The Swiss National Bank move to eliminate the 1.2 EURCHF Peg has proven to be a big market/media event. Follows a few random thoughts on how this story played out. Caveat - Some of this is wonkish, some guesses on my part.
The Weekly FX Flows
The FX market has two different types of risk profiles depending on what day it is. The two risk periods are:
Monday through Friday
Friday night through Sunday night
There are risks that the FX market participants face every second of the week. But the risks of the weekend roll are much higher than the Monday through Friday trading period
The developments during any given week may cause wild gyrations in FX pricing, but there is also a very active FX market to lay off, or take on risk. The FX market runs 24/7 from Monday morning in Asia until the close in NY on Friday. From Friday night to the next opening in Asia there is no market to lay off risk.
The fact that there are two different risk periods creates two classes of participants in the FX market. Short-term players who are trying to make a buck, but have no interest in taking positions over the weekend. And those who are taking a long-term view of the world, and are happy to take the risks associated with liquidity over the weekend. For every player who takes a long view there are 20 who only dance from Monday through Friday. The bulk of the actors are squared up for the weekend.
There is a very logical reason for this. Over the past twenty years the vast majority of "surprise" critical steps taken by government authorities have been taken on Sunday evenings. (Devaluations/revaluations, Fannie and Freddie going bust, TARP etc., Plaza Accord, Louver Accord) If you're in the FX Biz you pay very close attention to what surprises may have been released when the markets have gone dark. And depending on your risk profile you want to be square for the weekend.
The SNB broke the "rules". It dropped its bomb on a Thursday. It did it at a time that insured that the NY market was still asleep.
The SNB could have held off for a few days and made their big announcement on Sunday. The amount of gross positions outstanding on Sunday would have been a fraction of the positions that were outstanding on Thursday morning. Obviously, the timing by SNB was very deliberate. They acted in what I consider to be a hostile manner - the SNB was a predator to the market participants. Not very sporting at all.
If the SNB had acted in a manner consistent with how Central Banks/Government make announcements of key changes to policy, the losses incurred by the market would have been far less than what they were. The retail accounts that have been blown away this week would not have suffered anywhere near the losses they did. I would add to this that if the announcement had come over the weekend there would not have been a 20% move in the CHF. The adjustment would have been closer to 10%.
My conclusion is that the SNB deliberately screwed the market, and in the process shot itself in the foot for 30-50 billion dollars. What were they thinking?
Did the 2014 Profits Play a Role in this?
Every January the SNB produces its annual profit and loss results. The surprise in 2014 was the size of the gains the SNB reported (CHF38B) . The headline from this year's profit report:
38B Francs is a huge amount of money. This treasure chest is equal to about half of the losses the SNB incurred when it floated the franc. My question is did the folks at the SNB already know that they were going to pull the plug on the peg on January 9 when they released the profit report?
The huge profit report plays into the story, but I'm not sure if the way it was introduced allows for a definitive conclusion that the decision to float had been made six days before the actual event. My read of these tea leaves is that the SNB was, at a minimum, considering the float on January 9,but had not yet made a final decision on when to act. The "profits" gave the SNB the ammo to take the huge loss. My question - Were the 2014 "profits" pumped up so that it would be "easier" for the SNB to act? I think there is a real possibility that those big gains were largely fluff.
On the SNB communication of January 6th
A very curious element in this is that three days before the float an SNB spokesperson, Jean-Pierre Danthine, had this to say:
"We took stock of the situation less than a month ago, we looked again at all the parameters and we are convinced that the minimum exchange rate must remain the cornerstone of our monetary policy,"
What to make of this? Was Jean-Pierre lying through his teeth when he said these words? Had the decision to float already been made?
I'm 100% convinced that the decision to float was made prior to the time that J.P. spoke. In other words J.P. lied; he was part of a deliberate effort to set the market up to be short the CHF and to cause the maximum amount of pain to the market participants.
I doubt we will ever know the facts on this. However if JP was tied down and water boarded he might fess up to being the guy who deliberately set up the market. I'm as certain as I can be that good old J.P. would not have said these words without the blessings of the head of the SNB, Thomas Jordan. So it is quite possible that this critical lie was set up by the guy who is running the show.
