, in 2011, approximately 53.6% of bachelor’s degree-holders under the age of 25 were either jobless or working in positions that didn’t require a college education, representing the highest percentage in at least 11 years. The data cited in the study implies that at least one out of four recent college graduates was completely out of work last year. This trend is unlikely to change anytime soon. According to government projections, “only three of the 30 occupations with the largest projected number of job openings by 2020 will require a bachelor’s degree or higher to fill the position – teachers, college professors and accountants. Most job openings are in professions such as retail sales, fast food and truck driving, jobs which aren’t easily replaced by computers.” With two thirds of the national college class of 2011 burdened with an average student loan debt of $26,600, the US economy will not be able to count on this demographic to generate increased spending in the years to come. If anything, most of these recent college grads are essentially an economic write-off until the US labour market improves.

    This trend of lower pay is also starting to show in post-graduate professions. According to statistics from the National Association for Law Placement (NALP), of law graduates in 2011 whose employment status was known, only 65.4% obtained a job for which bar passage was required.15 NALP writes, “Moreover, with about 8% of these jobs reported as part-time, the percentage employed in a full-time job requiring bar passage is even lower, 60%.” Figure 4 shows the decrease in average law salaries since 2009, with the most striking decline evident in the median salary at law firms, which has fallen 35% over the past three years as law firms shift to more lower paying jobs.

    FIGURE 4: STARTING SALARIES: CLASSES OF 2009, 2010, AND 2011

    Source: Source: National Association for Law Placement, Inc.

    Think of the difference in disposable income between a salary of $130,000 in 2009 vs. $85,000 in 2011. That’s the difference that isn’t being expressed in today’s labour statistics, but has a profound impact on consumer spending.

    Then there are the retirees, and while they may not yet identify themselves with the Occupy movement, they do undeniably make up a key component of the 99%. This is a group that has not only faced continual inflation erosion, particularly due to massive increases in healthcare costs (see Figure 5), but also now faces the burden of generating retirement income in a perpetual zero percent interest rate environment. If there is any group that has felt the decline in living standards over the past decade it is this one. Consider, for example, that in 2012 a savings of $1 million dollars invested in a generic 10-year Treasury bond currently pays a mere $17,000 in interest before taxes. And that’s $17,000 in 2012 dollars. In comparison, $1 million invested in 10-Year Treasuries in 1999 would have generated $47,200 before tax in 1999 dollars, when a gallon of gas was $1.22 and the cost of almost every household item was lower by half. There is no statistic that measures the impact of this decline on the disposable income for retirees, but it doesn’t take much imagination to realize that it has completely changed the prospects for an entire generation of savers.

    FIGURE 5: HEALTH CARE COSTS EXPLODING

    Source: US Department of Labor: Bureau of Labor Statistics

    Then there are the millions of Americans who haven’t saved enough: According to the Transamerica Center for Retirement Studies, an estimated 54% of workers in their 60’s do not have enough financial wealth to sustain themselves in their retirement. According to the Employee Benefit Research Institute, 60% of all workers in the US have less than $25,000 of savings and investments. That’s less than $25,000 in an investment environment that only pays 1.7% on 10-year Treasury bonds. If they don’t have enough saved for retirement today, how can we expect them to spend more tomorrow? Couple this with the 46 million Americans who are now enrolled in the federal welfare food stamps program, (more than double the amount from a decade earlier), and it paints an extremely bleak picture. But this is the reality of the 99%. This is the reality affecting the class of consumers that is expected to drive the US out of recession.

    When Ben Bernanke announced QE3 in September, he discussed the importance of increasing the US consumer’s willingness to spend: “The issue here is whether or not improving asset prices generally will make people more willing to spend… If people feel that their financial situation is better because their 401(k) looks better for whatever reason, or their house is worth more, they are more willing to go out and provide the demand.” The 99% will not spend more unless the trend in declining real incomes can be reversed. The current antidote of quantitative easing has indeed helped the equity market and lowered the costs of mortgages. But on the flipside, it has driven the prices of food and energy far beyond the rate of inflation, destroyed retirees’ savings through zero percent interest rates, and ultimately done nothing to boost the confidence and investment required to reverse the persistent labour trend towards lower paying jobs.

