Tag Archives: depression

Shedlock: Recession Will Be Deeper Than The Great Financial Crisis

Economists at IHS Markit downgraded their economic forecast to a deep recession.

Please consider COVID-19 Recession to be Deeper Than That of 2008-2009

Our interim global forecast is the second prepared in March and is much more pessimistic than our 17 March regularly scheduled outlook. It is based on major downgrades to forecasts of the US economy and oil prices. The risks remain overwhelmingly on the downside and further downgrades are almost assured.

IHS Markit now believes the COVID-19 recession will be deeper than the one following the global financial crisis in 2008-09. Real world GDP should plunge 2.8% in 2020 compared with a drop of 1.7% in 2009. Many key economies will see double-digit declines (at annualized rates) in the second quarter, with the contraction continuing into the third quarter.

It will likely take two to three years for most economies to return to their pre-pandemic levels of output. More troubling is the likelihood that, because of the negative effects of the uncertainty associated with the virus on capital spending, the path of potential GDP will be lower than before. This happened in the wake of the global financial crisis.

Six Key Points

  1. Based on recent data and developments, IHS Markit has slashed the US 2020 forecast to a contraction of 5.4%.
  2. Because of the deep US recession and collapsing oil prices, IHS Markit expects Canada’s economy to contract 3.3% this year, before seeing a modest recovery in 2021.
  3. Europe, where the number of cases continues to grow rapidly and lockdowns are pervasive, will see some of the worst recessions in the developed world, with 2020 real GDP drops of approximately 4.5% in the eurozone and UK economies. Italy faces a decline of 6% or more. The peak GDP contractions expected in the second quarter of 2020 will far exceed those at the height of the global financial crisis.
  4. Japan was already in recession, before the pandemic. The postponement of the summer Tokyo Olympics will make the downturn even deeper. IHS Markit expects a real GDP contraction of 2.5% this year and a very weak recovery next year.
  5. China’s economic activity is expected to have plummeted at a near-double-digit rate in the first quarter. It will then recover sooner than other countries, where the spread of the virus has occurred later. IHS Markit predicts growth of just 2.0% in 2020, followed by a stronger-than-average rebound in 2021, because of its earlier recovery from the pandemic.
  6. Emerging markets growth will also be hammered. Not only are infection rates rising rapidly in key economies, such as India, but the combination of the deepest global recession since the 1930s, plunging commodity prices, and depreciating currencies (compounding already dangerous debt burdens) will push many of these economies to the breaking point.

No V-Shaped Recovery

With that, Markit came around to my point of view all along. Those expecting a V-shaped recovery are sadly mistaken.

I have been amused by Goldman Sachs and Morgan Stanley predictions of a strong rebound in the third quarter.

For example Goldman Projects a Catastrophic GDP Decline Worse than Great Depression followed by a fantasyland recovery.

  • Other GDP Estimates
  • Delusional Forecast
  • Advice Ignored by Trump
  • Fast Rebound Fantasies

I do not get these fast rebound fantasies, and neither does Jim Bianco. He retweeted a Goldman Sachs estimate which is not the same as endorsing it.

I do not know how deep this gets, but the rebound will not be quick, no matter what.

Fictional Reserve Lending

Please note that Fictional Reserve Lending Is the New Official Policy

The Fed officially cut reserve requirements of banks to zero in a desperate attempt to spur lending.

It won’t help. As I explain, bank reserves were effectively zero long ago.

US Output Drops at Fastest Rate in a Decade

Meanwhile US Output Drops at Fastest Rate in a Decade

In Europe, we see Largest Collapse in Eurozone Business Activity Ever.

Lies From China

If you believe the lies (I don’t), China is allegedly recovered.

OK, precisely who will China be delivering the goods to? Demand in the US, Eurozone, and rest of the world has collapse.

We have gone from praying China will soon start delivering goods to not wanting them even if China can produce them.

Nothing is Working Now: What’s Next for America?

On March 23, I wrote Nothing is Working Now: What’s Next for America?

I noted 20 “What’s Next?” things.

It’s a list of projections from an excellent must see video presentation by Jim Bianco. I added my own thoughts on the key points.

The bottom line is don’t expect a v-shaped recovery. We will not return to the old way of doing business.

Globalization is not over, but the rush to globalize everything is. This will impact earnings for years to come.

Finally, stimulus checks are on the way, but there will be no quick return to buying cars, eating out, or traveling as much.

Boomers who felt they finally had enough retirement money just had a quarter of it or more wiped out.

It will take a long time, if ever, for the same sentiment to return. Spending will not recover. Boomers will die first, and they are the ones with the most money.

Shedlock: Fed Trying To Save The Bond Market As Unemployment Explodes

Bond market volatility remains a sight to behold, even at the low end of the curve.

Bond Market Dislocations Remain

The yield on a 3-month T-Bill fell to 1.3 basis points then surged to 16.8 basis points in a matter of hours. The yield then quickly crashed to 3 basis points and now sits at 5.1 basis points.

The Fed is struggling even with the low end of the Treasury curve.

$IRX 3-Month Yield

Stockcharts shows the 3-month yield ($IRX) dipping below zero but Investing.Com does not show the yield went below zero.

Regardless, these swings are not normal.

Cash Crunch

Bloomberg reports All the Signs a Cash Crunch Is Gripping Markets and the Economy

In a crisis, it is said, all correlations go to one. Threats get so overwhelming that everything reacts in unison. And the common thread running through all facets of financial markets and the real economy right now is simple: a global cash crunch of epic proportions.

Investors piled $137 billion into cash-like assets in the five days ending March 11, according to a Bank of America report citing EPFR Global data. Its monthly fund manager survey showed the fourth-largest monthly jump in allocations to cash ever, from 4% to 5.1%.

“Cash has become the king as the short-term government funds have had massive deposits, with ~$13 billion inflows last week (a 10-standard deviation move),” adds Maneesh Dehspande, head of equity derivatives strategy at Barclays.

4th Largest Jump in History

It’s quite telling that a jump of a mere 1.1 percentage point to 5.1% cash is the 4th largest cash jump in history.

Margin and Short Covering

“In aggregate, the market saw a large outflow, with $9 billion of long liquidation and $6 billion of short covering,” said Michael Haigh, global head of commodity research at Societe Generale. “This general and non-directional closure of money manager positions could be explained by a need for cash to pay margin calls on other derivatives contracts.

The comment is somewhat inaccurate. Sideline cash did not change “in aggregate” although cash balances t various fund managers did.

This is what happens when leveraged longs get a trillion dollar derivatives margin call or whatever the heck it was.

Need a Better Hedge

With the S&P 500 down more than 12% in the five sessions ending March 17, the Japanese yen is weaker against the greenback, the 10-year Treasury future is down, and gold is too.

That’s another sign dollars are top of mind, and investors are selling not only what they want to, but also what they have to.

Dash to Cash

It’s one thing to see exchange-traded products stuffed full of relatively illiquid corporate bonds trade below the purported sum of the value of their holdings. It’s quite another to see such a massive discount develop in a more plain-vanilla product like the Vanguard Total Bond Market ETF (BND) as investors ditched the product to raise cash despite not quite getting their money’s worth.

The fund closed Tuesday at a discount of nearly 2% to its net asset value, which blew out to above 6% last week amid accelerating, record outflows. That exceeded its prior record discount from 2008.

It is impossible for everyone to go to cash at the same time.

Someone must hold every stock, every bond and every dollar.

Fed Opens More Dollar Swap Lines

Moments ago Reuters reported Fed Opens Dollar Swap Lines for Nine Additional Foreign Central Banks.

The Fed said the swaps, in which the Fed accepts other currencies in exchange for dollars, will for at least the next six months allow the central banks of Australia, Brazil, South Korea, Mexico, Singapore, Sweden, Denmark, Norway and New Zealand to tap up to a combined total of $450 billion, money to ensure the world’s dollar-dependent financial system continues to function.

The new swap lines “like those already established between the Federal Reserve and other central banks, are designed to help lessen strains in global U.S. dollar funding markets, thereby mitigating the effects of these strains on the supply of credit to households and businesses, both domestically and abroad,” the Fed said in a statement.

The central banks of South Korea, Singapore, Mexico and Sweden all said in separate statements they intended to use them.

Fed Does Another Emergency Repo and Relaunches Commercial Paper Facility

Yesterday I commented Fed Does Another Emergency Repo and Relaunches Commercial Paper Facility

Very Deflationary Outcome Has Begun: Blame the Fed

The Fed is struggling mightily to alleviate the mess it is largely responsible for.

I previously commented a Very Deflationary Outcome Has Begun: Blame the Fed

The Fed blew three economic bubbles in succession. A deflationary bust has started. They blew bubbles trying to prevent “deflation” defined as falling consumer prices.


BIS Deflation Study

The BIS did a historical study and found routine price deflation was not any problem at all.

“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the BIS study.

For a discussion of the study, please see Historical Perspective on CPI Deflations: How Damaging are They?

Deflation is not really about prices. It’s about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals.

Blowing bubbles in absurd attempts to arrest “price deflation” is crazy. The bigger the bubbles the bigger the resultant “asset bubble deflation”. Falling consumer prices do not have severe negative repercussions. Asset bubble deflations are another matter.

Assessing the Blame

Central banks are not responsible for the coronavirus. But they are responsible for blowing economic bubbles prone to crash.

The equities bubbles before the coronavirus hit were the largest on record.

Dollar Irony

The irony in this madness is the US will be printing the most currency and have the biggest budget deficits as a result. Yet central banks can’t seem to get enough dollars. In that aspect, the dollar ought to be sinking.

But given the US 10-year Treasury yield at 1.126% is among the highest in the world, why not exchange everything one can for dollars earning positive yield.

This is all such circular madness, it’s hard to say when or how it ends.

Unemployment Set To Explode

A SurveyUSA poll reveals 9% of the US is out of a job due to the coronavirus.

Please consider the Results of SurveyUSA Coronavirus News Poll.

Key Findings

  1. 9% of Working Americans (14 Million) So Far Have Been Laid Off As Result of Coronavirus; 1 in 4 Workers Have Had Their Hours Reduced;
  2. 2% Have Been Fired; 20% Have Postponed a Business Trip; Shock Waves Just Now Beginning to Ripple Through Once-Roaring US Economy:
  3. Early markers on the road from recession to depression as the Coronavirus threatens to stop the world from spinning on its axis show that 1 in 4 working Americans have had their hours reduced as a result of COVID-19, according to SurveyUSA’s latest time-series tracking poll conducted 03/18/20 and 03/19/20.
  4. Approximately 160 million Americans were employed in the robust Trump economy 2 months ago. If 26% have had their hours reduced, that translates to 41 million Americans who this week will take home less money than last, twice as many as SurveyUSA found in an identical poll 1 week ago. Time-series tracking graphs available here.
  5. 9% of working Americans, or 14 million of your friends and neighbors, will take home no paycheck this week, because they were laid off, up from 1% in an identical SurveyUSA poll 1 week ago. Time-series tracking graphs available here.
  6. Unlike those laid-off workers who have some hope of being recalled once the worst of the virus has past, 2% of Americans say they have lost their jobs altogether as a result of the virus, up from 1% last week.
  7. Of working Americans, 26% are working from home either some days or every day, up from 17% last week. A majority, 56%, no longer go to their place of employment, which means they are not spending money on gasoline or transit tokens.

About: SurveyUSA interviewed 1,000 USA adults nationwide 03/18/20 through 03/19/20. Of the adults, approximately 60% were, before the virus, employed full-time or part-time outside of the home and were asked the layoff and reduced-hours questions. Approximately half of the interviews for this survey were completed before the Big 3 Detroit automakers announced they were shutting down their Michigan assembly lines. For most Americans, events continue to unfold faster than a human mind is able to process the consequences.

Grim Survey of Reduced Hours

Current Unemployment Stats

Data from latest BLS Jobs Report.

If we assume the SurveyUSA numbers are accurate and will not get worse, we can arrive at some U3 and U6 unemployment estimates.

