Tag Archives: employment

Previous Employment Concerns Becoming An Ugly Reality

Last week, we saw the first glimpse of the employment fallout caused by the shutdown of the economy due to the virus. To wit:

“On Thursday, initial jobless claims jumped by 3.3 million. This was the single largest jump in claims ever on record. The chart below shows the 4-week average to give a better scale.”

This number will be MUCH worse when claims are reported later this morning, as many individuals were slow to file claims, didn’t know how, and states were slow to report them.

The importance is that unemployment rates in the U.S. are about to spike to levels not seen since the “Great Depression.” Based on the number of claims being filed, we can estimate that unemployment will jump to 15-20% over the next quarter as economic growth slides 8%, or more. (I am probably overly optimistic.)

The erosion in employment will lead to a sharp deceleration in economic and consumer confidence, as was seen Tuesday in the release of the Conference Board’s consumer confidence index, which plunged from 132.6 to 120 in March.

This is a critical point. Consumer confidence is the primary factor of consumptive behaviors, which is why the Federal Reserve acted so quickly to inject liquidity into the financial markets. While the Fed’s actions may prop up financial markets in the short-term, it does little to affect the most significant factor weighing on consumers – their jobs.

The chart below is our “composite” confidence index, which combines several confidence surveys into one measure. Notice that during each of the previous two bear market cycles, confidence dropped by an average of 58 points.

With consumer confidence just starting its reversion from high levels, it suggests that as job losses rise, confidence will slide further, putting further pressure on asset prices. Another way to analyze confidence data is to look at the composite consumer expectations index minus the current situation index in the reports.

Similarly, given we have only started the reversion process, bear markets end when deviations reverse. The differential between expectations and the current situation, as you can see below, is worse than the last cycle, and only slightly higher than before the “dot.com” crash.

If you are betting on a fast economic recovery, I wouldn’t.

There is a fairly predictable cycle, starting with CEO’s moving to protect profitability, which gets worked through until exhaustion is reached.

As unemployment rises, we are going to begin to see the faults in the previous employment numbers that I have repeatedly warned about over the last 18-months. To wit:

“There is little argument the streak of employment growth is quite phenomenal and comes amid hopes the economy is beginning to shift into high gear. But while most economists focus at employment data from one month to the next for clues as to the strength of the economy, it is the ‘trend’ of the data, which is far more important to understand.”

That “trend” of employment data has been turning negative since President Trump was elected, which warned the economy was actually substantially weaker than headlines suggested. More than once, we warned that an “unexpected exogenous event” would exposure the soft-underbelly of the economy.

The virus was just such an event.

While many economists and media personalities are expecting a “V”-shaped recovery as soon as the virus passes, the employment data suggests an entirely different outcome.

The chart below shows the peak annual rate of change for employment prior to the onset of a recession. The current cycle peaked at 2.2% in 2015, and has been on a steady decline ever since. At 1.3%, which predated the virus, it was the lowest level ever preceding a recessionary event. All that was needed was an “event” to start the dominoes falling. When we see the first round of unemployment data, we are likely to test the lows seen during the financial crisis confirming a recession has started. 

No Recession In 2020?

It is worth noting that NO mainstream economists, or mainstream media, were predicting a recession in 2020. However, as we noted in 2019, the inversion of the “yield curve,” predicted exactly that outcome.

“To CNBC’s point, based on this lagging, and currently unrevised, economic data, there is ‘NO recession in sight,’ so you should be long equities, right?

Which indicator should you follow? The yield curve is an easy answer.

While everybody is ‘freaking out’ over the ‘inversion,’it is when the yield-curve ‘un-inverts’ that is the most important.

The chart below shows that when the Fed is aggressively cutting rates, the yield curve un-inverts as the short-end of the curve falls faster than the long-end. (This is because money is leaving ‘risk’ to seek the absolute ‘safety’ of money markets, i.e. ‘market crash.’)”

I have dated a few of the key points of the “inversion of the curve.” As of today, the yield-curve is now fully un-inverted, denoting a recession has started.

While recent employment reports were slightly above expectations, the annual rate of growth has been slowing. The 3-month average of the seasonally-adjusted employment report, also confirms that employment was already in a precarious position and too weak to absorb a significant shock. (The 3-month average smooths out some of the volatility.)

What we will see in the next several employment reports are vastly negative numbers as the economy unwinds.