If this is correct, it is a heinous act. I would think that there would be lawsuits if it could be proven that the SNB deliberately set up the market - billions were lost as result of the J.P. statement. (where is that water-board when you need it?)
Jordan Acts Old School Style
Jordan must have read from Paul Volker's playbook. Volker was famous for his "surprises". During those years I was on an FX trading desk. We were always afraid of the "Volker Factor". Markets were under siege by the Fed. As a result positioning was kept light, and market liquidity suffered. The "fear factor" worked to Volker's advantage, but even he would would admit that he was responsible for a great sucking noise in the markets. Volker succeeded, but the costs were very high.
Central Bank communication policy has morphed over the past 20 years. The changes were led by Greenspan who established the concept of 'guidance'. The Fed became more open as a result. By communicating its intentions the Fed was able to steer capital markets in a way that suited it. The strategy of communication was designed to minimize the market shocks of unanticipated policy changes. For the most part, the policy of providing forward guidance has worked. Ben Bernanke took another leg up on the idea of communication as a means of guiding markets. Most other central banks have followed this policy.
But the SNB went entirely in the other direction. On Tuesday it said, "That will not happen", three days later it happened. Thomas Jordan and his merry men at the SNB turned the clocks back 40 years.
There was No Crisis on Thursday
When the SNB established the Peg in 2011 there was a true market crisis going on. In a short period of time the EURCHF fell from 1.5 to parity. The SNB introduced the Peg in the same manner that they have taken it off. It came as a surprise to the market, it caused an immediate 20% jump in the EURCHF. Pretty much the exact opposite of what happened on Thursday. One could argue that if the SNB went "Shock and Awe" when the peg was established, it is equally fair that they took it off with the same Shock and Awe.
BUT - There was no market panic last Thursday. There was no crisis that forced the SNB to act on that day. The EURCHF was trading above the peg, it had been for days prior. The SNB had some bids in the market to ensure that there was no move to the 1.2000 level. The intervention required to maintain the Peg in the days just prior to the float was very small - under 10b CHF.
My point is that there was no compelling reason to act on a Thursday. Therefore the only conclusion I can draw is that the SNB acted in a malicious way. It took actions with the express intent of hurting the markets. It achieved its objectives. In the process the SNB incurred losses that are 50% higher then they might have otherwise taken.
What are the Other CBs Thinking?
As of last Tursday every Central Bank on the globe hates the SNB. Not only did the SNB destroy its own credibility, it undermined the credibility of every other CB. How many headlines like this have we seen the past few day? (hundreds).
I'm convinced that the SNB move has put the ECB (Mario Draghi in particular) in a very difficult position. I expect that we will see markets converging on the ECB in the not too distant future. The empty promises of Uncle Mario are now just that - empty promises. Draghi's job has just become incredibly more difficult - if not impossible.
The Japanese CB is now quaking. They have just observed first hand what happens when CBs take a U-turn. The BoJ has made more promises than any other CB. If the markets come to doubt the resolve and promises of the BoJ then you can kiss off any chance that the BoJ will succeed. A loss of confidence means that Japan will soon slip into another lost decade.
Any CB who is now managing a fixed currency is at risk. Hong Kong, China and Korea come to mind. If (when) any of these CBs come under attack they will face the same fate as the Swiss. The reality is that the global markets are much larger and more powerful than the CBs. What happened in Switzerland will be repeated elsewhere. It's likely that these attacks will happen fairly soon.
What About the Players?
I do feel a bit sorry for those who lost big on the CHF move. I think they were set up, and lied to by the SNB. If the SNB had acted on a Sunday we would not be reading about all of the retail losses. The same is true for the big banks that got whacked (JPM, Citi, Deutsche, Barclays, and the many more will soon be fessing.