Baseline Unemployment Estimate (U3)

  • Unemployed: 5.787 million + 14 million = 19.787 million unemployed
  • Civilian Labor Force: 164.546 million (unchanged)
  • Unemployment Rate: 19.787 / 164.546 = 12.0%

That puts my off the top of the head 15.0% estimate a few days in the ballpark.

Underemployment Estimate (U6)

  • Employed: 158.759 million.
  • 26% have hours reduced = 41.277 million
  • Part Time for Economic Reasons: 4.318 million + 41.277 million = 45.595 million underemployed
  • 45.595 million underemployed + 19.787 million unemployed = 65.382 million
  • Civilian Labor Force: 164.546 million (unchanged)
  • U6 Unemployment Rate: 65.382 / 164.546 = 39.7%

Whoa Nellie

Wow, that’s not a recession. A depression is the only word.

Note that economists coined a new word “recession” after the 1929 crash and stopped using the word depression assuming it would never happen again.

Prior to 1929 every economic slowdown was called a depression. So if you give credit to the Fed for halting depressions, they haven’t. Ity’s just a matter of semantics.

Depression is a very fitting word if those numbers are even close to what’s going to happen.

Meanwhile, It’s no wonder the Fed Still Struggles to Get a Grip on the Bond Market and there is a struggled “Dash to Cash”.

Very Deflationary Outcome Has Begun: Blame the Fed

The Fed is struggling mightily to alleviate the mess it is largely responsible for.

I previously commented a Very Deflationary Outcome Has Begun: Blame the Fed

The Fed blew three economic bubbles in succession. A deflationary bust has started. They blew bubbles trying to prevent “deflation” defined as falling consumer prices.

BIS Deflation Study

The BIS did a historical study and found routine price deflation was not any problem at all.

“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the BIS study.

For a discussion of the study, please see Historical Perspective on CPI Deflations: How Damaging are They?

Deflation is not really about prices. It’s about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals.

Blowing bubbles in absurd attempts to arrest “price deflation” is crazy. The bigger the bubbles the bigger the resultant “asset bubble deflation”. Falling consumer prices do not have severe negative repercussions. Asset bubble deflations are another matter.

Assessing the Blame

Central banks are not responsible for the coronavirus. But they are responsible for blowing economic bubbles prone to crash.

The equities bubbles before the coronavirus hit were the largest on record.

Dollar Irony

The irony in this madness is the US will be printing the most currency and have the biggest budget deficits as a result. Yet central banks can’t seem to get enough dollars. In that aspect, the dollar ought to be sinking.

But given the US 10-year Treasury yield at 1.126% is among the highest in the world, why not exchange everything one can for dollars earning positive yield.

This is all such circular madness, it’s hard to say when or how it ends.

Shedlock: Supply And Demand Shocks Coming Up

Dual economic shocks are underway simultaneously. There are shortages of some things and lack of demand for others.

Rare Supply-Demand Shocks

Bloomberg has an excellent article on how the Global Economy Is Gripped by Rare Twin Supply-Demand Shock.

The coronavirus is delivering a one-two punch to the world economy, laying it low for months to come and forcing investors to reprice equities and bonds to account for lower company earnings.

From one side, the epidemic is hammering the capacity to produce goods as swathes of Chinese factories remain shuttered and workers housebound. That’s stopping production of goods there and depriving companies elsewhere of the materials they need for their own businesses.

With the virus no longer contained to China, increasingly worried consumers everywhere are reluctant to shop, travel or eat out. As a result, companies are likely not only to send workers home, but to cease hiring or investing — worsening the hit to spending.

How the two shocks will reverberate has sparked some debate among economists, with Harvard University Professor Kenneth Rogoff writing this week that a 1970s style supply-shortage-induced inflation jolt can’t be ruled out. Others contend another round of weakening inflation is pending.

Some economists argue that what’s happened is mostly a supply side shock, others have highlighted the wallop to demand as well, to the degree that the distinction matters.

Slowest Since the Financial Crisis


Inflationary or Deflationary?

In terms of prices, it’s a bit of both, but mostly the latter.

There’s a run on sanitizers, face masks, toilet paper ect. Prices on face masks, if you can find them, have gone up.

But that is dwarfed by the demand shock coming from lack of wages for not working, not traveling, not eating out etc.

The lost wages for 60 million people in China locked in will be a staggering hit alone.

That has also hit Italy. It will soon hit the US.

Next add in the fear from falling markets. People, especially boomers proud of their accounts (and buying cars like mad) will stop doing so.

It will be sudden.

Bad Timing

Stockpiling

Deflation Risk Rising

Another Reason to Avoid Stores – Deflationary

Hugely Deflationary – Weak Demand

This was the subject of a Twitter thread last week. I agreed with Robin Brooks’ take and did so in advance but I cannot find the thread.

I did find this.

Deflation is not really about prices. It’s about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals.

That is what the Fed fears. It takes lower and lower yields to prevent a debt crash. But it is entirely counterproductive and it does not help the consumer, only the asset holders. Fed (global central bank) policy is to blame.

These are the important point all the inflationistas miss.

Dallas Fed President Sees “No Move” In Fed Funds Rate

Dallas Fed President Robert Kaplan made some interesting comments today on interest rates, repos, and the coronavirus.


Dallas Fed President Robert Kaplan was on panel discussion today at the University of Texas McCombs School of Business on the “2020 Business Outlook: Real Estate and the Texas Economy” in Austin, Texas.

Bloomberg Econoday Synopsis

  1. Dallas Fed President Robert Kaplan is neutral right now on monetary policy, saying neither a rate cut nor a rate hike are necessary in the medium term. “My base case is no movement up or down in the Fed funds rate [in 2020], but I’ll be monitoring [things] carefully … this year,” Kaplan said in a panel discussion.
  2. Kaplan believes the outlook for the economy has stabilized and if anything has “firmed”, and though he now has “a more confident outlook” he isn’t ready to commit to a rate hike saying it’s “too soon to judge if a hike is coming, and you’ve got a number of [risky] factors going on.”
  3. Regarding a so-called “coronavirus cut” to reassure markets, Kaplan doesn’t see justification yet adding, however, that he is carefully watching how the virus unfolds and that he will have a better sense of its effects over the next few months. Kaplan also noted that he will be watching the first-half impact of the Boeing 737 production shutdown.
  4. On repo operations, Kaplan described the rise in the Fed’s balance sheet through year-end as “substantial” but he sees slowing growth through June. “I’d be hopeful and expect that as we continue bill purchases during the second quarter, the repo usage will begin to decline and the headline net balance-sheet growth for the Fed will moderate – certainly far more moderate than what’s we’ve seen to this period.”
  5. On inflation, Kaplan’s base case is an upward trend toward 2 percent in the medium term. Kaplan said the Fed is debating whether to lengthen out its look at inflation from a one-year average to perhaps a two-year average. “We look at a variety of factors to make our judgment.”

Regarding no interest rate movement, the market disagrees, and so do I.

On inflation, the entire fed is clueless about what it is.

In regards to a firming economic outlook, Kaplan may wish to ponder Coronavirus Deaths Surge, No Containment In Sight.

The supply chains disruptions will be massive. A “Made in China” Economic Hit is coming right up.

On repo operations, yep, it’s entirely believable the Fed will keep ballooning its balance sheet risking even bigger bubbles.

The yield curve is inverted once again. And that’s flashing another recession signal. On Average, How Long From Inversion to Recession?

Recession Arithmetic: What Would It Take?

David Rosenberg explores Recession Arithmetic in today’s Breakfast With Dave. I add a few charts of my own to discuss.

Rosenberg notes “Private fixed investment has declined two quarters in a row as of 2019 Q3. Since 1980, this has only happened twice outside of a recession.”

Here is the chart he presented.

Fixed Investment, Imports, Government Share of GDP


Since 1980 there have been five recessions in the U.S.and only once, after the dotcom bust in 2001, was there a recession that didn’t feature an outright decline in consumption expenditures in at least one quarter. Importantly, even historical comparisons are complicated. The economy has changed over the last 40 years. As an example, in Q4 of 1979, fixed investment was 20% of GDP, while in 2019 it makes up 17%. Meanwhile, imports have expanded from 10% of GDP to 15% and the consumer’s role has risen from 61% to 68% of the economy. All that to say, as the structure of the economy has evolved so too has its susceptibility to risks. The implication is that historical shocks would have different effects today than they did 40 years ago.

So, what similarities exist across time? Well, every recession features a decline in fixed investment (on average -9.8% from the pre-recession period), and an accompanying decline in imports (coincidentally also about -9.5% from the pre-recession period). Given the persistent trade deficit, it’s not surprising that declines in domestic activity would result in a drawdown in imports (i.e. a boost to GDP).

So, what does all of this mean for where we are in the cycle? Private fixed investment has declined two quarters in a row as of 2019 Q3. Since 1980, this has only happened two other times outside of a recession. The first was in the year following the burst of the dotcom bubble, as systemic overinvestment unwound itself over the course of eight quarters. The second was in 2006, as the housing market imploded… and we all know how that story ended.Small sample bias notwithstanding, we can comfortably say that this is not something that should be dismissed offhand.

For now, the consumer has stood tall. Real consumption expenditures contributed 3.0% to GDP in Q2, and 2.1% in Q3. Whether the consumer can keep the economy from tipping into recession remains to be seen.

Dave’s comments got me thinking about the makeup of fixed investment. It does not take much of a slowdown to cause a recession. But there are two components and they do not always move together.

Fixed Investment Year-Over-Year

One thing easily stands out. Housing marked the bottom in 12 of 13 recessions. 2001 was the exception.

Fixed Investment Year-Over-Year Detail

Fixed Investment Tipping Point

We are very close to a tipping point in which residential and nonresidential fixed investment are near the zero line. The above chart shows recessions can happen with fixed investment still positive year-over-year.

Manufacturing Has Peaked This Economic Cycle

The above charts are ominous given the view Manufacturing Has Peaked This Economic Cycle

Key Manufacturing Details

  • For the first time in history, manufacturing production is unlikely to take out the previous pre-recession peak.
  • Unlike the the 2015-2016 energy-based decline, the current manufacturing decline is broad-based and real.
  • Manufacturing production is 2.25% below the peak set in december 2007 with the latest Manufacturing ISM Down 5th Month to Lowest Since June 2009.

Other than the 2015-2016 energy-based decline, every decline in industrial production has led or accompanied a recession.

Manufacturing Jobs

After a manufacturing surge in November due to the end of the GM strike, Manufacturing Sector Jobs Shrank by 12,000 in December.

PPI Confirmation

Despite surging crude prices, the December Producer Price Inflation was Weak and Below Expectations

Shipping Confirmation

Finally, please note that the Cass Year-Over-Year Freight Index Sinks to a 12-Year Low

Manufacturing employment, shipping, industrial production, and the PPI are all screaming the same word.

In case you missed the word, here it is: Recession.

Gold: How High Will It Go In 2020?


Gold broke out of a six year consolidation. Things look up in 2020.

Gold Monthly Chart 2004-Present

Gold Monthly Chart 2010-Present


Smart Money Shorts

I ignore short-term COT “smart money” warnings although I would prefer there to be fewer bulls.

For discussion of “smart money“, please see Investigating Alleged Smart Money Positions in Gold.

Pater Tenebrarum at the Acting Man blog pinged me with this idea: The only caveat remains the large net speculative long position, but at the moment this strikes me almost as a “bear hook” that is keeping people on the sidelines waiting for the “inevitable” pullback while the train is leaving the station.

With the 6-year consolidation over, there is every reason fundamentally and technically for gold to continue up.

So, be my guest if you want to time gold to COT positions.

Technically Speaking

Technically, there is short-term monthly resistance between here and $1566. Perhaps there’s a pullback now, but with technical and fundamentals otherwise aligned why bet on it?

The next technical resistance area is the $1700 to $1800 area so any move above $1566 is likely to be a fast, strong one, perhaps with a retest of the $1566 area from above that.

Gold Fundamentals

Gold fundamentals are in excellent shape as I noted in How Does Gold React to Interest Rate Policy?

Much of the alleged “fundamentals” are noise, not fundamental price factors.

Not Fundamentally Important

  • Mine supply
  • Central Bank Buying
  • ETF analysis
  • The ever popular jewelry buying in India discussion

Aso, gold does not follow the dollar except superficially and in short-term time frames.

