Who’s Buying?

Sputtering again, the S&P500 dipped 0.25% for the week, the first consecutive weekly loss since March.  Volume fell for the second week in a row.  Yet the VIX dropped as well, suggesting  that complacency is starting to set in.  Almost two months after April, and the S&P has gone almost nowhere.

The economic data did not fail to disappoint.  Both existing and new home sales were lower than expected.  Durable goods orders rose, but most of that came from aircraft orders; durable goods shipped, however, dropped again.  Initial claims jumped, unexpectedly, to 627,000 and continuing claims also rose to 6.74 million.  Personal income looked good on the surface–rising 1.4% in May–but much of that gain came from unsustainable government stimulus payments.  Most notably, personal spending did not match the gain in income, rising only 0.3%.  That meant that the personal savings rate spiked to 6.9%–the highest savings rate in 15 years. 

Technically, the S&P is in a slight downtrend, on a daily basis.  It is still overbought, especially on a weekly basis.  On the monthly charts, the bear market is holding, even after the run up from mid-March.

If American consumers are saving more than they have in years, where will fundamental demand from goods come from?  And since almost 70% of U.S. economic activity depends on consumers, exports or business investment are the two non-government options left.

Many economic experts have suggested that China, for example, must step up and start consuming more of the world’s production.  After all, at only 35% of GDP, Chinese consumption is far behind that of the levels here in the U.S.

The Economist, this week, examined this potential solution and the conclusions were not promising.

Because China lacks the broad social safety nets (for health-care, retirement, and poverty) that support the people of most OECD countries, Chinese people save much more of their personal incomes.  Lately, the Chinese government has taken steps to beef up social security programs; it has also provided incentives and access to credit–both with the intention of boosting consumption.  But The Economist concludes that unless China allows its currency to appreciate (as it would if it were freely traded against all other currencies), the Chinese production will not shift resources to its domestic market; instead it will continue focusing on the bubble era policy of producing for Western consumers.

And that’s a problem.  If we in the U.S. aren’t buying anymore, and if the Chinese don’t step up their buying, then who’s going to do the buying?  Who will fill the monstrous hole in global GDP caused by the implosion of the asset and credit bubble in the western world?

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