zerohedge.com / by Teddy Valle Via PerValle.com / Sep 21, 2016 5:40 PM
The market is materially mispricing the strength of the US consumer whose weakness will lead the US economy into a recession in Q117. The divergence is a result of the top 40% of earners who have accrued 84% of all new income and only 34% of new debt since 2013. This strength has driven headline sales figures and accounted for nearly all deleveraging since the financial crisis.
That said, the market has extrapolated the health of top 40% to all consumers, as it corresponds to the current narrative of low unemployment and rising average hourly earnings leading to higher rates of consumption and balance sheet strength.
Due to this misconception, we believe the market has overlooked the deterioration of lower and middle income households who have historically preceded the fall of the top.
We see this disparity being corrected over the next 6-9 months, as a series of disappointing retail sales and consumption figures lead market participants to the realization that their thesis is imperfect.
This will drive yields lower and handcuff the Federal Reserve, which we see as a very supportive backdrop for gold.
We outline this thesis below.
The True Rate of Unemployment
The consumer bull thesis has been predicated on robust job growth and declining unemployment leading to higher wages, in turn driving consumption and GDP. We believe this premise is false, as it fails to correspond to the facts. For example, since 1980, when the unemployment rate was at or below 5.1% (currently 4.9%), nominal GDP averaged 5.35% and average hourly earnings (AHE) grew at 4.4% y/y. Over the trailing twelve months (TTM), we have seen nominal GDP print 2.87% and AHE growth of 2.3%, which is a 46% and 48% discount to historical precedents. This is also the case for discretionary consumption, which over the TTM grew at a 42% discount (3.7%) to its historical average of 6.42%. While we would expect growth rates to come down over time from a higher base, we believe the current spreads indicate that the unemployment rate is not an accurate reflection of the labor market, which is due to those that have left the labor force.
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