Gold vs the Dollar

Many people believe gold reacts primarily to changes in the US dollar.

Last week, I rebutted than notion in Gold’s vs the US Dollar: Correlation Is Not What Most Think.

True Supply of Gold and Reservation Demand

It is important to note that nearly every ounce of gold ever mined is still in existence. A small fraction of that mined gold has been lost, and other small fractions sit in priceless statues in museums etc., and is thus not available for sale.

Otherwise, someone has to hold every ounce of gold ever mined, 100% of the time. That is the true supply. Jewelry buying and mine output are insignificant in comparison. We are not about to run out of gold as some gold shills suggest.

Mises refers to the desire to hold gold as “Reservation Demand“, that is the desire of people to hold their gold coins, bullion, bars, and jewelry rather than trading it for something else.

If we strike out jewelry buying, central bank buying, the dollar, and mine supply, what then determines “Reservation Demand” to own gold vs some other asset?

Faith in Central Banks

Talk of normalization was nonsense, as were various “Dot Plots” that suggested the Fed was on a major hiking cycle.

For an amusing chart of where the Fed projected interest rates would be in 2020, please see Dot Plot Fantasyland Projections.

The market did not believe the Fed, neither did I, and neither did gold.

Once again we are back to my central gold theme question.

Is everything under control or not?

Hussman Agrees With Powell: It’s Not QE4

A debate over a sudden dramatic surge in Repos is raging. Is it or isn’t it QE4?


Organic Growth

On October 9, Powell discussed “Organic Growth” of its balance sheet.

“Going forward, we’re going to be very closely monitoring market developments and assessing their implications for the appropriate level of reserves,” Powell said at a news conference. “And we’re going to be assessing the question of when it will appropriate to resume the organic growth of our balance sheet.”

Not QE

On October 10, Powell commented on Not QE.

“I want to emphasize that growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis,” said Powell.

In no sense, is this QE,” Powell said in a moderated discussion after delivering his speech.

Quacks Like QE

Peter Schiff chimed in what what I believe to be the consensus view: Powell Can Call It What He Wants, But It Quacks Like QE

As the reliable American folk wisdom states: if something “looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.” In this case, Powell can call the new Fed program anything he wants, but it certainly quacks like QE.

Hussman Sides With Powell

In One Tier and Rubble Down Below John Hussman made the case that Powell is correct.

There’s a broad misunderstanding that the Fed’s recent repo operations somehow represent “quantitative easing in disguise.”

Not quite.

The essential feature of QE was that the Fed purchased interest-bearing Treasury bonds, replaced them with zero-interest base money, and created such a massive pile of zero-interest hot potatoes that investors went absolutely out of their minds to seek alternatives, resulting in a multi-year bender of yield-seeking speculation.

With that understanding, it should be clear why the Federal Reserve’s recent repo facilities do not, in fact, represent a fresh round of QE. The difference is that the repo facilities replace interest-bearing Treasury bills with bank reserves that are eligible for the same rate of interest. This swap does nothing to promote yield-seeking speculation. Now, the psychology around these repos has certainly been good for a burst of investor enthusiasm and a nice little can-kick. But that enthusiasm isn’t driven by actual yield differentials – as QE was – it rests wholly on the misconception that these repos themselves represent fresh QE.

Balance Sheet, Monetary Base, Excess Reserves vs QE

To better understand and explain what Hussman is saying, I created the above chart.

I based my QE boxes on Yadeni Chronology of Fed’s QE and Tightening.

Hussman mentioned “Treasury Bonds” but the Fed bought various durations. I used the 10-year Treasury Rate as a proxy in my chart.

If one wants to nitpick, zero-interest base money is not perfectly accurate as interest on excess reserves was slightly above 0% as shown by the green line.

That tiny correction aside, the Fed did suck up bonds yielding over 3% at time and replaced then with reserves yielding just over 0%.

As Hussman points out, someone has to hold those cash reserves at all times resulting in the “hot potato” environment in which those earning 0% desperately tried to get rid of the cash.

This only “worked”, using the term loosely, because asset prices were rising. If at any time, asset prices fell for a prolonged period, cash at near-0% would not have looked so bad.

Effectively, with its policy, the Fed blew another massive bubble.

Just Don’t Call it QE

Subadra Rajappa, head of US rates strategy at Société Générale, also sides with Hussman.

That’s the distinction between QE and just increasing cash reserves in the system. It’s a communication challenge. It’s a very nuanced difference which could easily get lost,” said Rajappa as quoted by the Financial Times.

Organic Growth

Let’s return to the top.

If you accept what Hussman is saying, this isn’t QE, but is sure the heck cannot be called “organic” growth either.

Organic growth looks like slow upward movement in monetary base, not the explosions in monetary base and asset growth

Can The Fed Fight Wealth Inequality

Minneapolis Fed President Neel Kashkari says the Fed Can Fight Inequality. Then in a move guaranteed to fail, Kashkari Hires an Obama Economic Advisior as His Guide.

Neel Kashkari, the outspoken dove at the Minneapolis Fed, says monetary policy can play the kind of redistributing role once thought to be the preserve of elected officials.

When Kashkari, a year into his job, launched an in-house effort in 2017 to examine widening disparities in the economy, he was expecting to generate research that might inform lawmakers’ decisions, rather than the Fed’s.

“We had historically said: distributional outcomes, monetary policy has no role to play,” he said in an October interview. “That was kind of the standard view at the Fed, and I came in assuming that. I now think that’s wrong.”

Kashkari’s project has taken an unexpected turn over the last two years, morphing into something more ambitious. It has the potential to transform an intensely political debate about inequality into a scientific endeavor that the Fed’s 21st-century technocrats could take up.

This year, he finally found someone to lead it: Abigail Wozniak, a Notre Dame economics professor, became the first head of the Minneapolis Fed’s Opportunity and Inclusive Growth Institute. Wozniak was a member of President Barack Obama’s Council of Economic Advisers.

One of its priorities has been to build a network of experts on income and wealth distribution, the same way the Fed brings in specialists in financial markets or growth.


Fed a Key Driver of Income Inequality

Kashkari is correct in a perverse sort of way given that Fed is a key driver of income inequality:

  1. By bailing out banks and financial institutions when they get in trouble
  2. By keeping interest rates too low too long
  3. By promoting economic bubbles
  4. By promoting inflation

So yes, the Fed could help if it simply stopped doing those things. It would be better still if there was no Fed at all, so the main thing the Fed could do would be to promote a sound currency then disband itself.

There is No Economic Benefit to Inflation

The BIS did a historical study and found routine deflation was not any problem at all.

“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study*.*

It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.

Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?

Challenge to Keynesians

And my Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.

There is no answer because history and logic both show that concerns over consumer price deflation are seriously misplaced.

Irony Abounds

Kashkari came to the right conclusion but instead of disbanding the Fed or changing any of the above four points, he hires and Obama economic clown as his guide.

Note that Kashkari is the biggest dove on the Fed. He would vote for 2, 3, and 4 at every chance.

Yet, inflation benefits those with first access to money (banks, wealthy, asset holders, and corrupt politicians). The poor only participate in bubbles after there is nothing left to gain.

Curiously, my answer is the same as Kashkari’s. Yes, the Fed can help. And the first thing Kashkari could do to help is simple enough, resign.

Addendum

A reader criticized the title “income inequality”. He thought distorted the picture.

He is correct but in the opposite sense as he intended. Wealth inequality (via asset bubbles) is imore of the issue.

I change the title to “wealth inequality”. The title of the linked-to article simply says “inequality”. It’s both income and wealth actually.

Income inequality is via stock options and pay bonuses for blowing bubbles. Wealth comes from cashing out stock options and holding assets accumulated during bubble phases.

$250 Trillion In Global Debt: How Can That Be Paid Back

Global debt just topped $250 trillion. Please ponder paying the interest on that, let alone the principal.

Global Debt $250 Trillion and Rising

Please note that Global debt surged to a record $250 trillion in the first half of 2019, led by the US and China.

What about Global GDP?


Global GDP

Global GDP Numbers from the World Bank.

To get a $1 rise in GDP it takes about a $3 rise in debt.

Things keep pointing back to 1971.

I have written about the importance of 1971 many times, most recently in Nixon Shock, the Reserve Currency Curse, and a Pending Dollar Crisis

Dollar Crisis

A reader asked the other day what I meant by “dollar crisis“.

What I meant to say was “currency crisis” and the above title is now changed.

Since the dollar is still rising (thanks to European, Japanese, and Chinese tactics), It may take even bigger US deficits before something major breaks.

On that score, both political parties in the US are poised to deliver increasing deficits as far as the eye can see.

Meanwhile, negative interest rates are destroying the European banks. For discussion of this important issue, please see In Search of the Effective Lower Bound.

US Picture

Currency Crisis Awaits

$250 Trillion in debt. How will that be paid back?

I expect an uncontrolled collapse of a major currency, debt market, or bank system that cannot be funded. It is hard to say where it starts but I doubt it starts in the US.

Chinese and European banks are in far worse shape than US banks. European banks are getting hammered by negative rates.

Japan still struggles with decades of Abenomics.

The Fed and Central Banks brought this on by refusing to let zombie banks and corporations go under and insisting on cramming more debt into a global financial system choking on debt.

But this all has its roots in 1971. Central banks are the enablers, but Nixon Shock set things off.

A currency crisis awaits but the timing and conditions of the crisis are not knowable. It can start anywhere but I suspect the EU, Japan, or China as opposed to the US.

Ponder even paying the interest on $250 trillion, let alone the principal. What interest rate will it take?

Meanwhile, please reflect on gold.

Gold is Not a Function of the US Dollar Nor is Gold an Inflation Hedge

In the link below I post charts that make a mockery of the claim gold is some sort of inflation hedge or tied to movements in the US dollar.

But if Gold is Not a Function of the US Dollar Nor is Gold an Inflation Hedge, what is it?

Here’s the answer.

If you think central banks have everything under control, gold is not where you want to be.

If you think otherwise, gold is where you want to be.

Do central banks have everything under control?

Addendum

My friend Pater Tenebrarum at the Acting Man Blog just pinged me with this pertinent thought:

“The answer is of course: It won’t be paid back. And since every debt is someone else’s asset, you can imagine what that ultimately means. A great many people are a lot less wealthy than they think. It is all phantom wealth that can disappear in an eyeblink.”

10-Reasons Why Productivity Is Declining

Economists debate whether the decline in productivity is real. It is real. let’s investigate 10 reasons why.

Productivity Measurement

Brookings questions the Productivity Slump. It cites measurement issues.

Much of the recent debate, and related research, on productivity measurement issues has focused on this decline in productivity in the U.S. Predating the financial crisis and the ensuing Great Recession, and now continuing for more than a decade, the productivity slowdown in the U.S. does not appear to be just cyclical in nature, but rather seems to reflect also deeper, structural phenomena. There are different views on what factors explain the slowdown. But one view challenges the very reality of the slowdown, arguing that the slowdown wholly or largely reflects the failure of the productivity statistics to capture recent productivity gains, particularly those from new and higher-quality ICT goods and services

There are two potentially important sources of underestimation of productivity related to ICT goods and services. First, if prices do not fully capture quality improvements in the new ICT products, price deflators are overestimated and real output (adjusted for improvements in quality, including product variety) is underestimated. Second, many ICT services, in particular internet-based services such as Google searches and Facebook, are largely not reflected in GDP measurement even though they generate substantial utility for consumers, the reason being that their use does not involve monetary cost as they are available free of charge to the users.


Facebook a Productivity Killer

Google searches are indeed a time-saver. But what the hell is “produced” by them. And where do the searches and Facebook playing take place?

At work perhaps. After discussing the above Brookings did come to this conclusion: “In large part, the productivity slowdown—and the associated productivity paradox—are real.”

It never explained why. Rather Brookings remains puzzled: “While recent research suggests that mismeasurement, although sizable, does not explain most of the observed decline in productivity, it must be noted that there remain unknowns and gaps in data.”

Real or Imagined

The National Bureau of Economic Research (NBER) asks Is the U.S. Productivity Slowdown a Mirage?

