Gordon T Long

Gordon T Long

Global Macro Research | Macro-Technical Analysis 

TIPPING POINTS

CONSUMER SENTIMENT & CONFIDENCE

 

CONSUMER SENTIMENT COLLAPSES! WHY?

Over the past half century, the University of Michigan Consumer Sentiment Index has only recorded larger losses (which occurred in the most recent shocking report) in six other surveys, all connected to sudden negative changes in the economy.
 
The only other larger declines in the Sentiment Index occurred during the economy’s shutdown in April 2020 (-19.4%) and at the depths of the Great Recession in October 2008 (-18.1%).
The August Preliminary came in at 70.2, down 11.0 (13%) from the July Final. Investing.com had forecast 81.2. Since its beginning in 1978, consumer sentiment is 18.5 percent below the average reading (arithmetic mean) and 17.6 percent below the geometric mean.
 
Surveys of Consumers chief economist, Richard Curtin, made the following comments:
 
Consumers reported a stunning loss of confidence in the first half of August.
 
    • The Consumer Sentiment Index fell by 13.5% from July, to a level that was just below the April 2020 low of 71.8.
    • The losses in early August were widespread across income, age, and education subgroups and observed across all regions.
    • Moreover, the loses covered all aspects of the economy, from personal finances to prospects for the economy, including inflation and unemployment.
    • There is little doubt that the pandemic’s resurgence due to the Delta variant has been met with a mixture of reason and emotion.
    • Consumers have correctly reasoned that the economy’s performance will be diminished over the next several months, but the extraordinary surge in negative economic assessments also reflects an emotional response, mainly from dashed hopes that the pandemic would soon end.
    • In the months ahead, it is likely that consumers will again voice more reasonable expectations, and with control of the Delta variant, shift toward outright optimism. Consumers’ reaction to Delta’s modestly higher precautionary measures indicates the difficulty of producing optimal policy responses.
 
Worse still, ‘expectations’ collapsed too ….
 
“Just 32% of consumers thought that the economy would improve, well below last month’s 45% and the 50% in June”
 
ABOVE: This sort of drop aligns to prior recessions suggesting a double-dip recession is ahead
BELOW: Americans’ consumer sentiment crashes to 10 year lows
 
WHY?
 
QUESTION: What has prompted this?
 
In today’s highly politicized environment people have become extremely reticent in answering surveys and polls according to professional surveyors. We believe the collapse in confidence is lost confidence in the current US political direction and founded in the following unspoken concerns:
 
    1. INVASION AT SOUTHERN BORDER: Worry and concerns for their family about unlawful entry of over 200 thousand illegal immigrates per month at the southern border with no Covid testing, Drug & Fentanyl infiltration, in addition to detected diseases being transported with these illegals to destinations across America.
    2. AFGHANISTAN COLLAPSE: A “Cut & Run” decision reminiscent of Nixon’s “Saigon” escape. There appears to be no US strategy with serious risks of hostages and brutality of former US supporters / workers to likely follow. This is also reminiscent of Iran “Hostages” during the Carter Administration
    3. FISCAL IRRESPONSIBILITY: $1.9T Covid Bill with 900B still unspent, 1.2T Infrastructure Bill and $3.5T Social Engineering Bill (Scored at +5.5T) while US Debt surges through $28.5T and the US Debt Ceiling Law about to yet again ignored.
    4. EDUCATION: Parents are shocked to learn of Schools teaching Critical Race Theory, potentially mandating masks and immunization of children unilaterally without any approval of parents,
    5. JOBS: More Jobs available than unemployed workers (disincentivized to work) which to average Americans screams that something is seriously wrong somewhere,
    6. INFLATION: Over the last 12 months Americans are absorbing costs of Housing up 54%, Used Vehicles Up 21%, Gasoline up 22%, Food up 10%, New vehicles up 4%, Misc up 7%.
    7. COVID STRATEGY: Americans are confused about the US Covid policy. They have found it erratic and confusing and seemingly more political than sound science based,
    8. CONSTITUTIONAL VIOLATIONS: Americans are witnessing their Government implementing policies that are in violation of the constitution and Supreme Court orders. Most recently the CDC extending moratorium on rents and mortgages instead of by a legal act of Congresswhich the Constitution mandates.
    9. ELECTION INTEGRITY: Unwillingness to investigate voter fraud or conduct forensic audits to ensure the integrity of the US election process despite 3000 sworn affidavits regarding the last election,
    10. MILITARY POLICY: Questions regarding US military actions in the South China Sea (China), Black Sea (Russia), Bombing of Syria and initiating the arming Taiwan,
    11. MEDIA CENSORSHIP: Government’s unwillingness to address large tech media censorship and the protection of Free Speech,
    12. COVID ORIGIN: Unwillingness of US government to investigate the source of Covid-19 to ensure Americans never see another repeat,
    13. LAW & ORDER: Crime in the US is exploding yet arrests and prosecutions have dropped precipitously and police budgets slashed to the point that police officers are resigning and retiring in record numbers.
 