    The sad fact is that the economic reality for the average family is far worse today than it was ten years ago… even fifteen years ago, and the trend of declining wealth is firmly in place. The youth need higher paying jobs and the retirees need yield, and for all the trillions of dollars that the US government and other western governments have spent and printed, none of it has addressed these key areas of weakness in a way that can reverse the long-term trend. As we approach year-end and the finality of the US election, there will likely be numerous indicators implying a US recovery. Unless they directly benefit the 99%, we would advise readers to take them with a large, bipartisan grain of salt. Weakness begets weakness, until something dramatic reverses the trend’s course. The 99% are firmly stuck in a declining trend, and we do not see it reversing any time soon.

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    About the Author

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    turd [at] tfmetalsreport [dot] com ()

      39 Comments

    Be Prepared
    Oct 30, 2012 - 6:06pm

    The Rain isn't staying on the Plains...

    There is a great wind a blowing..... I have felt it's harsh and bitter edge. The seeds of destruction, planted long ago, are finally overgrowing all that was once worth something in the ol' U.S. of A. We are in the Turning of this Century and its apex seems to be ever close upon us. We can ignore that the fact we hold no store of value in the paper and electronic debits we have been driven to hold, but it would be and is truly to our perish.

    Yes, we hold silver and gold and there is hope that it might be a safe bridge over these waters, but the system knows how to grind.... to grind away at freedoms.... to smash a person's resolve.... to audit one into oblivion. There are few within the system that see the masses as the holders and owners of the government..... and, more than likely, see us as cattle to be herded and branded. Many days it's hard to live with so many blind and oblivious people because I know that they will so readily serve me (us) up to the alter of a fascist state without nary a thought.

    My comfort lies not in metal, although a chunk of lead does a mind good, but in knowing that I am willing to see the truth..... always looking to find the truth.... seeking to learn the truth with all that it means and holds. Truth may not set me free in the future, but today... it is my beacon and it lights a mighty path. :-)

    Patrancus
    Oct 30, 2012 - 8:00pm

    Empty chair @ Pennsylvania Ave?

    of epic proportion

    theBuckWheat
    Oct 30, 2012 - 8:27pm

    With all due respect to Mr. Sprott

    With all due respect to Mr. Sprott, the consumer is not the prime mover of the economy, investment is. This is not just my opinion.

    see:

    Malinvestment and Regime Uncertainty Mises Daily: Monday, October 29, 2012 by John P. Cochran Mark Skousen, in "Consumer Spending Does Not Drive the Economy," summarizes: The truth is that consumer spending does not account for 70 percent of economic activity and is not the mainstay of the U.S. economy. Investment is! Business spending on capital goods, new technology, entrepreneurship, and productivity are more significant than consumer spending in sustaining the economy and a higher standard of living. In the business cycle, production and investment lead the economy into and out of a recession; retail demand is the most stable component of economic activity. Professor Skousen has attempted to partially bridge the gap with an alternative measure of economic activity, gross domestic expenditures (GDE). He argues, GDE appears to be more than twice the size of GDP, and has historically been three times more volatile than GDP, and serves as a better indicator of business cycle activity. I conclude that consumer spending represents approximately 30 percent of total economic activity (GDE), not 70 percent as often reported. This conclusion is more consistent with the leading economic indicators published by the Conference Board. Why is this important? The more aggregated model of the economy can lead one to misdiagnose the cause of the boom-bust and the slow recovery as aggregate demand shocks requiring continuing doses of monetary or fiscal stimulus.... https://mises.org/daily/6245/Malinvestment-and-Regime-Uncertainty
    Big Rocks George Clooney
    Oct 30, 2012 - 8:32pm

    Gore

    XTY, I think Gore was promised or extorted financial rewards in return for dropping his SCOTUS challenge to the 2000 election. The Clinton's did even better for repealing Glass Steagel . I think they are up around 250 mil. Meanwhile the Bushes have been partying all over the people's every orifice for many decades. How much will Obama be worth after his time is up?

    S Roche
    Oct 30, 2012 - 10:22pm

    @Ivars

    If you haven't seen Commerzbanks forecasts you might like to consider them, they do daily & weekly (Incl G/S Ratio) for institutional clients only but the reports seem to find their way to the inter-tubes pretty quickly, Sharps Pixley always post them.

    https://www.sharpspixley.com/uploads/BullionWeeklyTechnicals29102012.pdf

    Libero theBuckWheat
    Oct 30, 2012 - 10:56pm

    Buckwheat don't make sense

    You say that Investment is the prime mover of the economy and not the consumer. I disagree. You state, "Business spending on capital goods, new technology, entrepreneurship, and productivity are more significant than consumer spending in sustaining the economy and a higher standard of living." The goal of each of those investments is tied to a product. The goal is to "sell something" so someone can "buy something" locking in the exchange of capital from one to another. I can't even imagine an exchange of capital that does not do this. Businesses spend because they want to make more money. They make more money by getting more customers/consumers.