But - The losers were idiots! What were those thousands of retail investors thinking? In any market a player must think about risk and reward. The "reward" of being long the EURCHF on Thursday was maybe 25BP. This was obvious as the EURCHF had traded the last three days a few ticks away from the intervention zone. There were caution flags flying. Anyone who thought there was some free money on the table made a huge mistake. The downside risks of the short CHF was at least 100Xs what might have been realized if the SNB had not acted. YOU NEVER DO THIS! Never take a 100 to one shot. To bet $100 to make $1 is just stupid.
The retail brokers providing FX executions for retail have been buried with losses. I couldn't be happier with this result. These clowns were providing 50X leverage to unsophisticated investors who did not understand the risks? They deserve to be wiped out.
There might be a few of these brokers left standing in a week - but I promise you the the days 2% margins on retail FX are over. Want to play in the FX sandbox? Be prepared to put 20% down. There are no profits left with that leverage, so the retail FX biz will disappear for a few years. (It will come back - greed trumps logic every time.)
Vladimir Putin has ordered the Russian state energy giant Gazprom to cut natural gas supplies to and through Ukraine to the EU in a little reported move. It took place late on Wednesday and was overshadowed by the Swiss National Bank market turmoil yesterday.
Russia has shut off gas supplies through Ukraine to six EU states, ostensibly due to Ukraine’s alleged illegal siphoning gas from the pipeline. The European Union warned that the sudden cut-off to some of its member countries was ‘completely unacceptable’. The move comes just as winter begins to bite across Europe.
The pipeline crossing Ukraine supplies over 60% of the entire EU’s natural gas. Six countries – Greece, Bulgaria, Macedonia, Croatia, Romania and Turkey – report a complete halt of gas coming in from Russia.
Yesterday, Ukraine confirmed that Russia had completely cut off their supply. Croatia said it was temporarily reducing supplies to industrial customers while Bulgaria said it had enough gas only ‘for a few days’ and was already in a ‘crisis situation’.
There is the risk of an energy crisis and it is worrying that the move comes about at a time of increased maneuverings and posturing by NATO and the Russian army and deepening conflict in Ukraine.
Ukraine lurched back toward full-scale conflict today as troops loyal to the new Ukraine government battled with pro-Russian forces for control of an eastern airport.
Ukraine said yesterday that cease fire violations have surged to a new record, while the nation’s security council warned the unrest may spark a “continental war” and German Chancellor Angela Merkel called for emergency talks.
Russia is planning to divert it’s EU bound natural gas to a pipeline through Turkey opening at the Turkey-Greece border. Bloomberg quotes Valentin Zemlyansky of the Ukrainian gas company Naftogaz, “They [the Russians] have reduced deliveries to 92 million cubic metres per 24 hours compared to the promised 221 million cubic metres without explanation,”
“We do not understand how we will deliver gas to Europe. This means that in a few hours problems with supplies to Europe will begin.”
Russian Energy Minister, Alexander Novak put it bluntly, “The decision has been made. We are diversifying and eliminating the risks of unreliable countries that caused problems in past years, including for European consumers.”
Bloomberg reports, “Gazprom, the world’s biggest natural gas supplier, plans to send 63 billion cubic meters through a proposed link under the Black Sea to Turkey, fully replacing shipments via Ukraine, Chief Executive Officer Alexey Miller said during the discussions.”
“We have informed our European partners, and now it is up to them to put in place the necessary infrastructure starting from the Turkish-Greek border,” Miller said.
Such a project would likely take months to implement. In the mean-time many Europeans may not have access to gas to warm their homes through winter and many industries will also be without gas – effecting production, employment in already struggling economies.
Whether or not Russia is calling Europe’s bluff in a bid to ease sanctions is unclear at this point. It appears that Turkey, an erstwhile NATO member, is warming to Russia, possibly due to the instability that western actions in the Middle East have brought to Turkey’s doorstep.
Earlier this week Turkish President Erdogan made the stunning accusation that “the West” staged the attacks in Paris last week.
The French, also, have been considering a foreign policy independent of the NATO status-quo. France is in the process of completing two battle ships for sale to Russia. Earlier this month President Hollande stated that sanctions against Russia should be lifted.