Lastly, while the BLS continually adjusts and fiddles with the data to mathematically adjust for seasonal variations, the purpose of the entire process is to smooth volatile monthly data into a more normalized trend. The problem, of course, with manipulating data through mathematical adjustments, revisions, and tweaks, is the risk of contamination of bias.

We previously proposed a much simpler method to use for smoothing volatile monthly data using a 12-month moving average of the raw data as shown below.

Notice that near peaks of employment cycles the BLS employment data deviates from the 12-month average, or rather “overstates” the reality. However, as we will now see to be the case, the BLS data will rapidly reconnect with 12-month average as reality emerges.

Sometimes, “simpler” gives us a better understanding of the data.

Importantly, there is one aspect to all the charts above which remains constant. No matter how you choose to look at the data, peaks in employment growth occur prior to economic contractions, rather than an acceleration of growth. 

“Okay Boomer”

Just as “baby boomers” were finally getting back to the position of being able to retire following the 2008 crash, the “bear market” has once again put those dreams on hold. Of course, there were already more individuals over the age of 55, as a percentage of that age group, in the workforce than at anytime in the last 50-years. However, we are likely going to see a very sharp drop in those numbers as “forced retirement” will surge.

The group that will to be hit the hardest are those between 25-54 years of age. With more than 15-million restaurant workers being terminated, along with retail, clerical, leisure, and hospitality workers, the damage to this demographic will be the heaviest.

There is a decent correlation between surges in the unemployment rate and the decline in the labor-force participation rate of the 25-54 age group. Given the expectation of a 15%, or greater, unemployment rate, the damage to this particular age group is going to be significant.

Unfortunately, the prime working-age group of labor force participants had only just returned to pre-2008 levels, and the same levels seen previously in 1988. Unfortunately, it may be another decade before we see those employment levels again.

Why This Matters

The employment impact is going to felt for far longer, and will be far deeper, than the majority of the mainstream media and economists expect. This is because they are still viewing this as a “singular” problem of a transitory virus.

It isn’t.

The virus was simply the catalyst which started the unwind of a decade-long period of debt accumulation and speculative excesses. Businesses, both small and large, will now go through a period of “culling the herd,” to lower operating costs and maintain profitability.

There are many businesses that will close, and never reopen. Most others will cut employment down to the bone and will be very slow to rehire as the economy begins to recover. Most importantly, wage growth was already on the decline, and will be cut deeply in the months to come.

Lower wage growth, unemployment, and a collapse in consumer confidence is going to increase the depth and duration of the recession over the months to come. The contraction in consumption will further reduce revenues and earnings for businesses which will require a deeper revaluation of asset prices. 

I just want to leave you with a statement I made previously:

“Every financial crisis, market upheaval, major correction, recession, etc. all came from one thing – an exogenous event that was not forecast or expected.

This is why bear markets are always vicious, brutal, devastating, and fast. It is the exogenous event, usually credit-related, which sucks the liquidity out of the market, causing prices to plunge. As prices fall, investors begin to panic-sell driving prices lower which forces more selling in the market until, ultimately, sellers are exhausted.

It is the same every time.”

Over the last several years, investors have insisted the markets were NOT in a bubble. We reminded them that everyone thought the same in 1999 and 2007.

Throughout history, financial bubbles have only been recognized in hindsight when their existence becomes “apparently obvious” to everyone. Of course, by that point is was far too late to be of any use to investors and the subsequent destruction of invested capital.

It turned out, “this time indeed was not different.” Only the catalyst, magnitude, and duration was.

Pay attention to employment and wages. The data suggests the current “bear market” cycle has only just begun.

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


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.


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?


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.

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.

Why The Measure Of “Savings” Is Entirely Wrong

In our recent series on capitalism (Read Here), we were discussing how the implementation of socialism, by its very nature, requires an ability to run unlimited deficits. In that discussion was the following quote:

Deficits are self-financing, deficits push rates down, deficits raise private savings.” – Stephanie Kelton

On the surface, there does seem to be a correlation between surging deficits and increases in private savings, as long as you ignore the long-term trend, or the reality of 80% of Americans in the U.S. today that live paycheck-to-paycheck.

The reality is the measure of “personal savings,” as calculated by the Bureau of Economic Analysis, is grossly inaccurate. However, to know why such is the case, we need to understand how the savings rate is calculated. The website HowMuch.com recently provided that calculation of us. 

As you can see, after the estimated taxes and estimated expenses are paid, there is $6,017 dollars left over for “savings,” or, as the Government figures suggest, an 8%+ savings rate. 

The are multiple problems with the calculation.