Labor productivity in the United States—defined as total output divided by total hours of labor—has been increasing for over a century and continues to increase today. However, its growth rate has fallen. One explanation for this phenomenon focuses on measurement difficulties, in particular the possibility that current tools for measuring economic growth do not fully capture recent advances in the goods and services associated with digital communications technology.

One reason some analysts believe that labor productivity is understated is that price inflation may be overstated for digital goods and services.

As with Brookings, the NBER concludes there is some mismeasurement but fails to figure out why.

As an aside, the NBER group is the official arbiter of recession dates in the US.

Federal Reserve Bank of San Francisco Study

The FRBSF asked the same question: Does Growing Mismeasurement Explain Disappointing Growth?

The FRBSF came to the same conclusion that mismeasurement is a problem but like the others fails to offer credible rationale.

No Hidden Productivity

The problem with the above analysis is the Fed, Brookings, and the NBER all focused on the measurement issue in apparent belief there is some sort of hidden productivity waiting to be discovered.

Mismeasurement Irony

I propose productivity is likely to be overstated, not understated because of mismeasurement.

How so?

  • How many overtime hours do supervisory workers at Walmart, Target, etc., actually work while getting paid for 40?
  • How many hours do employees work at home and on vacation while not getting paid for them?

Before diving into a 6-point practical explanation as to why productivity losses are real, please ponder a few charts that I put together.

Nonfarm Productivity 1990-Present

In the above and all the following charts, I let Excel plot the trendline. The chart shows declining productivity, but it’s horribly misleading. Let’s investigate other timeframes to understand why.

Nonfarm Productivity 1990-2000

Those are the heydays of the internet revolution. Computers replaced people. Spreadsheets replaced accountants. Robots replaced manufacturing workers at an increased pace.

Nonfarm Productivity 2001-2007

Productivity soared coming out of the dotcom and 911-related recession.

By 2004, economic activity was all about housing and finance.

Nonfarm Productivity 2009-2019

Productivity soared coming out the the Great Recession as is the case coming out of any recession. Since then corporate productivity has been anemic.

Manufacturing Real Output vs Employees

From 1990 until 2008 manufacturing output per employee skyrocketed. Both plunged in the Great Recession and the trends are now positive but output per employee has slowed to a crawl as the number of manufacturing employees has been on the rise.

This indicates decreasing marginal utility of robots, lower worker skill sets, or both.

Obesity Trends

Chart from the National Institute of Health.

Obese workers have more health-related issues and thus need more time off. They also move slower and do not function as well as healthy workers.

Rise of the Zombies

Zombie firms are companies that are unable to cover debt servicing costs from current profits over an extended period. Cheap financing is the primary cause. The result is low productivity.

Please review Rise of the Zombie Corporations: Percentage Keeps Increasing

Collective Bargaining with Militant Unions

On October 31, I asked Chicago ISM Crashes: How Much is GM to Blame?

I do not pretend to have the answer, but GM agreed to a lot of worker protections, guaranteed hours, plant improvements, etc, that will not make any sense if there is an economic slowdown.

Chicago also just settled its teacher strike to which I commented Chicago Headed for Insolvency, Get the Hell Out Now

Chicago Teacher Contract Details

  1. 16% raise over five years (not including raises based on longevity)
  2. Three-year freeze on health insurance premiums
  3. Lower insurance copays
  4. Caps on class sizes
  5. More than 450 new social workers and nurses.
  6. New job protections for substitute teachers who going forward may only be removed after conferring with the union about “performance deficiencies.”
  7. Chicago Public Schools will become a “sanctuary district,” meaning school officials won’t be allowed to cooperate with the Immigration and Customs Enforcement without a court order.
  8. Employees will be allowed 10 unpaid days for personal immigration matters.
  9. Under the new contract, a joint union-school board committee will be convened to “mitigate or eliminate any disproportionate impacts of observations or student growth measures” on teacher evaluations.
  10. Instead of student performance, teachers will probably be rated on more subjective measures, perhaps congeniality in the lunchroom.
  11. The new union contract caps the number of charter-school seats, so no new schools will be able to open without others closing.

Points four through 11 are all productivity killers.

Soaring Fiscal Deficits

Government does not spend money wisely to say the least. It collects money via taxes then wastes in on counterproductive military operations and other nonsense.

When it spends on infrastructure, it overpays because of prevailing wage laws and collective bargaining.

For further discussion of the debt vs deficits, please see Budget Deficit Lies: What’s the Real Deficit?

It’s the Debt Stupid

It takes $103 in public debt for a $100 increase in GDP.

Build up public debt, expect lower productivity.

Interest on the National Debt

According to Treasury Direct, Interest on the National Debt is $574 billion.

There is nothing remotely productive about paying interest to banks.

Corporate Buybacks

Trump’s tax cuts did not spur investment as claimed. Corporations took the cuts and another repatriation holiday for dividend and buybacks.

In addition to using profits to buy back shares, some companies went further into debt to buy back shares.

If you skimp on investment, don’t expect productivity miracles.

Real Productivity Decline, 10 Simple Explanations

  1. The internet boom and the rising productivity associated with it were very real. The rate of change in internet-related improvements has fallen since 2000.
  2. Decreasing marginal utility of robots.
  3. The Fed’s easy money policies sponsored numerous corporate zombies. Those zombies survive only because of ultra-easy financing. Zombie companies are unproductive, by definition. Things are even worse in the EU because of negative rates.
  4. The Fed’s easy money policies also sponsored a “store on every corner”. There are far more retail stores, restaurants, fast food establishments, and outlet malls than needed.
  5. Marginal stores have to be manned by somebody and they are, by increasingly marginal employees as the unemployment rate declines.
  6. Demographics. As skilled workers retire, those workers are replaced by workers with lower skills.
  7. Health issues in general. Obesity and drug-related issues are on the rise as are time off for those reasons.
  8. Militant unions demand and receiving unwarranted pay, time off, and control over workplace conditions.
  9. Corporate buybacks mainly benefit CEOs and executives who cash out their shares and options. It takes careful investment, not reckless expansion, not buybacks to have productivity gains.
  10. It’s the debt, stupid. Fiscal deficits are totally out of control. Interest on the national debt by itself is $574 billion. What are we getting for it?

Looking in the Wrong Place

The San Francisco Fed, Brookings, and the National Bureau of Economic Research all struggle to explain falling productivity.

They can’t come up with the answer because they all have a spotlight on mismeasurement (and in the wrong direction at that, failing to count supervisory overtime and hours worked at home).

But there’s the answer, in ten easy to understand points, supported by data, logical analysis, and graphs.

By the way, this enormous buildup of debt at every level is hugely deflationary. Bubbles do burst eventually.

China’s Growth Much Worse Than Reported, What About The U.S.?

China doubles value of infrastructure project approvals to stave off economic slowdown amid trade war.

The South China Morning Post reports China Doubles Value of Infrastructure Project Approvals to Stave Off Slowdown.

The National Development and Reform Commission (NDRC) has approved 21 projects, worth at least 764.3 billion yuan (US$107.8 billion), according to South China Morning Post calculations based on the state planner’s approval statements released between January and October this year.

The amount is more than double the size of last year’s 374.3 billion yuan (US$52.8 billion) in approvals recorded over the same period, which included 11 projects such as railways, roads and airports.

Local governments have been under increasing pressure from Beijing to support the economy, but they have less budget room due to lower tax revenues after the central government over the past year ordered individual and business tax cuts.

To fill the gap, Beijing has allowing local governments to sell more special purpose bonds, whose proceeds can only be used to fund infrastructure projects. At the beginning of this year, the Ministry of Finance raised the quota for special bonds to 2.15 trillion (US$302 billion) from 1.35 trillion (US$190 billion) last year. And when local governments came close to exhausting their annual quota set this autumn, the central government brought forward a portion of their 2020 quota so they could continue to raise funding for new projects.

Infrastructure Urgency

Michael Pettis, Finance Professor, Peking University, and author of the China Financial Markets website has an interesting take infrastructure projects.

Allocation of Money

To fund the projects China Cuts Banks’ Reserve Ratios, Frees up $126 Billion for Loans.

Analysts had expected China to announce more policy easing measures soon as the world’s second-largest economy comes under growing pressure from escalating U.S. tariffs and sluggish domestic demand.

The People’s Bank of China (PBOC) said it would cut the reserve requirement ratio (RRR) by 50 basis points (bps) for all banks, with an additional 100 bps cut for qualified city commercial banks. The RRR for large banks will be lowered to 13.0%. The PBOC has now slashed the ratio seven times since early 2018. The size of the latest move was at the upper end of market expectations, and the amount of funds released will be the largest so far in the current easing cycle.

The broad-based cut, which will release 800 billion yuan in liquidity, is effective Sept. 16. The additional targeted cut will release 100 billion yuan, in two phases effective Oct. 15 and Nov. 15.

Real Growth

Trade Agreement

Chinese Local Government Funds Run Out of Projects to Back

On October 16, the Fiancial Times reported Chinese Local Government Funds Run Out of Projects to Back.

There are not many economically viable projects for us to take on,” an official at Sichuan Development told the FT. “We have plenty of bridges and roads already.

GDP Formula

GDP = C + I + G + (X – M)

GDP = private consumption + gross investment + government investment + government spending + (exports – imports).

Whether or not the projects are viable, government spending adds to nominal GDP.

If the government paid people to spit at the moon it would add to GDP.

Arguably, that’s a far better use than dropping bombs and making enemies in the process.

Not Writing Down Losses

​China isn’t writing down losses, but neither is the US, EU, or any other country.

With that in mind How Badly Overstated is Chinese and US GDP?

Concern over GDP with no concern over losses and malinvestment is concern over nonsense.

GDP Estimates Collapse After Dismal ISM Report

GDPNow and other GDP estimates took a dive today on weaker than expected manufacturing reports.

The GDPNow forecast for third-quarter GDP fell to 1.8% today on weak economic reports.

Gold and Treasuries Rally

GDP Estimates

Oxford Estimate

Real Final Sales

The important number is “Real Final Sales“.

That’s the bottom line estimate for the economy. The rest is inventory adjustment which nets to zero over time.

The GDPNow estimate of Real Final Sales fell to 1.6% today, a new low for the series. It’s near, and possibly below the economic stall point.

Also, please see my report today: Manufacturing ISM Worst Since 2009 on Severe Contraction of Export Orders.

Currency War: Rising Dollar & Trump’s Retaliation

The ECB cut rates further into negative territory and the BoJ is expected to do the same. How long before Trump reacts?

Japan Poised to Escalate Currency War

A Bank of Japan board member says risks risks are growing and the BOJ Ready to Ease Again if Price Momentum Lost.

“My recent concern is that, amid significant downside risks concerning overseas economies, negative effects would be exerted on prices,” Takako Masai said in a speech to business leaders in Tsu, Mie Prefecture, central Japan, posted on the BOJ’s website.

Sales Tax Increase

Japan is set to hike its sales tax from 8% to 10% on Oct 1 in response to fiscal policy completely run amok.

That sales tax hike is guaranteed to be detrimental to Japan’s goal of spurring inflation.

Policies Proven to Not Work

The message from the BOJ is that it is ready, willing, and able to escalate polices proven not to work.

The current interest rate is -0.1%.

Not only will the Japanese pay more for goods thanks to the tax hike, they are also poised to lose more money on deposits via increasingly negative rates.

How that is supposed to help policy goals remains a mystery.

Rising Dollar

The result of all this monetary madness by the ECB and BoJ is a rising US dollar.

Albert Edwards at Society General explains via email.

The consequence of continued aggressive easing by the BoJ and ECB is that the US dollar is seeing continued unwelcome strength. Unwelcome in the sense that the US is in effect, importing eurozone and Japanese deflation. I simply don’t think this is sustainable much longer. Patience is wearing very thin at the White House at the Fed’s lack of easing vigor and the impact this is having on the dollar. I expect President Trump to take matters into his own hands and respond with real aggression imposing tariffs on EU auto exports to the US and authorizing unlimited foreign exchange intervention to drive the dollar lower.

