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Consumer Confidence Plunging Recession Ahead?

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
October 15, 2013

IN THIS ISSUE:

1. Consumer Confidence is Falling Off a Cliff

2. Could Drop in Confidence Spark a Recession?

3. Some Interesting Facts About the National Debt

4. The Interest Paid on the National Debt

5. What to Expect From New Fed Chair Janet Yellen

Overview

The stalemate in Washington continues, the government remains in partial shutdown and the debt ceiling looms on Thursday. A bipartisan deal to fund the government until January 15 and raise the debt limit until early February is working its way through the Senate and could be voted on later today or tomorrow. It is unlikely that the Senate bill will pass in the House, which is reportedly working on yet another bill (see link below) that is unlikely to pass in the Senate.

The mindless gridlock continues and the Treasury Department warns that it will run out of “extraordinary measures” by the end of this week and the statutory debt ceiling will be eclipsed on Thursday or Friday. While this will technically be a “default,” the Treasury will continue to collect enough revenue each day to pay the interest on all of our outstanding debt. Still, things are likely to get increasingly crazy in the next few days.

As a result of all the hype and anguish over the shutdown and the debt ceiling, consumer confidence has plunged since the beginning of this month. The confidence index, as measured by Gallup, has declined by the most since September 2008 when Lehman Brothers went bankrupt at the height of the financial crisis. And it continues to fall. This raises fears that consumer spending will drop significantly and a recession could unfold just ahead.

Following that discussion, we’ll look at some interesting facts surrounding our national debt which now stands at a mind-boggling $16.965 trillion. Since our national debt is Issue #1 on the minds of most Americans, the discussion below should be very timely.

Finally, today’s E-Letter will print longer than usual because we have lots of charts and graphs.

Consumer Confidence is Falling Off a Cliff

The budget fight between Democrats, Republicans and President Obama is throwing a scare into Americans. According to two separate polls, consumer confidence fell more in the first week of October than in any week since the financial crisis began in 2008.

Polls from both Gallup and Rasmussen show that consumer confidence has plummeted since the start of the month. Gallup’s Economic Confidence Index has dropped 12 points to -34 in the last week. The only bigger drop in the index’s history came in the week following the collapse of Lehman Brothers in September 2008. That drop was 15 points.

The latest reading in the Gallup Index marks the lowest level since December 2011 and well below this year’s peak of -3 seen in early June. During the previous debt ceiling crisis in the summer of 2011, it fell to -54. The index dropped to -65 during the Lehman crisis of 2008.

The negative sentiment also shows up in the Rasmussen Consumer Index, which measures consumer confidence on a daily basis. As of last Wednesday, it had dropped 11 points since the start of the month, when it stood at 103, the second highest it's been all year. This is very close to what the Rasmussen Index did in the week following the Lehman collapse, when it fell 12 points.

Gallup also found that 67% of Americans say the economy is getting worse, the highest level since early December 2011. The continued stalemate over the budget and the debt ceiling are only making things worse.

A third of the people that Gallup surveyed say that a “dysfunctional government” is the biggest problem the nation faces. That’s twice the reading of a month earlier and the largest percentage of people to say they feel that way since Gallup began asking about the nation’s biggest problem back in 1939.

 Economic Confidence Index

While confidence has dropped sharply, people aren't as panicked as they were in the fall of 2008 when financial markets were melting down – at least not yet.

Could Drop in Confidence Spark a Recession?

Economists worry that growing consumer anxiety over congressional gridlock will cause a sharp pull back in spending. That could turn the growing fear that the economy is weak into a self-fulfilling prophecy. Some of the largest drops in confidence in the past came just before the nation toppled into recession.

What would be worse is if the stalemate drags on as the Christmas shopping season approaches. That could hurt the key sales season for most retailers and manufacturers, and it could take the wind out of the strong recoveries in car sales and the housing market so far this year.

The hope is that the current crisis will be resolved without a government default and consumer confidence will bounce back. That’s what happened after the debt ceiling debate led to the downgrade of the US credit rating in August of 2011. By early November, consumer confidence readings by Gallup were back to where they had been before the crisis, and no recession followed.

The idiots in Washington had better come to a resolution very soon or they may lose their jobs in the next election. A new poll from NBC News/Wall Street Journal highlighted public disgust with Congress over the government shutdown and debt ceiling fight, with Republicans taking much of the blame. Six in 10 people said they would defeat and replace every member of Congress if they could, including their own, a warning to members of both parties just a year before the midterm elections.