  1. It assumes that everyone in the U.S. lives on the budget outlined above
  2. It also assumes the cost of housing, healthcare, food, utilities, etc. is standardized across the country. 
  3. That everyone spends the same percentage and buys the same items as everyone else. 

The cost of living between California and Texas is quite substantial. While the median family income of $78,635 may raise a family of four in Houston, it is probably going to be quite tough in San Francisco.

While those flaws are apparent, the biggest issue is the saving rate is heavily skewed by the top 20% of income earners. This is the same problem that also plagues disposable personal income and debt ratios, as previously discussed  in “America’s Debt Burden Will Fuel The Next Crisis.” To wit:

“The calculation of disposable personal income (which is income less taxes) is largely a guess, and very inaccurate, due to the variability of income taxes paid by households. More importantly, the measure is heavily skewed by the top 20% of income earners, and even more so by the top 5%. As shown in the chart below, those in the top 20% have seen substantially larger median wage growth versus the bottom 80%. (Note: all data used below is from the Census Bureau and the IRS.)”

The interactive graphic below from MagnifyMoney shows the disparity of income versus savings even more clearly.

When you look at the data in this fashion, you can certainly begin to understand the calls for “socialism” by political candidates. The reality is the majority of Americans are struggling just to make ends meet, which has been shown in a multitude of studies. 

“The [2019] survey found that 58 percent of respondents had less than $1,000 saved.” – Gobankingrates.com

Or, as noted by the WSJ:

“The American middle class is falling deeper into debt to maintain a middle-class lifestyle.

Cars, college, houses, and medical care have become steadily more costly, but incomes have been largely stagnant for two decades, despite a recent uptick. Filling the gap between earning and spending is an explosion of finance into nearly every corner of the consumer economy.

Consumer debt, not counting mortgages, has climbed to $4 trillion—higher than it has ever been even after adjusting for inflation.”

When looking at the data, it is hard to suggest that Americans are saving 8% or more of their income.

The differential between incomes and the actual “cost of living” is quite substantial. As Researchers at Purdue University found in their study of data culled from across the globe, in the U.S., $132,000 was found to be the optimal income for “feeling” happy for raising a family of four. (I can attest to this personally as a father of a family of six)

A Gallup survey found it required $58,000 to support a family of four in the U.S. (Forget about being happy, we are talking about “just getting by.”) 

So, while the Government numbers suggest the average American is saving 8% of their income annually, the majority of “savings” is coming from the differential in incomes between the top 20% and the bottom 80%.

In other words, if you are in the “Top 20%” of income earners, congratulations, you are probably saving a chunk of money.

If not, it is likely a very different story.

The “gap” between the “standard of living” and real disposable incomes is shown below. Beginning in 1990, incomes alone were no longer able to meet the standard of living so consumers turned to debt to fill the “gap.” However, following the “financial crisis,” even the combined levels of income and debt no longer fill the gap. Currently, there is almost a $2654 annual deficit that cannot be filled.

That gap explains why consumer debt is at historic highs and growing each year. If individuals were saving 8% of their money every year, debt balances would at least be flat, if not declining, as they are paid off. 

We can see the inconsistency between the “saving rate” and the requirement to sustain the “cost of living” by comparing the two. Beginning in 2009, it required the entire income of wage earners plus debt just to maintain the standard of living. The gap between the reported savings rate, and reality, is quite telling.

While Stephanie Kelton suggests that running massive deficits increases saving rates, and pose not economic threat as long as their is no inflation, the data clearly suggests this isn’t the case.

Savings rates didn’t fall in the ’80s and ’90s because consumers decided to just spend more. If that was the case, then economic growth rates would have been rising on a year-over-year basis. The reality, is that beginning in the 1980’s, as the economy shifted from a manufacturing to service-based economy, productivity surged which put downward pressure on wage and economic growth rates. Consumers were forced to lever up their household balance sheet to support their standard of living. In turn, higher levels of debt-service ate into their savings rate.

The problem today is not that people are not “saving more money,” they are just spending less as weak wage growth, an inability to access additional leverage, and a need to maintain debt service restricts spending.

That is unless you are in the top 20% of income earners. 

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.

Peak Buybacks? Has Corporate Indulgence Hit Its Limits

Since the passage of “tax cuts,” in late 2017, the surge in corporate share buybacks has become a point of much debate. As I previously wrote, stock buybacks are once again on pace to set a new record in 2019. To wit:

“A recent report from Axios noted that for 2019, IT companies are again on pace to spend the most on stock buybacks this year, as the total looks set to pass 2018’s $1.085 trillion record total.”