Tensions and suspicions are escalating even within the Western block. The EU does not have many cards left to play in dealing with Russia.
Tensions in the EU may arise as natural gas required for industry may have to be diverted to households to avoid social upheaval.
Geopolitical tensions are escalating across the world, concurrent with indications of an imminent and severe recession globally.
Gold has played an important role in protecting peoples wealth in uncertain times and will do so again in the coming years.
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"There are too many ugly balance sheets," warns one energy industry analyst, adding simply that "the group is not positioned for this downturn." While the mainstream media continues to chant the happy-clappy side of lower oil prices, spewing various 'statistics' about how the down-side of low oil prices is 'contained' and the huge colossal massive tax cut means 'everything is awesome' for America, the data - and now actions - do not bear this out. Macro data has done nothing but disappoint and now, we have the first casualty of the shale oil leverage debacle as WSJ reports, on Sunday, a private company that drills in Texas, WBH Energy LP, and its partners, filed for bankruptcy protection, saying a lender refused to advance more money. There are many more to come...
In December we illustrated the problem names (in the publicly traded markets) among the most-levered energy companies in America...
And now, as The Wall Street Journal reports, the bankruptcies have begun as financing costs are not just prohibitive, there is no liquiidty available at any price for many...
American oil and gas companies have gone heavily into debt during the energy boom, increasing their borrowings by 55% since 2010, to almost $200 billion.Their need to service that debt helps explain why U.S. producers plan to continue pumping oil even as crude trades for less than $50 a barrel, down 55% since last June.But signs of strain are building in the oil patch, where revenue growth hasn’t kept pace with borrowing. On Sunday, a private company that drills in Texas, WBH Energy LP, and its partners, filed for bankruptcy protection, saying a lender refused to advance more money and citing debt of between $10 million and $50 million. Neither the Austin-based company nor its lawyers responded to requests for comment.Energy analysts warn defaults could be coming. “The group is not positioned for this downturn,” said Daniel Katzenberg, an analyst at Robert W. Baird & Co. “There are too many ugly balance sheets.”...In 2010, U.S. companies focused on producing oil and gas had $128 billion in combined total debt, according to financial data collected by S&P Capital IQ.As of their latest quarter, such companies had $199 billion of combined total debt.Before crude prices began falling, U.S. oil and gas producers were able to acquire leases and drill wells even if that meant outspending their incomes. Debt was used to bridge the cash shortfall so that companies could develop oil fields in Texas, North Dakota and newer locations including Colorado.
Now that is coming back to bite.
The upshot of cash conservation and higher borrowing costs will be less money spent on producing oil and natural gas.Concho Resources Inc. said late Monday that it was cutting its capital spending budget by a third, to $2 billion.
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And the credit market knows it...
Chicago Fed's Charlie Evans appears to have decided to flex his voting member status, Bullard-ness this evening. Speaking during a forum in Chicago, after The FOMC Minutes showed data-dependence was the thing... Evans exclaimed "raising rates would be a catastrophe," and that "housing hasn't shown the strength he'd like to see," prompting S&P futures - with the help of USDJPY - to suddenly surge 16 points (and drag WTI Crude futures above $49.50 for fun). Nikkei futures enjoyed the ride ramping 200 points as USDJPY hit 119.70. But, much to the chagrin of the millions of freshly minted retail investors there, Chinese stocks plunged 2.2%... "we love the smell of stability in the Asian morning"
- *FED'S EVANS SAYS RAISING RATES WOULD BE A CATASTROPHE
- *EVANS SAYS OIL IMPACT ON INFLATION TO REQUIRE CLOSE MONITORING
- *EVANS SAYS WAGE GROWTH CONSISTENT WITH GOAL WOULD BE 3.5%-4%
- *EVANS: DROP IN LONG-TERM INTEREST RATES `EXTRAORDINARY' PAST YR
- *EVANS SAYS HOUSING HASN'T SHOWN STRENGTH HE'D LIKE TO SEE
And thus the fun-durr-mentals kick in...
and in Japan...
But not so much in China...