Some Interesting Facts About the National Debt

With the Republican-led House engaged in a stare-down with Senate Democrats and President Obama over raising the federal debt limit, perhaps it’s time to take a closer look at our national debt, interest payments on the nation’s credit line and who actually owns our debt.

The federal government’s total debt stood at $16.74 trillion, as of September 30 according to the Treasury Department. If you go to www.usdebtclock.org, you find that the national debt is now $16,965 trillion, thanks to the Treasury using “extraordinary measures” to pay our bills. Nearly all of the national debt is subject to the statutory debt ceiling, which is currently set at a hair under $16.7 trillion.

The debt is now larger than gross domestic product (GDP), which was $16.661 trillion in the 2Q.  The government’s first estimate of 3Q GDP which ended September 30, isn’t due until the end of this month (but it may be delayed due to the federal shutdown.) Debt as a share of GDP has risen steeply since the 2008 financial crisis.

Components of Debt Subject to Limit

As of the end of September, 28.4% of the debt ($4.76 trillion) was owed to another arm of the federal government itself. This debt is referred to as “Intragovernmental Debt.” Some suggest that this debt should not be included in the national debt based on the argument that ‘We owe it to ourselves.’ I beg to differ. These Treasury securities mature and must be rolled over, just like the debt held by the public. And they have to be repaid at some point.

Take Social Security, for example. The federal government’s single biggest creditor is Social Security with its two trust funds which together hold $2.76 trillion in special non-traded Treasury securities (16.5% of the total debt). All of that money will be paid out over time, and should very much be included in the national debt.

The Federal Reserve banks collectively held nearly $2.1 trillion worth of Treasuries (12.4% of the total debt) as of last week. People frequently ask me why the Fed should hold any government debt, and that’s a good question – but unfortunately too long and complicated to answer here. With the nomination of Janet Yellen as the new Fed Chair, it is almost certain that the Fed will continue its huge QE bond buying program indefinitely (more on Yellen below).

The Interest Paid on the National Debt

In fiscal 2013, which ended September 30, net interest payments on the debt totaled $222.75 billion, or 6.23% of all federal outlays. By comparison, debt service was more than 15% of federal outlays in the mid-1990s; the share has fallen partly because lower rates have held down interest payments, but also because outlays have risen substantially, up 39.4% over the past decade.

Net Interest Payments on National Debt

Largely due to the Federal Reserve’s aggressive efforts to keep interest rates low, the US government is paying historically low rates on its debt. In fiscal 2013, according to the Treasury Department, the average interest rate on the public debt was 2.43%. Though you might think such low rates would dissuade investors from buying US government debt, demand has remained strong. But the ongoing debt crisis may be changing that, especially for short-term securities.

Average Interest Rate on Public Debt

*  Thanks to Drew Desilver of the Pew Research Center for the charts & some of the
    analysis above on the national debt.

Who Owns the US National Debt?

US Treasuries are the most widely held class of security in the world. The US national debt is now more than $16.7 trillion. The Treasury Department manages the US debt (among other things) through its Bureau of the Public Debt. As noted above, the Bureau has broken out the debt into two main categories: “Debt Held by the Public” ($11.9 trillion) and “Intragovernmental Holdings” ($4.8 trillion).

Debt Held by the Public – Foreign governments and investors hold about half of the nation’s public debt. A little over one-fifth is held by other governmental entities, like the Federal Reserve and state and local governments. Another 15% is held by mutual funds, private pension funds, savings bonds or individual Treasury notes. The rest is held by businesses, like banks, and insurance companies, a mish-mash of trusts, etc. Here's the breakout:

  • Foreign - $5.724 trillion
  • Federal Reserve – $2.1 trillion
  • State & Local Government, including pension funds - $703.5 billion
  • Mutual Funds - $946.4 billion
  • Private Pension Funds - $457.7 billion
  • Banks - $341.4 billion
  • Insurance Companies - $263.3 billion
  • U.S. Savings Bonds - $181.7 billion
  • Other (individuals, government-sponsored enterprises, brokers and dealers, bank personal trusts and estates, corporate and non-corporate businesses, and other investors) - $1.497 trillion.

Intragovernmental Holdings ($4.8 trillion) - Just under one-third of the national debt is owed to about 230 federal agencies. How does this happen? Some agencies, like Social Security, take in more revenue from taxes than they need right now. Rather than stick this cash under a giant mattress, these agencies buy US Treasuries with it.