The reason companies spend billions on buybacks is to increase bottom-line earnings per share which provides the “illusion” of increasing profitability to support higher share prices. Since revenue growth has remained extremely weak since the financial crisis, companies have become dependent on inflating earnings on a “per share” basis by reducing the denominator. 

“As the chart below shows, while earnings per share have risen by over 360% since the beginning of 2009; revenue growth has barely eclipsed 50%.”

As shown by BofA, in 2019, cumulative buybacks are up +20% on an annualized basis, with the 4-week average reaching some of the highest levels on record. This is occurring at a time when earnings continue to come under pressure due to tariffs, slower consumption, and weaker economic growth.

While share repurchases are not necessarily a bad thing, it is just the “least best” use of companies liquid cash. Instead of using cash to expand production, increase sales, acquire competitors, make capital expenditures, or buy into new products or services which could provide a long-term benefit; the cash is used for a one-time boost to earnings on a per-share basis.

Yes, share purchases can be good for current shareholders if the stock price rises, but the real beneficiaries of share purchases are insiders where changes in compensation structures have become heavily dependent on stock-based compensation. Insiders regularly liquidate shares which were “given” to them as part of their overall compensation structure to convert them into actual wealth. As the Financial Times recently penned:

Corporate executives give several reasons for stock buybacks but none of them has close to the explanatory power of this simple truth: Stock-based instruments make up the majority of their pay and in the short-term buybacks drive up stock prices.

That statement was further supported by a study from the Securities & Exchange Commission which found the same issues:

  • SEC research found that many corporate executives sell significant amounts of their own shares after their companies announce stock buybacks, Yahoo Finance reports.

Not surprisingly, as corporate share buybacks are hitting record highs; so is corporate insider selling.

What is clear, is that the misuse, and abuse, of share buybacks to manipulate earnings and reward insiders has become problematic. As John Authers recently pointed out:

“For much of the last decade, companies buying their own shares have accounted for all net purchases. The total amount of stock bought back by companies since the 2008 crisis even exceeds the Federal Reserve’s spending on buying bonds over the same period as part of quantitative easing. Both pushed up asset prices.”

In other words, between the Federal Reserve injecting a massive amount of liquidity into the financial markets, and corporations buying back their own shares, there have been effectively no other real buyers in the market. 

Less Bang For The Buck

While investors have chased asset prices higher over the last couple of years on hopes of a “trade deal,” more accommodation from Central Banks, or hope the “bull market will never end,” the impact of share buybacks on asset prices is fading.

The chart below is the S&P 500 Buyback Index versus the Total Return index. Following the financial crisis, when companies changed from “splitting shares” to “reducing shares,” there has been a marked outperformance by those companies.

However, while corporate buybacks have accounted for the majority of net purchases of equities in the market, the benefit of pushing asset prices higher is waning. Outside of the brief moment in 2018 when tax cuts were implemented, which allowed companies to repatriate overseas cash, the buyback index has underperformed.

Without that $4 trillion in stock buybacks, not to mention the $4 trillion in liquidity from the Federal Reserve, the stock market would not have been able to rise as much as it has. Given high valuations, weakening earnings, and sluggish economic growth, without continued injections of liquidity going forward, the risk of a substantial repricing of assets has risen.

A more opaque problem is that share repurchases have increasingly been done with the use of leverage. The ongoing suppression of interest rates by the Federal Reserve led to an explosion of debt issued by corporations. Much of the debt was not used for mergers, acquisitions or capital expenditures but for the funding of share repurchases and dividend issuance.

The explosion of corporate debt in recent years will become problematic during the next bear market. As the deterioration in asset prices increases, many companies will be unable to refinance their debt, or worse, forced to liquidate. With the current debt-to-GDP ratio at historic highs, it is unlikely this will end mildly.

This is something Dallas Fed President Robert Kaplan warned about:

U.S. nonfinancial corporate debt consists mostly of bonds and loans. This category of debt, as a percentage of gross domestic product, is now higher than in the prior peak reached at the end of 2008.

A number of studies have concluded this level of credit could ‘potentially amplify the severity of a recession,’

The lowest level of investment-grade debt, BBB bonds, has grown from $800 million to $2.7 trillion by year-end 2018. High-yield debt has grown from $700 million to $1.1 trillion over the same period. This trend has been accompanied by more relaxed bond and loan covenants, he added.

It’s only a problem if a recession occurs.