Japan has lagged the ECB recently in the easing game but seems set to catch up. In that context US yields have resumed their downward slide despite the recent stronger than expected economic data. Consequently the dollar remains annoyingly strong against the euro for the US administration – and even stronger if one looks at a broader [trade-weighted] basket.

Trade-Weighted Dollar

Monetary Madness Trademark

Make no mistake, further BoJ QE is taking us to a whole new level of monetary debauchery pioneered in Japan and now known under the Monetary Madness Trademark (aka MMT). The ECB and especially the Fed are real amateurs at this game. No wonder the dollar is around 50% too strong versus the yen

Japan on Different Planet

The Bank of Japan’s balance sheet is over 100% of GDP. By comparison, the Fed is in the gutter at about 18% of GDP.

In Search of the Effective Lower Bound

Yesterday, I penned In Search of the Effective Lower Bound

I define ELB as the “point at which monetary policy becomes counterproductive to the goal, whether or not the goal makes any sense.

In this case, neither the policy nor the goal makes any sense.

After decades of monetary madness, all Japan has to show for it is stagnation.

I proposed yesterday Japan was already at the ELB. If so, rate cuts cannot possibly help.

However, it will be difficult to assess the blame because the monetary policy action will be in addition to the counterproductive fiscal policy action, raising taxes.

Producing Inflation is Easy

It’s a mystery how Japan has struggled with this goal for decades.

Over three years ago I came up with Mish’s Sure Fire Proposal to End Japanese Deflation: Negative Sales Taxes, 1% Monthly Tax.

Mish’s Four Pronged Proposal to End Japanese Deflation

  1. Negative Sales Taxes
  2. One Percent Tax, Per Month, on Government Bonds
  3. National Tax Free Lottery
  4. Hav-a-Kid

Instead of increasing sales taxes Japan should cut them to negative. That alone would do the trick if the rate was deeply negative enough.

For added insurance, and to prevent bond yields rising out of control, Japan first needs to fully corner the bond market. It can do that by taxing government bonds at 1% a month. I guarantee you there would be a mass exodus pronto and the government could buy them all at a price it sets. At that point it could retire all the bonds all on the basis “we owe the money to ourselves”.

A national tax free lottery works this way. For every purchase one makes on a credit card, that person gets a free lottery ticket for a weekly drawing worth $10,000,000 tax free. Perhaps we need to set a minimum purchase of $100 or so. Combined with a negative sales tax of say 20%, spending is sure to rise.

Hav-a-Kid addresses the demographic problem.

  • One new child: 50% reduction in income taxes for a period of ten years.
  • Two new children: 100% reduction in income taxes for a period of twenty years.
  • Three new children: Subsidized housing, free healthcare, free schooling, and no income taxes for thirty years.

Easy Peasy

It is maddening that Japan struggles to produce inflation.

Current methods don’t work because of demographics and the ELB.

My plan addresses both issues.

I offered this plan to Japan for free, but I will help guide this program personally for the token amount of $10 million dollars.

Since 2000 Wage Growth Has Barely Grown, If You Even Got That Much

Women are slowly catching up to men in median wages but growth has been pathetic across the board.

BLS data on real wages shows women are slowly catching up to men.

That’s the good news.

The bad news is real wages for women have only risen at slightly over 1/2 of 1 percent per year for 19.5 years.

Men performed even worse. Real wages for men have risen at a pathetic rate of about 1/4 of 1 percent per year in the same period.

The featured images is from a set of Interactive BLS Graphs on Fred.

The anecdotes and calculations are mine.

I used an Annual Rate of Return Calculator to determine the percentages.

Major Assumption

The numbers assume you believe the BLS’ questionable rates of inflation.

I don’t because the BLS excludes housing prices and ignores asset bubbles. The BLS also dramatically understates health care costs.

Questioning the BLS Medical Care Index

I discuss health care and incorrect BLS methodology in Another Surge in CPI Medical Care Costs.

One person commented “I bought my own insurance and it went up about 180% in the first three years of Obamacare.”

Unfortunately, that’s typical. Anyone buying their own insurance will not believe the purported 4.3% rise in the past year.

I discuss other problems with the BLS’ medical calculations.

Annualized Home Price Increases

Housing Bubble Reblown

Last Chance for a Good Price

The Last Chance for a Good Price Was 7 Years Ago.

Home prices are not in the CPI.

Those who want to buy a home quickly discover wage growth has not kept up with home price growth.

Since 2000, assuming you believe the CPI, wages are going up 0.27% per year for men and 0.56% per year for men. Add them together to get a household and the combined increase is well under a full percent.

Home prices are dramatically outstripping median wage increases.

For those looking to buy a home and for those who do buy their own medical insurance, real wage growth is negative.

American Dream

In case you missed it, 68% of Millennial Homeowners Regret Buying a Home

The top regret “too costly to maintain”.

So congratulations American Dreamers on your 0.34% annualized wage growth since January, 2000, assuming you believe you actually got that.

QE Debate: Powell’s Comment On “Resuming Balance Sheet Growth”

Some interpreted Powell’s statement to mean more QE. There’s a strong clue Powell meant something else. OK, but ….

What did Powell Mean?

I confess, I thought Powell was talking about QE, but I did not see the exact quote. Powell said “organic growth”.

I believe Coppola has the correct intent.

Intention vs Reality

However, Coppola’s point is mostly moot.

What the Fed thinks it will do and intends to do, typically miss the mark badly on what it actually does.

The Fed “intended” to dramatically shrink its balance sheet. Look what happened.

Look at a Dot Plot of interest rate expectations from 2017.

Dot Plot December 13, 2017

Fade This Consensus

That was my precise comment at the time.

Some FOMC participants actually believed the Fed would hike to over 4.0% by 2020 (next year!). The majority believed rates would be over 3.0%.

Fed’s Intended Meaning

So what?!

The Fed may do a brief period of “organic” expansion (which by the way can mean anything the Fed wants), but I propose more QE is coming whether the Fed “intends” to do so or not.

By the way, we really do not know what the Fed “intended”. Perhaps the the Fed wanted to open the door for more QE later but without alarming the market of that.

Job Report: Badly Misses Estimates As Economy Slows

The jobs report dramatically missed expectations today, especially with private jobs.

Initial Reaction – Huge Misses

  • The Econoday consensus was for a payroll expansion of 163,000 jobs, 150,000 of them private. The ADP forecast was 195,000 jobs.
  • ADP missed consensus by 65,000 jobs.
  • Econoday missed consensus by 33,000 jobs.
  • Econonday missed the private consensus by 54,000 jobs.
  • The Econoday lowest estimate missed the private consensus by 40,000 jobs.

A 34,000 surge in government jobs was primarily due to temporary census hiring of 25,000. So this report is far weaker than the headline number indicates.

By the way, revisions were negative for the third time.

The one positive in the report was a household survey surge in employment coupled with a household surge in the labor force thereby keeping the unemployment rate unchanged.

Even then, things are weaker than they look. The surge in involuntary part-time work was +397,000 and voluntary part-time work rose by +260,000. Don’t add those numbers together as it does not work that way.

U-6 Unemployment jumped 0.2% to 7.2%.

Job Revisions

The change in total nonfarm payroll employment for June was revised down by 15,000 from +193,000 to +178,000, and the change for July was revised down by 5,000 from +164,000 to +159,000. With these revisions, employment gains in June and July combined were 20,000 less than previously reported.

Also recall my August 21 report: BLS Revises Payrolls 501,000 Lower Through March.

BLS Jobs Statistics at a Glance

  • Nonfarm Payroll: +130,000 – Establishment Survey
  • Private Nonfarm Payroll: +96,000 – Establishment Survey
  • Employment: +590,000 – Household Survey
  • Unemployment: -19,000 – Household Survey
  • Involuntary Part-Time Work: +397,000 – Household Survey
  • Voluntary Part-Time Work:+260,000 – Household Survey
  • Baseline Unemployment Rate: 3.7% – Household Survey
  • U-6 unemployment: up 0.2 to 7.2% – Household Survey
  • Civilian Non-institutional Population: +207,000
  • Civilian Labor Force: +370,000 – Household Survey
  • Not in Labor Force: -364,000 – Household Survey
  • Participation Rate: +0.2 to 63.2% – Household Survey

Employment Report Statement

Total nonfarm payroll employment rose by 130,000 in August, and the unemployment rate was unchanged at 3.7 percent, the U.S. Bureau of Labor Statistics reported today. Employment in federal government rose, largely reflecting the hiring of temporary workers for the 2020 Census. Notable job gains also occurred in health care and financial activities, while mining lost jobs.

Unemployment Rate – Seasonally Adjusted

The above Unemployment Rate Chart is from the BLS. Click on the link for an interactive chart.

Nonfarm Employment Change from Previous Month

Hours and Wages

Average weekly hours of all private employees rose 0.1 hours to 34.4 hours. Average weekly hours of all private service-providing employees rose 0.1 hours to 34.3 hours. Average weekly hours of manufacturers rose 0.2 hours to 40.6 hours.

Average Hourly Earnings of All Nonfarm Workers rose $0.11 to $28.11. That a 0.39% gain.

Average hourly earnings of Production and Supervisory Workers rose $0.11 to $23.59. That’s a 0.47% gain.

Year-Over-Year Wage Growth

  • All Private Nonfarm from $27.23 to $28.11, a gain of 3.2%
  • All production and supervisory from $22.80 to $23.46, a gain of 3.5%.

For a discussion of income distribution, please see What’s “Really” Behind Gross Inequalities In Income Distribution?

Birth Death Model

Starting January 2014, I dropped the Birth/Death Model charts from this report. For those who follow the numbers, I retain this caution: Do not subtract the reported Birth-Death number from the reported headline number. That approach is statistically invalid. Should anything interesting arise in the Birth/Death numbers, I will comment further.

Table 15 BLS Alternative Measures of Unemployment

Table A-15 is where one can find a better approximation of what the unemployment rate really is.

Notice I said “better” approximation not to be confused with “good” approximation.

The official unemployment rate is 3.7%. However, if you start counting all the people who want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

U-6 is much higher at 7.2%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years.

Some of those dropping out of the labor force retired because they wanted to retire. The rest is disability fraud, forced retirement, discouraged workers, and kids moving back home because they cannot find a job.

Strength is Relative

It’s important to put the jobs numbers into proper perspective.

In the household survey, if you work as little as 1 hour a week, even selling trinkets on eBay, you are considered employed.

In the household survey, if you work three part-time jobs, 12 hours each, the BLS considers you a full-time employee.

In the payroll survey, three part-time jobs count as three jobs. The BLS attempts to factor this in, but they do not weed out duplicate Social Security numbers. The potential for double-counting jobs in the payroll survey is large.

Household Survey vs. Payroll Survey

The payroll survey (sometimes called the establishment survey) is the headline jobs number, generally released the first Friday of every month. It is based on employer reporting.

The household survey is a phone survey conducted by the BLS. It measures unemployment and many other factors.

If you work one hour, you are employed. If you don’t have a job and fail to look for one, you are not considered unemployed, rather, you drop out of the labor force.

Looking for jobs on Monster does not count as “looking for a job”. You need an actual interview or send out a resume.

These distortions artificially lower the unemployment rate, artificially boost full-time employment, and artificially increase the payroll jobs report every month.

Final Thoughts

This was a huge miss vs expectations, especially on the private side. The addition of temporary census workers is not a positive.

Job volatility remains high. Revisions continue to be negative. Excluding January, job growth is clearly slowing.

This report is way weaker than the headline numbers.

Making Sense Of 100-Year Bonds At 0% & 30-Year Bonds At Negative Yields

Over 50% of European gov’t bonds have a negative yield. Globally there’s $15 trillion in negative-yield debt.

$15 Trillion in Negative-Yield Debt

Excluding the US 44% of Bonds Have a Negative Yield

European Negative Yield Government Bonds

As of mid-June, over 50% of European government bonds have a negative yield. The total is higher now.

Negative-Yield 30-Year Bond

Yesterday, Germany issued a 30-year bond yielding less than 0%. Held to maturity you will not even get your money back.

Logically this is impossible. But it’s happening. And Trump likes it.

What Happens on Hundred-Year Bonds?