So to summarize - a Dovish Dove said Dovish things that he has said a thousand times before, contradicting a modestly hawkish biased FOMC and markets explode in a fit of illiquid exuberance...? Okeydokey, let's just see what happens when Europe opens
Will 2015 be a year of financial crashes, economic chaos and the start of the next great worldwide depression? Over the past couple of years, we have all watched as global financial bubbles have gotten larger and larger. Despite predictions that they could burst at any time, they have just continued to expand. But just like we witnessed in 2001 and 2008, all financial bubbles come to an end at some point, and when they do implode the pain can be extreme.
Personally, I am entirely convinced that the financial markets are more primed for a financial collapse now than they have been at any other time since the last crisis happened nearly seven years ago. And I am certainly not alone. At this point, the warning cries have become a deafening roar as a whole host of prominent voices have stepped forward to sound the alarm. The following are 11 predictions of economic disaster in 2015 from top experts all over the globe…
#1 Bill Fleckenstein: “They are trying to make the stock market go up and drag the economy along with it. It’s not going to work. There’s going to be a big accident. When people realize that it’s all a charade, the dollar will tank, the stock market will tank, and hopefully bond markets will tank. Gold will rally in that period of time because it’s done what it’s done because people have assumed complete infallibility on the part of the central bankers.”
#2 John Ficenec: “In the US, Professor Robert Shiller’s cyclically adjusted price earnings ratio – or Shiller CAPE – for the S&P 500 is currently at 27.2, some 64pc above the historic average of 16.6. On only three occasions since 1882 has it been higher – in 1929, 2000 and 2007.”
#3 Ambrose Evans-Pritchard, one of the most respected economic journalists on the entire planet: “The eurozone will be in deflation by February, forlornly trying to ignite its damp wood by rubbing stones. Real interest rates will ratchet higher. The debt load will continue to rise at a faster pace than nominal GDP across Club Med. The region will sink deeper into a compound interest trap.”
#4 The Jerome Levy Forecasting Center, which correctly predicted the bursting of the subprime mortgage bubble in 2007: “Clearly the direction of most of the recent global economic news suggests movement toward a 2015 downturn.”
#5 Paul Craig Roberts: “At any time the Western house of cards could collapse. It (the financial system) is a house of cards. There are no economic fundamentals that support stock prices — the Dow Jones. There are no economic fundamentals that support the strong dollar…”
#6 David Tice: “I have the same kind of feel in ’98 and ’99; also ’05 and ’06. This is going to end badly. I have every confidence in the world.”
#7 Liz Capo McCormick and Susanne Walker: “Get ready for a disastrous year for U.S. government bonds. That’s the message forecasters on Wall Street are sending.”
#8 Phoenix Capital Research: “Just about everything will be hit as well. Most of the ‘recovery’ of the last five years has been fueled by cheap borrowed Dollars. Now that the US Dollar has broken out of a multi-year range, you’re going to see more and more ‘risk assets’ (read: projects or investments fueled by borrowed Dollars) blow up. Oil is just the beginning, not a standalone story.
If things really pick up steam, there’s over $9 TRILLION worth of potential explosions waiting in the wings. Imagine if the entire economies of both Germany and Japan exploded and you’ve got a decent idea of the size of the potential impact on the financial system.”
#9 Rob Kirby: “What this breakdown in the crude oil price is going to spawn another financial crisis. It will be tied to the junk debt that has been issued to finance the shale oil plays in North America. It is reported to be in the area of half a trillion dollars worth of junk debt that is held largely on the books of large financial institutions in the western world. When these bonds start to fail, they will jeopardize the future of these financial institutions. I do believe that will be the signal for the Fed to come riding to the rescue with QE4. I also think QE4 is likely going to be accompanied by bank bail-ins because we all know all western world countries have adopted bail-in legislation in their most recent budgets. The financial elites are engineering the excuse for their next round of money printing . . . and they will be confiscating money out of savings accounts and pension accounts. That’s what I think is coming in the very near future.”
#10 John Ing: “The 2008 collapse was just a dress rehearsal compared to what the world is going to face this time around. This time we have governments which are even more highly leveraged than the private sector was.