According to CNN, 53 percent of chief financial officers expect the United States to enter a recession prior to the 2020 presidential election. That information was sourced from the Duke University/CFO Global Business Outlook survey released on Wednesday. And two-thirds predict a downturn by the end of next year. While a slight downturn may not amount to a recession, it certainly means CFOs are taking the initiative to prepare for the worst.”

This is a very important point.

CEO’s make decisions on how they use their cash. If concerns of a recession persist, it is likely to push companies to become more conservative on the use of their cash, rather than continuing to repurchase shares. If that source of market liquidity fades, the market will have a much tougher time maintaining current levels, or going higher.


While share repurchases by themselves may indeed be somewhat harmless, it is when they are coupled with accounting gimmicks and massive levels of debt to fund them in which they become problematic.

The biggest issue was noted by Michael Lebowitz:

“While the financial media cheers buybacks and the SEC, the enabler of such abuse idly watches, we continue to harp on the topic. It is vital, not only for investors but the public-at-large, to understand the tremendous harm already caused by buybacks and the potential for further harm down the road.”

Money that could have been spent spurring future growth for the benefit of investors was instead wasted only benefiting senior executives paid on the basis of fallacious earnings-per-share.

As stock prices fall, companies that performed un-economic buybacks are now finding themselves with financial losses on their hands, more debt on their balance sheets, and fewer opportunities to grow in the future. Equally disturbing, the many CEO’s who sanctioned buybacks, are much wealthier and unaccountable for their actions.

For investors betting on higher stock prices, the question is whether we have now seen “peak buybacks?”

The Disconnect Between The Markets & Economy Has Grown

A couple of years ago, I wrote an article discussing the disconnect between the markets and the economy. At that time, the Fed was early into their rate hiking campaign. Talks of tax cuts from a newly elected President filled headlines, corporate earnings were growing, and there was a slew of fiscal stimulus from the Government to deal with the effects of 3-major hurricanes and 2-devastating wildfires. Now, the Fed is cutting rates, so it is time to revisit that analysis.

Previously, the consensus for the rise in capital markets was the tax cuts, and low levels of interest rates made stocks the only investment worth having. 

Today, rates have risen, economic growth both domestically and globally has weakened, and corporate profitability has come under pressure. However, since the Fed is cutting rates, hinting at expanding their balance sheet, and a “trade deal” is at hand, stocks are the only investment worth having.

In other words, regardless of the economic or fundamental backdrop, “stocks are the only investment worth having.” 

I am not so sure that is the case.

Let’s begin by putting the markets into perspective.

Yes, the markets are flirting with “all-time highs.” While this certainly sounds impressive, for many investors, they have just started making money on their investments from the turn of the century. As we noted in “The Moment You Know You Know, You Know,” what is often forgotten is the massive amount of “time” lost in growing capital to meet retirement goals.

This is crucially important to understand as was something I addressed in “Stocks – The Great Wealth Equalizer:”

“By the time that most individuals achieve a point in life where incomes and savings rates are great enough to invest excess cash flows, they generally do not have 30 years left to reach their goal. This is why losing 5-7 years of time getting back to “even” is not a viable investment strategy.

The chart below is the inflation-return of $1000 invested in 1995 with $100 added monthly. The blue line represents the impact of the investment using simple dollar-cost averaging. The red line represents a “lump sum” approach. The lump-sum approach utilizes a simple weekly moving average crossover as a signal to either dollar cost average into a portfolio OR moves to cash. The impact of NOT DESTROYING investment capital by buying into a declining market is significant.”

“Importantly, I am not advocating “market timing” by any means. What I am suggesting is that if you are going to invest into the financial markets, arguably the single most complicated game on the planet, then you need to have some measure to protect your investment capital from significant losses.

While the detrimental effect of a bear market can be eventually recovered, the time lost during that process can not. This is a point consistently missed by the ever bullish media parade chastising individuals for not having their money invested in the financial markets.”

However, let’s set aside that point for the moment, and discuss the validity of the argument of the rise of asset prices is simply a reflection of economic strength.

Assuming that individuals are “investing” in companies, versus speculating on price movement, then the investment process is a “bet” on future profitability of the company. Since, companies derive their revenue from consumption of their goods, products, and services; it is only logical that stock price appreciation, over the long-term, has roughly equated to economic growth. However, during shorter time-frames, asset prices are affected by investor psychology which leads to “boom and bust” cycles. This is the situation currently, which can be seen by the large disconnect between current economic growth and asset prices.