Austria has a 100-year bond that was trading at 116% of par on December 31 and 198% of par yesterday.

Note that if held to maturity, the bond would get about half your money back.

I asked Jim Bianco at Bianco Research a pair of questions.

  1. What happens if the yield very quickly rises to 0.25%, 0.5%, 1.0%, 2.0%?
  2. Same thing in reverse. What happens if the yield very quickly falls to -0.25%, -0.5%, -1.0%, -2.0%?

Jim responded that movement is not linear because of duration and convexity.

Convexity measures the degree of the non-linear relationship between the price and the yield of the bond.

Austria 100-Year Bond Example

​Bianco Comments

  • If the Modified Duration (green line) goes up and the Yield-to-Maturity (blue line) drops, the bond has “positive convexity”. Callable bonds like mortgages, because we can “pre-pay them when we re-finance, have “negative convexity”.
  • The 100-year Austria bond is the longest ever recorded in history. The Modified Duration is now effectively 56.64.
  • The orange line represents the price. On December 31, the price was 116.5. It’s now 198.1. That’s a year-to-date gain of 70%. Add is 8/12s of a 2.1% coupon and its total return is over 71%. This might be the best total return for an investment-grade bond in human history.
  • You would lose over half your money if the Austrian 100-year yield “skyrockets” to the nose-bleed interest rate of 1.7%. What would cause that to happen? An economic recovery.
  • So, yes the bond market is at risk of blowing up should Europe’s economy recover. That said, Germany all but admitted they are in recession which is why they are considering pump priming fiscal stimulus.

Bond Market Blow-Up

Clearly, no one intends to hold a 30-year negative-yield bond to maturity. Losses will be both steep and sudden should yields rise.

At some point the bond market is guaranteed to blow up. Timing the point is difficult.

Traders have been betting against Japan for two decades, incorrectly.

Negative Yield Madness

The 10-year Swiss bond yield of negative 1% implies it is better to have 90 cents ten years from now than a dollar today.

That is logically impossible. It would never happen in the real world without central bank intervention.

Yield vs Storage Costs

It’s important to distinguish between yield and storage costs.

One would expect to pay a small nominal storage costs for gold.

But if one lent gold, as opposed to placing it in a bank for safekeeping, the yield would never be negative or zero.

Lending Gold

Historically, banks collapsed when they lent more gold than they had rights to do so.

Lending gold that is supposedly available on demand is fraud. Gold cannot be available on demand if it is lent. The same applies to checking accounts whose money is also supposedly available on demand.

The bottom line is fractional reserve lending is a fraud. This is why I support a 100% gold-backed dollar.

Making Sense of the Madness

  • Those buying 100-year bonds are betting there will not be an economic recovery.
  • Those buying negative-yield bonds are speculating that yields will go even further negative.

Even though we can rationalize purchasing negative-yield bonds, the fact remains that negative yields are logically impossible and can only occur with central bank intervention and outright monetary fraud.

Gold vs Faith in Central Banks

What Gold is and Isn’t

In addition to being money, gold is primarily a hedge against central bank sponsored monetary madness.

If you believe central banks have everything under control, don’t buy gold.

However, negative yield bonds are proof of monetary madness.

Everything Under Control?

  1. “Zero Has No Meaning” Says Greenspan: I Disagree, So Does Gold
  2. 30-Year Long Bond Yield Crashes Through 2% Mark to Record Low 1.98%
  3. More Currency Wars: Swiss Central Bank Poised to Cut Interest Rate to -1.0%
  4. Inverted Negative Yields in Germany and Negative Rate Mortgages.
  5. Fed Trapped in a Rate-Cutting Box: It’s the Debt Stupid

If you believe monetary madness, negative interest rates, and negative rate mortgages prove central banks do not have things under control, then you know what to do.

Buy gold, but please understand what gold is and isn’t.

Gold is Not an Inflation Hedge

In contrast to popular belief, Gold is Not a Function of the US Dollar Nor is Gold an Inflation Hedge in any meaningful sense with one exception (sustained high inflation including hyperinflation).

Gold has historically been money for thousands of years. Governments and central banks have not changed that fact.

No Recession In Sight? But Cutting Rates To Avoid One

President Trump and his economic advisor Larry Kudlow have important announcements. I can help with translations.

Please consider Trump ‘Not Ready’ for China Trade Deal, Dismisses Recession Fears.

Consumers Doing Well

  • Trump: “We’re doing tremendously well, our consumers are rich, I gave a tremendous tax cut, and they’re loaded up with money.”
  • Trump Translated: The “tremendous tax” cut primarily benefited the wealthy. Consumers are tapped out. That’s why housing and autos are on the ropes.

Deal With China

  • Trump: “I’m not ready to make a deal yet [with China].”
  • Trump Translated: China is damn sick and tired of my tactics. They prefer to wait hoping for a Democrat president.
  • Trump: “I would like to see Hong Kong worked out in a very humanitarian fashion,” Trump said. “I think it would be very good for the trade deal.”
  • Trump Translated: I have completely abandoned the idea there will soon be a trade deal unless I further capitulate to the demands of China. I was forced to give Huawei Another 90-Day Reprieve and sadly, I Chickened Out by Delaying my Trade War Tariffs to Save the Holiday Season.

Recession

However, if there is “no recession” in sight, then by is Barron’s writer Matthew Klein proposing to stop the recession by cutting interest rates like it’s 1995.

Kleion says How to Avoid a Recession? Cut Interest Rates Like It’s 1995.

One of the most reliable harbingers of U.S. recession—short-term interest rates on U.S. Treasury debt higher than longer-term yields—has been flashing warning signs for months. That doesn’t mean the economy is doomed to a downturn.

So-called yield-curve inversions have preceded every U.S. downturn since the 1950s, with only one false positive in 1966. This past week, the yield on two-year Treasuries briefly surpassed the yield on 10-year notes for this first time since 2007. The most straightforward explanation is that traders…

Absurd Notion

The rest of the article is behind a paywall, but I can tell you with 100% certainty Klein’s notion is absurd.

Inverted yield curves do not cause recessions. They are symptoms of a buildup of excess debt, or other fundamental problems.

Those problems will not not go away if the Fed “cuts rates like 1995” or even like 2008.

If a zero percent interest rate stopped recessions, Japan would not have had a half-dozen recessions in the past decades that it did have, many without inversions.

Not even negative rates can stop recessions.

The Eurozone, especially Germany, has negative rates. Yet, it’s highly likely the Eurozone is in recession now and even more likely Germany is (with the rest of the Eurozone to follow).

Monetary Madness

As a prime example of global monetary madness, witness Inverted Negative Yields in Germany and Negative Rate Mortgages.

Even if the Fed made a 100 basis point cut (four quarter point cuts at once), what the heck would that do?

Stop recession for how long? Zero months? Six months? And at what expense?

What Then?

Yes, what then? Negative mortgages? A 10-year yield of -1.0% like Switzerland.

And if that doesn’t work?

Hello @M_C_Klein What then?

Central banks are the source of problems, not the cure. If central banks could stop recessions, there never would be any!

Fed Trapped In a Rate-Cutting Box: It’s The Debt Stupid

The Fed desperately needs to keep credit expanding or the economy will collapse. However, it’s an unsustainable scheme.

Key Debt Points

  • In 1984 it took $1 of additional debt to create an additional $1 of Real GDP.
  • As of the fourth quarter of 2018, it took $3.8 dollars to create $1 of real GDP.
  • As of 2013, it took more than a dollar of public debt to create a dollar of GDP.
  • If interest rates were 3.0%, interest on total credit market debt would be a whopping $2.16 trillion per year. That approximately 11.5% of real GDP year in and year out.

Total Credit Market Debt Detail

Tiny Credit Drawdown, Massive Economic Damage

Note the massive amount of economic damage caused by a tiny drawdown in credit during the Great Recession

Q. Why?

A. Leverage.

The Fed halted the Great Recession implosion by suspending mark-to-market accounting.

What will it do for an encore?

Choking on Debt

The Fed desperately needs to force more debt into the system, but the system is choking on debt.

That’s the message from the bond market.

One look at the above charts should be enough to convince nearly everyone the current model is not close to sustainable.

Here’s another.

Housing Bubble Reblown

How the heck are millennials (or anyone who doesn’t have a home) supposed to afford a home?

Despite the fact that Existing Homes Prices Up 88th Month, the NAR Can’t Figure Out Why Sales Are Down.

Negative Yield Ponzi Scheme

Note that Negative Yield Debt Hits Record $15 Trillion, Up $1 Trillion in 2 Business Days.

So far, all of this negative-yielding debt is outside the US.

Why?

  1. The ECB made a huge fundamental mistake. Whereas the the Fed bailed out US banks by paying interest on excess reserves, the ECB contributed to the demise of European banks, especially Italian banks and Deutsche by charging them interest on excess reserves that it forced into the system.
  2. The demographics in Europe and Japan are worse than the US.

Tipping Point

We are very close to the tipping point where the Fed can no longer force any more debt into the system. That’s the clear message from the bond market.

Currency Wars

Meanwhile, major currency wars are in play.

Under orders from Trump, US Treasury Declares China a Currency Manipulator.

Hello Treasury Bears

For decades, bond bears have been predicting massive inflation.

Once again, I caution Hello Treasury Bears: 10-Year Bond Yield Approaching Record Low Yield.

Fed Misunderstands Inflation

The Fed remains on a foolish mission to achieve 2% inflation.

In reality, the Fed produced massive inflation but does not know how to measure it.

Inflation is readily see in junk bond prices, home prices, equity prices, and credit expansion.

Note that small credit contraction in 2008-2010. Recall the ‘Great Recession” damage that accompanied it.

I do not expect a repeat on that scale, all at once. But I do expect a prolonged period of credit stagnation as retiring boomers start to worry about their retirement. All it will take to set the wheels in motion is a prolonged downturn in the equity markets.

Economic Challenge to Keynesians

Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.

My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.

BIS Deflation Study

The BIS did a historical study and found routine deflation was not any problem at all.

“**Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the BIS study.

It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.

Deflationary Outcome

The existing bubbles ensure another deflationary outcome.

So prepare for another round of debt deflation, possibly accompanied by a lower CPI especially if one accurately includes home prices instead of rents in the CPI calculation.

Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?

Message from Gold

Please pay attention to gold. As Gold Blasts Through $1500, the Message is Central Banks Out of Control, Not Inflation

Inflation is, or will soon be, in the rear-view mirror. Another deflationary credit bubble bust is at hand.

Recession Is Coming: Fed Cuts Rates & Bond Yields Crash

The long end of the yield curve continued its post-FOMC decline on poor manufacturing reports and new Trump tariffs.

Bond yields were already in steep decline today on ISM news. Trump goosed the market with additional tariffs on China.

Fed Gets Unwanted Reaction

The Fed cut interest rates this week in hopes of steepening the yield curve.

Counting the FF Rate, the yield curve flattened quite a bit but inversions between 3-month and long end widened.

In its policy decision, the Fed was hoping to steepen the long end of the yield curve. The opposite happened as rates at the long end fell.

Interest Rate Spreads After the FOMC Announcement

Arrows indicate inversions.

In the following chart, I pay particular attention to the inversion between the 10-year note and the 3-month note.

Interest Rate Spreads Prior to FOMC Announcement

The spread between the 10-year note and the 3-month bill was a mere -1.3 basis points ahead of the announcement. It is now -7.1 basis points.

So much for the notion a rate cut would steepen the curve.

Yield Curve Following Decision

Following the decision the Rate Cut Odds Shrank Dramatically.

I don’t buy it. This is a recessionary reaction.

Expect more cuts than are priced in.

The bond market does not believe Powell’s “Mid-Cycle” Adjustment speech following the announcement and neither do I.

Inversions continued to strengthen today on Manufacturing reports: ISM and Markit PMI On Verge of Contraction.

Even before Trump’s tariff announcement, I commented that “I Expect Contraction Next Month.”

A global manufacturing recession has already started. Trump’s unwise move increases the odds of an economic recession soon, assuming it has not already started.

Half-Point Rate Cut Odds Explode To 71%! Does It Really Matter?

The odds of a 50 basis point rate cut on July 31 topped the 70% mark in the wake of a dive in leading indicators.