So this time the collapse will be on a scale that is many magnitudes greater than what the world witnessed in 2008.”
#11 Gerald Celente: “What does the word confidence mean? Break it down. In this case confidence = con men and con game. That’s all it is. So people will lose confidence in the con men because they have already shown their cards. It’s a Ponzi scheme. So the con game is running out and they don’t have any more cards to play.
What are they going to do? They can’t raise interest rates. We saw what happened in the beginning of December when the equity markets started to unravel. So it will be a loss of confidence in the con game and the con game is soon coming to an end. That is when you are going to see panic on Wall Street and around the world.”
If you have been following my website, you know that I have been pointing to 2015 for quite some time now.
For example, in my article entitled “The Seven Year Cycle Of Economic Crashes That Everyone Is Talking About“, I discussed the pattern of financial crashes that we have witnessed every seven years that goes all the way back to the Great Depression. The last two major stock market crashes began in 2001 and 2008, and now here we are seven years later.
Will the same pattern hold up once again?
In addition, there are many other economic cycles that seem to indicate that we are due for a major economic downturn. I discussed quite a few of these theories in my article entitled “If Economic Cycle Theorists Are Correct, 2015 To 2020 Will Be Pure Hell For The United States“.
But just like in 2000 and 2007, there are a whole host of doubters that are fully convinced that the party can continue indefinitely. Even though our economic fundamentals continue to get worse, our debt levels continue to grow and every objective measurement shows that Wall Street is more reckless and more vulnerable to collapse than ever before, they mock the idea that a financial collapse is imminent.
So let’s see what happens in 2015.
I have a feeling that it is going to be an extremely “interesting” year.
It has been a busy few days for Germany. In the space of a week, they have warned Greece "there will be no blackmail," adding that a Greek exit from the euro was "manageable," only to hours later deny (clarify) these comments. This was then followed up with beggars-are-choosers Syriza demanding any ECB QE must buy Greek bonds (or else) - which Germany has flatly ruled out - only to see today that Syriza is practically guaranteed to win a "decisive victory" at the forthcoming snap election. So it with a wry smile that we note Bild reports tonight that the German government is preparing for a possible Greek exit, warning of financial system collapse, bank runs, and huge costs for the rest of the EU.
Germany has been flip-flopping (as Reuters notes)...
Der Spiegel magazine reported on Saturday that Berlin considers a Greek exit almost unavoidable if Syriza wins, but believes the euro zone would be able to cope.Vice Chancellor Sigmar Gabriel said on Sunday that Germany wants Greece to stay and there are no contingency plans to the contrary, while noting the euro zone has become far more stable in recent years.As the euro zone's paymaster, Germany is insisting that Greece stick to austerity and not backtrack on its bailout commitments, especially as it does not want to open the door for other struggling members to relax reform efforts.
But now the rhetoric is heating up...
Germany is making contingency plans for the possible departure of Greece from the euro zone, including the impact of any run on a bank, tabloid newspaper Bild reported, citing unnamed government sources.The newspaper said the government was running scenarios for the Jan. 25 Greek election in case of a victory by the leftwing Syriza party, which wants to cancel austerity measures and a part of the Greek debt.In a report in the Wednesday issue of the paper, Bild said government experts were concerned about a possible bank collapse if customers storm Greek institutions to secure euro deposits in the event that Greece leaves the zone.The European Union banking union would then have to intervene with a bailout worth billions, the paper said.
We have always argued that a Grexit would be painful for both the Eurozone and Greece, but relatively more painful for the latter. As such, it has always seemed unlikely that Greece would unilaterally seek to exit the euro. This still seems to be the case, though there have been internal shifts. As we noted in Part 1, the economic and financial contagion from a Grexit could likely now be more easily contained. This allows the Eurozone to take a harder line with Greece, not least since giving into SYRIZA, will send the message to Podemos and others that fiscal discipline etc is fair game.So the Eurozone may be less nervous about Grexit and feel it has more reason to stick to the rules as it has laid them out, which may harden its negotiating stance. Equally though, Greece may have more reason to think a Grexit could be economically manageable, which could encourage a SYRIZA-led government to stick to its guns more firmly. This to us suggests the clash could be bigger and the negotiations more difficult this time around. Ultimately, though – with hundreds of billions of euros and the political project of the euro at stake – it still seems likely someone will blink and a fudge will be on hand as is usually the way in Europe. Allowing Greece to remain inside the euro for now.