Since January 1st of 2009, through the end of the second quarter of 2019, the stock market has risen by an astounding 164.90% (inflation-adjusted). However, if we measure from the March 9, 2009 lows, the percentage gain explodes to more than 200%. With such a significant gain in the financial markets, we should see a commensurate indication of economic growth.

The reality is that after 3-massive Federal Reserve driven “Quantitative Easing” programs, a maturity extension program, bailouts of TARP, TGLP, TGLF, etc., HAMP, HARP, direct bailouts of Bear Stearns, AIG, GM, bank supports, etc., all of which total more than $33 Trillion, the economy grew by just $3.87 Trillion, or a whopping 24.11% since the beginning of 2009. The ROI equates to $8.53 of interventions for every $1 of economic growth.

Not a very good bargain.

We can look at this another way.

The stock market has returned almost 103.6% since the 2007 peak, which is more than 4-times the growth in GDP and nearly 3-times the increase in corporate revenue. (I have used SALES growth in the chart below as it is what happens at the top line of income statements and is not AS subject to manipulation.)

The all-time highs in the stock market have been driven by the $4 trillion increase in the Fed’s balance sheet, hundreds of billions in stock buybacks, and valuation (PE) expansion. With Price-To-Sales ratios and median stock valuations near the highest in history, one should question the ability to continue borrowing from the future?

Speaking of rather extreme deviations, another concern for the detachment of the markets from more basic economic realities, the deviation of reported earnings from corporate profits after-tax, is at historical extremes.

These sharp deviations tend to occur in late market cycles when “excess” from speculation has reached extremes. Recessions tend to follow as a “reversion to the mean occurs.

While, earnings have surged since the end of the last recession, which has been touted as a definitive reason for higher stock prices, it is not all as it would seem.

Earnings per share are indeed an important driver of markets over time. However, the increase in profitability has not come strong increases in revenue at the top of the income statement. The chart below shows the deviation between the widely touted OPERATING EARNINGS (earnings before all the “bad” stuff) versus REPORTED EARNINGS which is what all historical valuations are based. I have also included revenue growth, as well.

This is not a new anomaly, but one which has been a consistent “meme” since the end of the financial crisis. As the chart below shows, while earnings per share have risen by over 360% since the beginning of 2009; revenue growth has barely eclipsed 50%.

While suppressed wage growth, layoffs, cost-cutting, productivity increases, accounting gimmickry, and stock buybacks have been the primary factors in surging profitability, these actions have little effect on revenue growth. The problem for investors is all of the gimmicks to win the “beat the estimate game” are finite in nature. Eventually, real rates of revenue growth will matter. However, since suppressed wages and interest rates have cannibalized consumer incomes – there is nowhere left to generate further sales gains from in excess of population growth.

Left Behind

While Wall Street has significantly benefited from the Fed’s interventions, Main Street has not. Over the past few years, as asset prices surged higher, there has been very little translation into actual economic prosperity for a large majority of Americans. This is reflective of weak wage, economic, and inflationary growth which has led to a surge in consumer debt to record levels.

Of course, weak economic growth has led to employment growth that is primarily a function of population growth. As I addressed just recently:

“Employment should increase to accommodate for the increased demand from more participants in the economy. Either that or companies resort to automation, off-shoring, etc. to increase rates of production without increases in labor costs. The chart below shows the total increase in employment versus the growth of the working-age population.”

While reported unemployment is hitting historically low levels, there is a swelling mass of uncounted individuals that have either given up looking for work or are working multiple part-time jobs. This can be seen below which shows those “not in labor force,” as a percent of the working-age population, skyrocketing.

If employment was indeed as strong as reported by government agencies, then social benefits would not be comprising a record high of 22% of real disposable incomes. 

Without government largesse, many individuals would literally be living on the street. The chart above shows all the government “welfare” programs and current levels to date. While unemployment insurance has hit record lows following the financial crisis, social security, Medicaid, Veterans’ benefits and other social benefits have continued to rise and have surged sharply over the last few months.

With 1/5 of incomes dependent on government transfers, it is not surprising that the economy continues to struggle as recycled tax dollars used for consumption purposes have virtually no impact on the overall economy.


While financial markets have surged to “all-time highs,” the majority of Americans who have little, or no, vested interest in the financial markets have a markedly different view. While the Fed keeps promising with each passing year the economy will come roaring back to life, the reality has been that all the stimulus and financial support hasn’t been able to put the broken financial transmission system back together again.

Amazingly, more than two-years following the initial writing of this article, the gap between the markets and the economy has grown even wider. Eventually, the current disconnect between the economy and the markets will merge.