Most Americans are seriously concerned about at least one item on the list above.
 
 
ONLY THE BEGINNING
 
THE CHINESE CREDIT IMPULSE IS COLLAPSING IN PARALLEL!
 
We have discussed many times the ramifications of the Chinese Credit Impusle on the American economy.
 
The latest Chinese Credit data was ugly and it will hammer China’s credit impulse, pushing it to the lowest level in over two years (see charts to the right).
 
New RMB loans, total social financing (TSF) and M2 all surprised to the downside in July, as both corporate and household loans slowed, while government bond net issuance was also smaller in July vs June due to the large amount of maturing bonds in the month. Meanwhile, shadow banking credit continues to contract. Tight regulations likely continued to slow credit extensions to property, consumers and LGFV sectors, and credit demand in the rest of the economy has likely been weak, as interest rates declined along with the slowdown in credit growth in July.
 
HERE ARE THE DETAILS
 
  • New CNY loans: RMB 1080bn in July (RMB loans to the real economy: RMB 839.1bn) missing consensus of RMB 1200bn. Outstanding CNY loan growth was 12.3% Y-o-Y in July, unchanged from June’s 12.3% Y-o-Y.
  • Total social financing: RMB 1060bn in July, badly missing consensus of RMB 1700bn. This was the lowest TSF print since February 2020 when the Chinese economy was effectively shut down.
  • TSF stock growth (after adding all government bonds) was 11.0% Y-o-Y in July, lower than 11.3% in June. The implied month-on-month growth of TSF stock moderated to 9.3% (seasonally adjusted annual rate) from 9.9% in June.
  • M2: 8.3% Y-o-Y in July (-0.9% SA annual M-o-M) also missing the Bloomberg consensus of 8.7% Y-o-Y. June: 8.6% Y-o-Y (10.2% SA annual M-o-M estimated by GS).
 
‌
 
BOTTOM LINE
 
Since the 2008 Financial Crisis the US Economy lags the US Credit Impulse by approximately 12 months. The chart to the right (top) suggests the US economy can be expected to slow rapidly in late Q3, Q4 and 2022.
 
 
THE GAUNTLET AHEAD
 
As we laid out in this month’s LONGWave video, August through October has historically been a weak period for the S&P 500. The 2021 market movement since January additionally mirrors the historical period of strength (Chart: Right Top). There is obviously no certainty that this pattern will be repeated, but the probabilities increase when distortions in fundamentals, risk and sentiment, which the current market is experiencing, are significantly above trend.
 
This window features a number of events that historically have been problematic for equity markets if the market is particularly fragile. Anyone of them has triggered abrupt market responses in the past. They are a tough gauntlet to run through if underlying market support is not strong. We believe this is the case, this time around!
 
This gauntlet kicks off during the height of the summer holiday period with the August Options expiration and historically low trading volumes.
The August Jackson Hole Economic and Monetary Summit is watched closely as it often signals subtle shifts in Federal Reserve policy thinking.
 
The September and October events are built around the realities of whether market analysts’ proverbial year end “hockey stick” forecasts will be met or not and how much they need to be brought down to match the realities of year-end financial statements.
 
Additionally, analysts and brokerages begin going on record with their calls for the following year. It is tough for distorted markets to get through this window unscathed. Problems with market fundamentals, risk and sentiment must be rationalized as sustainable or not with supporting analytics from market pundits who now place their reputations on the line.
 
 
 
 
 
 
 
“Consumers have correctly reasoned that the economy’s performance will be diminished over the next several months, but the extraordinary surge in negative economic assessments also reflects an emotional response, mainly from dashed hopes that the pandemic would soon end,” 
 

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