* * *
Greek stocks were closed on Tuesday (but ETFs in the US were notably lower) as Greek bond prices tumbled...
Greek stocks were closed on Tuesday (but ETFs in the US were notably lower) as Greek bond prices tumbled...
And if Germany is 'preparing' for Grexit, then maybe its 5Y Greek CDS they are buying?
As we concluded previously, the consensus can certainly forget the ECB announcing public QE at its next monetary policy meeting on January 22, which will be followed just 3 days later by the Greek national elections. In fact, things in the coming weeks and months may get very ugly, fast depending on how things in Greece play out.
So after 3 years of kicking the can and pretending it is fixed, suddenly everything that is broken in the Eurozone threatens to float right back to the surface, leading to another showdown when photos such as this one become a daily occurrence.
The only question is whether this time anyone will believe the rhetorical "whatever it takes" threats uttered by the one central bank which for the past 4 years has proven it is utterly incapable of acting, instead chosing to talk each and every day, a strategy that has worked brilliantly, until now.
For all the endless media buzz pitching the bullish spin of plunging gas prices, namely that while crude capex spending and energy company earnings are both crashing, high-paying shale jobs are about to suffer pervasive layoffs and energy HY bonds are entering mass default territory leading to who knows what unexpected downstream effects, the average US consumer will spend substantially more to offset all the adverse side-effects of the plunging oil price. Or rather, was supposed to spend more. Because as Gallup finds, this did not happen.
Here is what did happen:
U.S. consumers' average daily spending in December was $98, matching the upper reaches on this measure since 2008. While strong relative to the recent recessionary period, it is similar to the $95 found in November, as well as the $96 in December 2013.
So crude tumbles in half, as does a gallon of gas, and US consumers spend a whopping $2 more in 2014 compared to a year ago, lifting their all in megaspend to an unprecedented $98?
Actually, make that precedented:
Because of holiday shopping, December spending has usually been the highest of any month in Gallup's seven-year history of asking this question. That was not the case in 2014, given that December's $98 average matched the $98 from May, and was barely higher than November's average.
The lack of a more significant November-to-December increase, common in prior years, could be a sign that the Christmas retail season was less than robust.
Uhm... Say what?
Maybe this only refers to those uber-wealthy Americans for whom spending on gas is such a small piece of the piece that a price reduction there doesn't have much of an impact? Well, there's certainly that: as the following chart shows Americans making more than $90,000 a year picked up their spending to $177 daily in December, but well below the $189 and $190 over the summer, suggesting that as expected, gas prices have no impact on the spending patterns of the wealthy.
So what about the poorer part of US society, those making $90K or less: surely they spent like crazy in December rejoicing in the "tax cut" low gas prices afforded them? Well, no. Because as the next chart shows, the poorer US households spent $85 daily in December.
How does this compare to a year ago? $84. A whopping one dollar increase!
Upper-income Americans, those whose household incomes are $90,000 or more a year, had daily spending reports averaging $177 in December, among the highest for this group in 2014, and over the years since the recession. The December average is similar to last December's level. Upper-income spending has shown steady gains since September.Spending among middle- and lower-income Americans, those whose annual household incomes are less than $90,000, was also higher than that found in most other monthly readings Gallup has conducted in the past several years. However, their spending levels in December 2014 roughly matched those in December 2013. Although spending among upper-income Americans often drives the changes in Gallup's monthly estimate, middle- and lower-income Americans make up the bulk of U.S. consumers.
And it is also the middle- and lower-income Americans that benefited the most from lower gas prices. In other words, the direct impact from the plunging oil price: an unprecedented increase from $84 to $85 between December 2013 and December 2014.
This will boost US GDP by how much again?