I bet such a convergence will likely not be a pleasant one.

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.

The Fed & The Stability/Instability Paradox

“Only those that risk going too far can possibly find out how far one can go.” – T.S. Eliot

Well, this certainly seems to be the path that the Federal Reserve, and global Central Banks, have decided take.

Yesterday, the Fed lowered interest rates by a quarter-point and maintained their “dovish” stance but suggested they are open to “allowing the balance sheet to grow.” While this isn’t anything more than just stopping Q.T. entirely, the markets took this as a sign that Q.E. is just around the corner.

That expectation is likely misguided as the Fed seems completely unconcerned of any recessionary impact in the near-term. However, such has always been the case, historically speaking, just before the onset of a recession. This is because the Fed, and economists in general, make predictions based on lagging data which is subject to large future revisions. Regardless, the outcome of the Fed’s monetary policies has always been, without exception, either poor, or disastrous.

“In the U.S., the Federal Reserve has been the catalyst behind every preceding financial event since they became ‘active,’ monetarily policy-wise, in the late 70’s. As shown in the chart below, when the Fed has lifted the short-term lending rates to a level higher than the 2-year rate, bad ‘stuff’ has historically followed.”

The idea of pushing limits to extremes also applies to stock market investors. As we pointed out on Tuesday, the risks of a liquidity-driven event have increased markedly in recent months. Yet, despite the apparent risk, investors have virtually “no fear.” (Bullish advances are supported by extremely low levels of volatility below the long-term average of 19.)

First, “record levels” of anything are records for a reason. It is where the point where previous limits were reached. Therefore, when a ‘record level’ is reached, it is NOT THE BEGINNING, but rather an indication of the MATURITY of a cycle. While the media has focused on employment, record stock market levels, etc. as a sign of an ongoing economic recovery, history suggests caution.”

In the “rush to be bullish” this a point often missed. When markets are hitting “record levels,” it is when investors get “the most bullish.” That is the case currently with retail investors “all in.”

Conversely, they are the most “bearish” at the lows.

It is just human nature.

“What we call the beginning is often the end. And to make an end is to make a beginning. The end is where we start from.” – T.S. Eliot

The point here is that “all things do come to an end.” The further from the “mean” something has gotten, the greater the reversion is going to be. The two charts below illustrate this point clearly.

Bull markets, with regularity, are almost entirely wiped out by the subsequent bear market.

Despite the best of intentions, market participants never act rationally.

Neither do consumers.

The Instability Of Stability

This is the problem facing the Fed.

Currently, investors have been led to believe that no matter what happens, the Fed can bail out the markets and keep the bull market going for a while longer. Or rather, as Dr. Irving Fisher once uttered:

“Stocks have reached a permanently high plateau.”

Interestingly, the Fed is dependent on both market participants, and consumers, believing in this idea. As we have noted previously, with the entirety of the financial ecosystem now more heavily levered than ever, due to the Fed’s profligate measures of suppressing interest rates and flooding the system with excessive levels of liquidity, the “instability of stability” is now the most significant risk.

The “stability/instability paradox” assumes that all players are rational and such rationality implies an avoidance of complete destruction. In other words, all players will act rationally, and no one will push “the big red button.”

The Fed is highly dependent on this assumption as it provides the “room” needed, after more than 10-years of the most unprecedented monetary policy program in U.S. history, to try and navigate the risks that have built up in the system.

Simply, the Fed is dependent on “everyone acting rationally.”

Unfortunately, that has never been the case.

The behavioral biases of individuals is one of the most serious risks facing the Fed. Throughout history, as noted above, the Fed’s actions have repeatedly led to negative outcomes despite the best of intentions.

  • In the early 70’s it was the “Nifty Fifty” stocks,
  • Then Mexican and Argentine bonds a few years after that
  • “Portfolio Insurance” was the “thing” in the mid -80’s
  • Dot.com anything was a great investment in 1999
  • Real estate has been a boom/bust cycle roughly every other decade, but 2006 was a doozy
  • Today, it’s ETF’s and “Passive Investing,” and levered credit.

As noted Tuesday, the risk to this entire house of cards is a credit-related event.

Anyone wonder what might happen should passive funds become large net sellers of credit risk? In that event, these indiscriminate sellers will have to find highly discriminating buyers who–you guessed it–will be asking lots of questions. Liquidity for the passive universe–and thus the credit markets generally–may become very problematic indeed.