CME Fedwatch notes a huge jump in the odds of a 50 basis point cut by the Fed on July 31.

This is an edited post. In the hour or so that it took me to write this, the odds jumped from 49% to 71%.

Increasing Odds of 50 BPs Cut

  • Today (one hour ago) 49.3%
  • Now (2:48 PM central) 71.0%
  • Yesterday: 34.3%
  • 1 Week ago: 19.9%
  • 1 Month Ago: 17.9%

Why?

  1. The odds jumped yesterday from the prior week on news Housing Slowly Rolling Over: June Permits Down 6.1%, Starts Down 0.9%
  2. The odds jumped today from yesterday on news Leading Economic Indicators (LEI) Unexpectedly Dive Into Negative Territory

What’s Really Happening?

  • Traders are front-running the Fed.
  • History shows the Fed is highly likely to cooperate with what traders want.

That’s it in a nutshell.

Four Easy Predictions

  1. Powell gets his name in lights
  2. Trump will praise the rate cuts while saying they may be too late. And if so, the Fed is to blame. Trump will have his scapegoat: Fed chair Jerome Powell.
  3. The market will not like a 25 basis point cut.
  4. The market will not like a 50 basis point cut either, although the initial reaction may be positive. Look for a gap and crap, if not immediately, within a couple days, but I expect the same day.

What About the Insurance Theory?

A number of Fed governors and economic writers want a big cuts for insurance purposes.

These people are economic illiterates.

Too Late for Insurance

Rate cuts now as economic insurance is like trying to buy insurance on your car after you wrecked it.

The bubbles have been blown.

Rate cuts cannot unblow economic bubbles any more than they can unblow a horn.

Rate Cuts Don’t Matter

The bottom line at this point is an economic recession is baked in the cake. The global economy is slowing and the US will not be immune.

It’s possible the US is in recession already, but consumer spending does not point that way, unless it’s revised.

It’s all moot.

Fed Deflation Boogeyman

The Fed has been fighting the deflation boogeyman.

Yet, the BIS did a historical study and found routine deflation was not any problem at all.

Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?

Deflationary Bust Baked in the Cake

In the Fed’s foolish attempt to stave off consumer price deflation, the Fed sowed the seeds of a very destructive set of asset bubbles in junk bonds, housing, and the stock market.

The widely discussed “everything bubble” is, in reality, a corporate junk bond bubble on steroids sponsored by the Fed.

For discussion, please see Junk Bond Bubble in Pictures: Deflation Up Next

A 50 or even 100 basis point cut won’t matter now.

It’s too late to matter. The debt deflation horn has already sounded.

Recession Probability Charts: Current Odds Now About 33%

The New York Fed has the odds of a recession within the next year at 33%. Some of the other models are humorous.

New York Fed Treasury Spread Model

The New York Fed Recession Model is based on yield curve inversions between the 10-year Treasury Note and the 3-Month Treasury Bill.

I added the highlights in yellow and the dashed red line.

The model uses monthly averages.

Smoothed Recession Odds

I do not know the makeup of the smoothed recession chart but it is clearly useless. The implied odds hover around zero, and are frequently under 20% even in the middle of recession.

GDP Recession Model

The GDP-based recession model is hugely lagging. The current estimate is 2.4%. This model will not spike until there is at least one quarter of negative or near-zero GDP.

Estimated Recession Probabilities

Predicting Recessions

The above chart is from the Yield Curve as a Predictor of U.S. Recessions by Arturo Estrella and Frederic S. Mishkin. It is from 1996 so the table may have been revised.

Practical Issues

One might also wish to consider the 2006 discussion the Yield Curve as a Leading Indicator: Some Practical Issues.

With regard to the short-term rate, earlier research suggests that the three-month Treasury rate, when used in conjunction with the ten-year Treasury rate, provides a reasonable combination of accuracy and robustness in predicting U.S. recessions over long periods.

Maximum accuracy and predictive power are obtained with the secondary market three-month rate expressed on a bond-equivalent basis, rather than the constant maturity rate, which is interpolated from the daily yield curve for Treasury securities.

Spreads based on any of the rates mentioned are highly correlated with one another and may be used to predict recessions. Note, however, that the spreads may turn negative—that is, the yield curve may invert—at different points and with different frequencies.

Our preferred combination of Treasury rates proves very successful in predicting the recessions of recent decades. The monthly average spread between the ten-year constant maturity rate and the three-month secondary market rate on a bond equivalent basis has turned negative before each recession in the period from January 1968 to July 2006 (Chart1). If we convert this spread into a probability of recession twelve months ahead using the probit model described earlier (estimated with Treasury data from January 1959 to December 2005), we can match the probabilities with the recessions (Chart 2). The chart shows that the estimated probability of recession exceeded 30 percent in the case of each recession and ranged as high as 98 percent in the 1981-82 recession.

Other Spreads

The article mentions “The ten-year minus two-year spread tends to turn negative earlier and more frequently than the ten-year minus three-month spread, which is usually larger.

That is certainly not the case today.

The 2-year yield is 1.882 whereas the 10-year yield is 2.041.

Chalk this up to QE, Fed manipulation, taper tantrums, and hedge funds front-running expected rate cut moves.

The Manufacturing Sector is Rolling Over But Inventories Keep Piling Up

Factory new orders are down year-over-year and barely afloat excluding transportation. Inventories are a concern.

The monthly report on Manufacturers’ Shipments, Inventories and Orders, shows strong signs of a manufacturing sector that has peaked.

New Orders

New orders for manufactured durable goods in May, down three of the last four months, decreased $3.1 billion or 1.3 percent to $243.5 billion, unchanged from the previously published decrease. This followed a 2.8 percent April decrease. Transportation equipment, also down three of the last four months, drove the decrease, $3.8 billion or 4.6 percent to $80.0 billion. New orders for manufactured nondurable goods decreased $0.5 billion or 0.2 percent to $250.1 billion.

Shipments

Shipments of manufactured durable goods in May, up following two consecutive monthly decreases, increased $0.9 billion or 0.3 percent to $254.2 billion, down from the previously published 0.4 percent increase. This followed a 1.6 percent April decrease. Machinery, up four of the last five months, led the increase, $0.3 billion or 1.0 percent to $33.4 billion. Shipments of manufactured nondurable goods, down following three consecutive monthly increases, decreased $0.5 billion or 0.2 percent to $250.1 billion. This followed a 0.4 percent April increase. Petroleum and coal products, also down following three consecutive monthly increases, drove the decrease, $1.3 billion or 2.4 percent to $54.7 billion.

Unfilled Orders

Unfilled orders for manufactured durable goods in May, down three of the last four months, decreased $6.3 billion or 0.5 percent to $1,171.1 billion, unchanged from the previously published decrease. This followed a 0.2 percent April decrease. Transportation equipment, also down three of the last four months, led the decrease, $5.7 billion or 0.7 percent to $803.7 billion.

Inventories

Inventories of manufactured durable goods in May, up ten of the last eleven months, increased $2.0 billion or 0.5 percent to $424.6 billion, unchanged from the previously published increase. This followed a 0.4 percent April increase. Transportation equipment, also up ten of the last eleven months, drove the increase, $2.2 billion or 1.6 percent to $138.5 billion. Inventories of manufactured nondurable goods, down two consecutive months, decreased $0.6 billion or 0.2 percent to $269.6 billion. This followed a 0.1 percent April decrease. Petroleum and coal products, down following four consecutive monthly increases, drove the decrease, $0.6 billion or 1.5 percent to $41.3 billion.

Core Capital Goods

Econoday finds some good news in the report: “Now the good news and that’s core capital goods orders (nondefense ex-air) which rose 0.5 percent for a 1 tenth upward revision from the advance reading. The Federal Reserve is focused on questions over the strength of business spending and this result should ease their immediate concerns.”

I used to follow that line item closely, but it is way over-rated.

The theory behind core capital good is that it is a measure of business investment and thus a leading indicator of future production.

Note the line in green in the above chart. Month-to-month fluctuations are totally random, even seasonally adjusted. In the Great Recession, that item did not turn lower until the recession was half over.

Year-Over-Year Chart

Year-Over-Year Numbers

Manufacturers’ Inventories

Inventories to Order Comparison

  • Inventories, are up 10 of the last 11 months to new record highs.
  • Even non-transportation inventories are near the all-time high.
  • Boeing may very well have skewed transportation numbers.
  • But excluding transportation, new orders year-over-year are barely in positive territory at +0.28% growth.
  • Overall, new orders are down 1.16% and durable goods new orders are down 2.75%.

This is not a healthy picture.

Surefire Recession Signal In Pictures

The strength of inversions widened today. That’s a strong recession warning, but it is not the actual recession signal.

Inversions Widen

Today’s bond market action is a strong follow-through on Friday’s action.

Imminent Signal

The recession imminent signal is not the inversion but a sudden steepening of the curve following a period of inversion.

A comparison of the strength of the inversions today vs 2007 will show what I mean.

Inversions With the 3-Month Note Today

The 10-year, 7-year, 5-year, 3-year, and 1-year notes are inverted with the 3-month T-Bill. The inversion isn’t the signal. A sudden steepening of the yield curve following inversion is the “recession imminent” signal.

Inversions With the 3-Month Note 2007


Chart 1 Repeated for Ease in Reading

Signal Discussion

  • Box 1, Box 4, and Box 5 all have the same thing in common: A sudden steepening of the 3-Month to 10-Year curve following inversion.
  • Box 2 had no inversions
  • Box 2 and Box 3 show a steepening of the 2-year to 10-year spread but not the 3-month to 10-year spread.

Some are waiting for a 2-10 inversion. Perhaps it does not happen. But even if it does, that will not be the signal.

Watch for a sudden steepening of the curve.

How? Why?

That’s easy. The Fed will either cut or signal it is about to cut.

Too Late

On August 17, the Fed Cut the Discount Rate by 50 Basis Points

Fed Statement: Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.

Flashback September 18, 2007

Inquiring minds are investigating the Minutes of the August 7, 2007 FOMC meeting released September 18, 2007.

Amazingly Wrong Points

  • At its August meeting, the FOMC decided to maintain its target for the federal funds rate at 5-1/4 percent. In the statement, the Committee acknowledged that financial markets had been volatile in recent weeks, credit conditions had become tighter for some households and businesses, and the housing correction was ongoing. The Committee reiterated its view that the economy seemed likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.
  • Conditions in corporate credit markets were mixed. Investment- and speculative-grade corporate bond spreads edged up; they were near their highest levels in four years, although they remained far below the peaks seen in mid-2002
  • In preparation for this meeting, the staff continued to estimate that real GDP increased at a moderate rate in the third quarter. However, the staff marked down the fourth-quarter forecast, reflecting a judgment that the recent financial turbulence would impose restraint on economic activity in coming months, particularly in the housing sector. The staff also trimmed its forecast of real GDP growth in 2008 and anticipated a modest increase in unemployment.
  • With credit markets expected to largely recover over coming quarters, growth of real GDP was projected to firm in 2009 to a pace a bit above the rate of growth of its potential.
  • Participants thought that the most likely prospect was for consumer expenditures to continue to expand at a moderate pace on average over coming quarters, supported by growth in employment and income.
  • In the Committee’s discussion of policy for the intermeeting period, all members favored an easing of the stance of monetary policy. The Committee agreed that the statement to be released after the meeting should indicate that the outlook for economic growth had shifted appreciably since the Committee’s last regular meeting but that the 50 basis point easing in policy should help to promote moderate growth over time.

Yield Curve Reaction

The Fed did not reduce the Fed’s fund rate. So, why did the yield curve react?

The Fed did slash the discount rate by 50 basis points. The yield curve reacted sharply.

If you think the Fed has a handle on stopping the next recession think again. As in 2007, they will not even see it. Nor would they admit it if they did.

Watch for Steepening

Watch for a sudden steeping of the 3-Month to 10-Year spread. Don’t expect a long warning period, and don’t pay attention to the Fed or president Trump yapping about the strong economy when it happens.

I expect the delay this time may be negative, the recession will already have started.

Miracles Not Coming

The Fed blew another magnificent bubble.