    It's really simple.

    SilverSurfers
    Oct 31, 2012 - 6:08am

    :(

    I only read the parts underline. Maggie was right. You do run out of other people's money. And had those trillions paid off peeps mortgages, or built infrastructure, but instead line the pockets of the moneyed interest and banksters.

    The FED just ran out of German Gold??? .....

    The Bundesbank's otherwise reserved Thiele said that he found at least "part of the debate" to be "rather grotesque." His financial institution currently has more pressing problems. Bundesbank head Weidmann, for example, is desperately fighting the European Central Bank (ECB) decision to buy unlimited quantities of sovereign bonds from crisis-ridden countries as a way of lowering their borrowing costs. In addition, the Bundesbank has already pumped nearly €700 billion ($906 billion) into primarily southern European countries as part of the euro-zone central bank transfers known as Target II.

    Germany's gold reserves are currently worth some €144 billion and are not stored "with dubious business partners," as Thiele stresses, but rather with "highly respected central bankers."

    Maybe the german bankster needs to hear some of Turdville's opinion of Bernak. The debate is over, the election results are in, from a Kraut, and Im sure glad our FED banksters are highly respected central bankers with a reputation world wide, taking care of the Banks, the REPUBLIC and PEOPLE be damned.

    The only way the Germans are going to get their gold back is to lease 3200 tons of Gold from the FED, through GS/JPM, sale the bullion on the CRIMEX paper only, and they secretly buy long contracts for 2035 deliveries, and then tell SilverSurfers on Bloomberg that Germany bought 3200 tons of gold, and tell the FED bank to stuff their 2x accounting scheme, like positive-negative particles, the credit-debt off set, and KABOOM, no no no, wait, when the 3200 ton delivery notices hit the CRIMEX, Crimex blows up on default, and Germans get 100B$ settlement, that Germany can use to buy Italian Bonds at 8%, so that the Italians can loan Spain 75B$, so that Spain can repay Bundesbank bonds, repatriating German WWII Riech-gold bars, of the super secret Hilter war stash, found by the Spanish during the Farage Pep rally in Madrid two weeks back, so that Frau Merkel can then lend the cash to the Irish Banks, who to promise to get votes for EU enslavement, unless 100,000 foreclosures go down on potatoe heaven, where Irish farmers produce a bumper crop to cause a massive surplus in EU trade deficits, sparking employment gains and repatriating 10,000,000 mulsims back into the EU proper from the NA vacation homes, forcing brussels to employ 5,000,000 airport security guards, giving demonstrable employment gains in the EU, leading to tax receipts surpluses, funneled into BHO's campaign coffers, hiering youths to hand out Obama snacks on wall street, to keep them campaign contributions rolling in, from the occupier crowd, to get them over the hump, before election day. Those lefties keyesian paper pushers are so so slick.... they got everything figure out ....


    Oct 31, 2012 - 6:35am

    First and Last

    Some of us may be slow, but I really appreciate being told there is a new thread. I have stayed out of the "first" thing, because while it doesn't much matter to me, it gives others joy. (Although I have seen Mr Fix hold the spot with a dot and then creep back in with an edit - not cricket in my books!) But mostly I am happy to even hat-tip a clever top ten. However, in the past I have suggested that getting first without first posting new thread or some such on the old thread is a hollow triumph. Not that anyone will particularly care, but I will no longer hat tip top tenners who fail to notify the slow amongst us that they have now moved on.

    And I will leave this here, mostly unread, but at least I will feel better.

    and I really hate Al Gore.

    boatman
    Oct 31, 2012 - 9:20am

    first...... by hook or crook

    is fair

    ONCE only

    al gore: more kilowatts in ONE year used in his VACATION house than i will use in 71 yrs.

    that's the biggest problem i have w/that side..............hypocrisy

    they're both bank owned.............one side just panders to the po folk like me while they get rich

    nothing wrong with getting rich if thats what u want............tho never was to me.

    just don't have rules for you and then rules for others.

    'in socialism the rich get poorer and the poor get poorer'

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