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Thursday, March 26, 2009


domestic savings rate jumping

via ft alphaville:

US retail investors poured close to $250bn (€184bn) into bank accounts in the first months of this year, sharply accelerating a flight to safety as they continued to flee volatile stock markets. Bank savings deposits rose by $246bn to a record $4,343bn in the nine weeks to March 9, according to data from the Federal Reserve. This is more than the whole of 2008, in which savings deposits rose by $229bn. ...

It is not clear where all the deposits came from but in the first two months of the year, investors pulled $20bn from stock mutual funds — almost half the total $43bn redeemed during the whole of 2008 — as they appeared to lose confidence in stock markets, according to data from Financial Research Corporation. During the first nine weeks of the year, investors pulled a small amount — $15bn — from savings accounts with a period of notice, in an apparent indication they were reluctant to lock up cash for even short periods of time.

US net flows into savings have gone into only two places — bank savings and US Treasuries, according to Charles Biderman, chief executive of TrimTabs, a research group. Both asset classes, he noted, offer extremely low yields with a high degree of safety. “During an economy where equity prices are down about 50 per cent and home prices down about 30 per cent or so, is there any question as to why money is flowing only into the safest bets?”, he told the FT.

this is testimony to households dumping assets in favor of cash and savings. given further the shocking decline in loans to households now underway mentioned earlier this week -- if the contraction was (-$70bn) in 3q08, imagine what must be going on in 4q08 and 1q09 -- the increase in savings actually understates the cash flowing into the banks significantly. the data aren't in yet, but banks have probably received well in excess of $400bn, perhaps as much as $500bn in cash in the last nine weeks from the private sector.

my first observation is that $200bn in fiscal stimulus spending in 2009 will be a minor offset to such a collapse in demand. this is going to be a very difficult year for american GDP. (UPDATE: though, as brad setser cites the IMF, a rise in government deficit ex-bailouts of 4.8% of GDP is more comprehensive a measure and implies new demand replacement spending on the order of $650bn -- an amount obviously better than $200bn but a far cry from what is headed into savings alone, much less debt repayment, at current rates.)

secondly, the united states treasury is slotted to auction on the order of $2000bn in debt in 2009. if this rate of cash flow into the banks and treasuries were sustained for all of the year, the result would be between $2300bn to $2900bn flowing into bank coffers. with private loan demand vanishing, there's little wonder that demand for treasuries is so high that yields remain near post-war lows in spite of collapsing crossborder flows.

the question, thirdly, is whether such flows will remain sufficient to take up the schedule. one has to think that the dramatic flight out of assets sparked by the lehman collapse -- while it was picking up steam even in the first nine weeks of this year -- is not going to be consistent. however, i would not underestimate the potential for it to be durable, even if at lower average levels. with american households now in balance sheet repair mode, a steady stream of asset divestiture is likely part of our new reality.

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