This effectively transfers their excess cash to the general fund, where it can be spent. As noted above, one day these agencies will redeem their Treasury notes for cash. The federal government will either need to raise taxes, or issue more debt, to give them the cash they will need.

Which agencies own the most Treasuries? As discussed above, Social Security holds the most by a long shot. Here’s the detailed breakdown, as of August 30:

  • Social Security Trust Fund & Disability Insurance Trust Fund) - $2.764 trillion
  • Office of Personnel Management (Federal Employees Retirement, Life Insurance, Hospital Insurance Trust Funds, Postal Service Retiree Contributions) - $826.8 billion
  • Military Retirement Fund - $419.5 billion
  • Uniformed Services Retiree Health Care Fund - $189 billion
  • Dept. of Health and Human Services (Federal Hospital Insurance Trust Fund, Federal Supplementary Medical Insurance Trust Fund) - $260 billion
  • Department of Energy - $54.8 billion
  • Federal Deposit Insurance Corporation - $33 billion
  • Department of Labor (Unemployment Trust Fund) - $30 billion
  • Department of the Treasury (Exchange Stabilization Fund) - $26 billion
  • Other Programs and Funds - $260 billion.

As you can see, if you add up debt held by Social Security and all the retirement and pension funds, nearly half of the Intragovernmental US Treasury debt is held in trust for people's retirements. If the US defaults on its debt, foreign investors would be angry, but the greatest harm would befall the average US citizen.

Finally, who are the largest foreign holders of our debt? If you guessed that the largest foreign holder is China, you would be correct. Here are the top 10 foreign holders of US debt, followed by Russia at #11, as of July 31 according to the Treasury Department (in billions):

China (Mainland) 1277.3   Taiwan 185.8
Japan 1135.4   Switzerland 178.2
Caribbean Banks 287.7   Belgium 167.7
Oil Exporters (3) 257.7   United Kingdom 156.9
Brazil 256.4   Luxembourg 146.8

Together, China and Japan own $2.413 trillion of our national debt, while the next eight countries own a collective $1.637 trillion.

What to Expect From New Fed Chair Janet Yellen

Last Wednesday, President Obama made it official – he nominated Janet Yellen to be the next Chairperson at the Federal Reserve, succeeding Ben Bernanke who has been the Chairman since 2005. Bernanke is expected to leave the Fed in late January. In the meantime, Ms. Yellen should have no big problems being confirmed by the Senate as the new Fed Chairwoman.

As one of the most powerful people in the world, come next January, I thought you might like to know a little about her. Janet Louise Yellen, age 67, was born in Brooklyn, NY to Jewish parents, Julius and Anna Yellen. She is married to George Akerlof, a Nobel Prize-winning economist and professor emeritus at the University of California, Berkeley.

Janet Yellen

Yellen was appointed as a member of the Fed Board of Governors from 1994 to 1997. She served as chair of President Bill Clinton’s Council of Economic Advisers from February 1997 to 1999. From June 2004 until 2010, Yellen was the President and Chief Executive Officer of the Federal Reserve Bank of San Francisco. She became a voting member of the Federal Open Market Committee (FOMC) in 2009.

On April 28, 2010, President Obama nominated Yellen to succeed Donald Kohn as vice-chair of the Federal Reserve System. In July of that year, the Senate Banking Committee voted 17 to 6 to confirm her.

Yellen is considered by many on Wall Street to be a “dove” (more concerned with unemployment than with inflation) and, as such, to be less likely to advocate Federal Reserve interest rate hikes. In addition, it is widely believed that Yellen will push to continue the Fed’s policy of “quantitative easing,” and some believe she may even be in favor of increasing the massive bond buying program.

Based on her positions in the past and her reported desire to continue QE indefinitely, many conservatives oppose her nomination. But with President Obama in office, with the power to nominate the next Fed chair, Yellen came as no surprise – especially after former Treasury Secretary Larry Summers took his name out of the hat for the next Fed chair.

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In closing, I look for this week to be a wild one. I will have an update in my blog on Thursday. If you have not signed up for this free weekly update, CLICK HERE and join the conversation.

Best regards,                                                 

Gary D. Halbert

SPECIAL ARTICLES

Boehner unveils yet another bill that is doomed in the Senate

Obama’s Ugly Shutdown Spectacle – The Devil Made Me Do It

The Sequester: The Hammer Republicans Hold (Or Do They?)

Rand Paul: Why I Plan to Grill Yellen

 


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Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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