Don’t expect miracles. The next recession is baked in the cake.

About That First Quarter GDP 3.2% Surprise

Real GDP rose 3.2% in the first quarter aided by a questionable measure of inflation.

The BEA’s Advance Estimate of First Quarter 2019 GDP is 3.2%.

  • The Bureau’s first-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency. The “second” estimate for the first quarter, based on more complete data, will be released on May 30, 2019.
  • The increase in real GDP in the first quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, state and local government spending, and nonresidential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased. These contributions were partly offset by a decrease in residential investment.
  • The acceleration in real GDP growth in the first quarter reflected an upturn in state and local government spending, accelerations in private inventory investment and in exports, and a smaller decrease in residential investment. These movements were partly offset by decelerations in PCE and nonresidential fixed investment, and a downturn in federal government spending. Imports, which are a subtraction in the calculation of GDP, turned down.

Estimates

  • The Nowcast estimate (released today) was 1.43%
  • The GDPNow estimate was 2.7% on April 25.

GDPNow, as volatile as it is, seems to have a far better model.

Advisor Perspectives has excellent charts.

Real GDP Trend

Percentage Point Contributions to GDP

  • PCE: 0.82 PP
  • …PCE Goods: -0.14 PP
  • …PCE Services: 0.96 PP
  • Gross Private Domestic Investment: 0.92 PP
  • Change in Private Inventories: 0.65 PP
  • Net Exports: 1.03 PP
  • …Exports: 0.45 PP
  • …Imports: 0.58 PP
  • Government: 0.41 PP

Consumers threw in the towel on goods. Net exports added 1.03 PP. Imports subtract because of counting methods. The positive addition to GDP represents a collapse in demand.

This is greatest positive boost to the headline since the fourth quarter of 2012. It’s also the second consecutive quarterly contraction in the value of imported goods.

Price Indexes

  • The price index for gross domestic purchases increased 0.8% in the first quarter, compared with an increase of 1.7% in the fourth quarter.
  • The PCE price index increased 0.6%, compared with an increase of 1.5% in the fourth quarter. Excluding food and energy prices, the PCE price index increased 1.3%, compared with an increase of 1.8%.
  • The GDP core price index was 1.3% vs 2.0% in the fourth quarter.

Those prices indexes don’t match reality or the CPI. They also inflate real GDP.

Bond Market Reaction

The GDP details are nowhere near as good as the headline number.

The number would not be as high in the first place with a higher measure for the GDP deflator.

Rick Davis at the Consumer Metrics Institute just pinged me “If the BEA’s nominal data was deflated using CPI-U inflation information the headline growth number would have been halved to a +1.56% annualized growth rate.

Not only is consumer spending down with inventories rising, but the big surprise also stems from the BEA’s questionable measure of inflation.

Despite Record Bull Market, Pension Plans Are In Miserable Shape

The amount owed to retirees accelerated faster than assets on hand despite a record bull market.

The Wall Street Journal reports the Long Bull Market Has Failed to Fix Public Pensions.

“Some of the states allowed themselves to get so underfunded that the higher returns aren’t helping them enough,” said Michael Cembalest, chairman of market and investment strategy for the asset-management arm of JPMorgan Chase & Co. and the author of an annual study on the financial health of cities and states.

Illinois Tops the Worst State List

Illinois, New Jersey and Kentucky top the list of states in worst shape on a percentage of revenue basis.

Chicago the Worst City

Worst Cities on Percentage Basis

  1. Chicago, IL
  2. Baton Rouge, LA
  3. Pittsburgh,PA
  4. Atlanta, GA
  5. Lubbock, TX

Deeper Pension Cuts Didn’t Materialize

Many states and cities reduced benefits for new employees after 2008. But deeper cuts often met resistance from judges, unions and angry constituents—even in some of the most indebted states.

The Illinois Supreme Court in 2015 threw out cuts by the legislature that were expected to save tens of billions of dollars. Kentucky’s legislature last year declined to approve the governor’s proposed cuts to cost-of-living increases for retired teachers after protests brought thousands to the state capitol and forced cancellations of classes in several school districts.

Pension Plan Assumptions

The average pension plan assumption is about 7.3%. That’s not going to happen.

Please consider charts and commentary from John Hussman’s April 2019 post You Are Here.

Valuations Second Highest in History

Expected Total 12 Year Return is Zero

The following chart shows nonfinancial market cap/nominal potential GDP on an inverted log scale (left), with actual subsequent 12-year S&P 500 total returns on the right scale. As usual, note that speculative bubbles always make it appear that valuations haven’t “worked” in the period immediately preceding the top, precisely because a substantial, if temporary, violation of historical norms is required to get to those extremes. As indicated by other reliable measures, investors are presently facing the likelihood of prospective nominal 12-year S&P 500 total returns averaging roughly zero.

​I remember a little boy listening to a concert at a Fourth of July celebration one year. As the music played, the little boy waved his arms as if he was conducting the orchestra. Monetary authorities are a lot like that, except that everyone who watches these kids at play actually believes that they are, in fact, conducting the orchestra.

I’m utterly mesmerized by the credulity of investors who believe that the Federal Reserve is capable of saving them from every possible contingency, no matter how irresponsible their own speculative behavior might be.

Imagine the shock of pension plans if the 12-year average is as low as 4% a year let alone a total return of zero.

Payrolls Rose 196k, Employment Fell By 200k

The wild ride in job reports continues, this time to the upside with the unemployment unchanged but employment down.

Initial Reaction

In January, the BLS reported the population supposedly shrunk by 649,000. Last month the jobs only rose by 20,000. This month the BLS says job gains were 196,0000. But the BLS also says employment fell by 201,000. The wild fluctuations continue.

Job Revisions

The change in total nonfarm payroll employment for January was revised up from +311,000 to +312,000, and the change for February was revised up from +20,000 to +33,000. With these revisions, employment gains in January and February combined were 14,000 more than previously reported. After revisions, job gains have averaged 180,000 per month over the last 3 months.

BLS Jobs Statistics at a Glance

  • Nonfarm Payroll: +196,000 – Establishment Survey
  • Employment: -201,000 – Household Survey
  • Unemployment: -24,000 – Household Survey
  • Involuntary Part-Time Work: +189,000 – Household Survey
  • Voluntary Part-Time Work: +144,000 – Household Survey
  • Baseline Unemployment Rate: Unchanged at 3.8% – Household Survey
  • U-6 unemployment: Unchanged at 7.3% – Household Survey
  • Civilian Non-institutional Population: +145,000
  • Civilian Labor Force: -224,000 – Household Survey
  • Not in Labor Force: +369,000 – Household Survey
  • Participation Rate: -0.2 to 63.0– Household Survey

Employment Report Statement

Total nonfarm payroll employment increased by 196,000 in March, and the unemployment rate was unchanged at 3.8 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in health care and in professional and technical services.

Unemployment Rate – Seasonally Adjusted

The above Unemployment Rate Chart is from the BLS. Click on the link for an interactive chart.

Nonfarm Employment Change from Previous Month

Hours and Wages

Average weekly hours of all private employees was flat at 34.4 hours. Average weekly hours of all private service-providing employees was flat at 33.3 hours. Average weekly hours of manufacturers was flat at 40.7 hours.

Average Hourly Earnings of All Nonfarm Workers rose $0.4 to $27.70. That a 0.14% gain. Average hourly earnings of private service-providing employees rose $0.05 to $27.47, a gain of 0.18%. Average hourly earnings of manufacturers fell $0.05 to $27.38, a loss of 0.18%.

Average hourly earnings of Production and Supervisory Workers rose $0.06 to $23.24. That’s a 0.26% gain. Average hourly earnings of private service-providing employees rose $0.06 to $22.98, a gain of 0.26%. Average hourly earnings of manufacturers rose $0.02 to $21.93, a gain of 0.09%

Year-Over-Year Wage Growth

  • All Private Nonfarm from $26.84 to $27.70, a gain of 3.2%
  • All production and supervisory from $22.49 to $23.24, a gain of 3.3%.

For a discussion of income distribution, please see What’s “Really” Behind Gross Inequalities In Income Distribution?

Birth Death Model

Starting January 2014, I dropped the Birth/Death Model charts from this report. For those who follow the numbers, I retain this caution: Do not subtract the reported Birth-Death number from the reported headline number. That approach is statistically invalid. Should anything interesting arise in the Birth/Death numbers, I will comment further.

Table 15 BLS Alternative Measures of Unemployment

Table A-15 is where one can find a better approximation of what the unemployment rate really is.

Notice I said “better” approximation not to be confused with “good” approximation.

The official unemployment rate is 3.8%. However, if you start counting all the people who want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

U-6 is much higher at 7.3%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years.

Some of those dropping out of the labor force retired because they wanted to retire. The rest is disability fraud, forced retirement, discouraged workers, and kids moving back home because they cannot find a job.

Strength is Relative

It’s important to put the jobs numbers into proper perspective.

  1. In the household survey, if you work as little as 1 hour a week, even selling trinkets on eBay, you are considered employed.
  2. In the household survey, if you work three part-time jobs, 12 hours each, the BLS considers you a full-time employee.
  3. In the payroll survey, three part-time jobs count as three jobs. The BLS attempts to factor this in, but they do not weed out duplicate Social Security numbers. The potential for double-counting jobs in the payroll survey is large.

Household Survey vs. Payroll Survey

The payroll survey (sometimes called the establishment survey) is the headline jobs number, generally released the first Friday of every month. It is based on employer reporting.

The household survey is a phone survey conducted by the BLS. It measures unemployment and many other factors.

If you work one hour, you are employed. If you don’t have a job and fail to look for one, you are not considered unemployed, rather, you drop out of the labor force.

Looking for jobs on Monster does not count as “looking for a job”. You need an actual interview or send out a resume.

These distortions artificially lower the unemployment rate, artificially boost full-time employment, and artificially increase the payroll jobs report every month.

Final Thoughts

The past several jobs reports have had wild fluctuations. This month repeated the story but in different ways. Last month I commented: “The three month average of jobs is now +186,000 per month but the three month average in employment is only +47,000 per month.”

That discrepancy continues. For the last three months, jobs are up an average of 180,000 per month. Employment is up 54,000 per month.

Year-over-year employment went from 155,160 to 156,748. That’s an average of 132,000 per month and slowing, if the trend holds.

What The Next Recession Will Look Like

I just recently spent some time on the Lance Roberts Podcast discussing why the next recession and market downturn. Here is the full interview:

However, the short answer is nothing like the last.

If you search for “next recession” numerous ideas pop up. Many believe there will not be a recession soon.

Condition Comparison

Conditions are radically different than in 2007 and 2000.

The Fed re-blew a housing price bubble but the number of jobs tied to construction, sales, CDOs, agents and even the impact on banks is a shell of what happened then.

Technology is bubbly, but not like 2000. This is how I see things.

  1. We will not have bank failures in the US.
  2. There will be major bank failures or bail-ins in Europe.
  3. Housing will not have a major role but will strengthen the recession.
  4. Millennials simply cannot afford houses so housing will not lead a Fed attempt at a recovery even if interest rates plunge.
  5. Low interest rates will keep zombie companies alive for a while longer .
  6. Proliferation of retail stores, Walmart, Target, everything requires minimum staffing levels no matter how poor sales become.
  7. Unemployment will not rise much like last time. Instead, expect to see hours cut.Also expect for many of those currently working two jobs to lose one of them.
  8. Retail sales will plunge with the reduction in work.
  9. The impact of the above is very weak profits but not massive labor disruption
  10. Stocks will get clobbered as earnings take a huge hit.
  11. Junk bonds also get clobbered on fears of rolling over debt.
  12. This malaise can potentially last for years.

Zombified Economy

Japan is in a state of zombification and Europe is on the verge.

The US may not and likely will not go through Japanese-like extremes just yet. However, the demography setup is poor, the student debt problem is a huge overhang, boomers unprepared for retirement is a huge overhang, and pensions are a huge overhang.

Democrats may win the next election and massively hike taxes. That will not help either.

Finally, the Fed only has room to cut by 240 basis points or so. Negative interest rates don’t help as proven by the ECB and the Bank of Japan.