The recent actions by Central Banks certainly suggest risk has risen. Whether this was just an anomalous event, or an early warning, it is too soon to know for sure. However, if there is a liquidity issue, the risk to ‘uniformed investors’ is substantially higher than most realize. 

Risk concentration always seems rational at the beginning, and the initial successes of the trends it creates can be self-reinforcing. That is, until suddenly, and often without warning, it all goes “pear\-shaped.”

In November and December of last year, it was the uniformity of the price moves which revealed the fallacy “passive investing” as investors headed for the door all at the same time. While, that rout was quickly forgotten as markets stormed back to all-time highs, on “hopes” of Central Bank liquidity and “trade deals.”

The difference today, versus then, are the warning signs of deterioration in areas which pose a direct threat to everyone “acting rationally.” 

“While yields going to zero] certainly sounds implausible at the moment, just remember that all yields globally are relative. If global sovereign rates are zero or less, it is only a function of time until the U.S. follows suit. This is particularly the case if there is a liquidity crisis at some point.

It is worth noting that whenever Eurodollar positioning has become this extended previously, the equity markets have declined along with yields. Given the exceedingly rapid rise in the Eurodollar positioning, it certainly suggests that ‘something has broken in the system.’” 

Risk is clearly elevated as the Fed is cutting rates despite the “economic data” not supporting it. This is clearly meant to keep everyone acting rationally for now.

The problem comes when they don’t.

The Single Biggest Risk To Your Money

All of this underscores the single biggest risk to your investment portfolio.

In extremely long bull market cycles, investors become “willfully blind,” to the underlying inherent risks. Or rather, it is the “hubris” of investors they are now “smarter than the market.”

Yet, the list of concerns remains despite being completely ignored by investors and the mainstream media.

  • Growing economic ambiguities in the U.S. and abroad: peak autos, peak housing, peak GDP.
  • Political instability and a crucial election.
  • The failure of fiscal policy to ‘trickle down.’
  • An important pivot towards easing in global monetary policy.
  • Geopolitical risks from Trade Wars to Iran 
  • Inversions of yield curves
  • Deteriorating earnings and corporate profit margins.
  • Record levels of private and public debt.
  •  More than $3 trillion of covenant light and/or sub-prime corporate debt. (now larger and more pervasive than the size of the subprime mortgages outstanding in 2007)

For now, none of that matters as the Fed seems to have everything under control.

The more the market rises, the more reinforced the belief “this time is different” becomes.

Yes, our investment portfolios remain invested on the long-side for now. (Although we continue to carry slightly higher levels of cash and hedges.)

However, that will change, and rapidly so, at the first sign of the “instability of stability.” 

Unfortunately, by the time the Fed realizes what they have done, it has always been too late.

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.

NFIB Survey Trips Economic Alarms

Last week, I wrote an article discussing the August employment report, which clearly showed a slowdown in employment activity and an overall deterioration the trend of the data. To wit:

“While the recent employment report was slightly below expectations, the annual rate of growth is slowing at a faster pace. Therefore, by applying a 3-month average of the seasonally-adjusted employment report, we see the slowdown more clearly.”

I want to follow that report up with analysis from the latest National Federation of Independent Businesses monthly Small Business Survey. While the mainstream media overlooks this data, it really shouldn’t be.

There are 28.8 million small businesses in the United States, according to the U.S. Small Business Administration, and they have 56.8 million employees. Small businesses (defined as businesses with fewer than 500 employees) account for 99.7% of all business in the U.S. The chart below shows the breakdown of firms and employment from the 2016 Census Bureau Data.

Simply, it is small businesses that drive the economy, employment, and wages. Therefore, what the NFIB says is extremely relevant to what is happening in the actual economy versus the headline economic data from Government sources.

In August, the survey declined 1.6 points to 103.1. While that may not sound like much, it is where the deterioration occurred that is most important.

As I discussed previously, when the index hit its record high:

Record levels of anything are records for a reason. It is where the point where previous limits were reached. Therefore, when a ‘record level’ is reached, it is NOT THE BEGINNING, but rather an indication of the MATURITY of a cycle.” 

That point of “exuberance” was the peak.

It is also important to note that small business confidence is highly correlated to changes in, not surprisingly, small-capitalization stocks.

The stock market, and the NFIB report, confirm risk is rising. As noted by the NFIB:

“The Uncertainty Index rose four points in August, suggesting that small business owners are reluctant to make major spending commitments.”

Before we dig into the details, let me remind you this is a “sentiment” based survey. This is a crucial concept to understand.

“Planning” to do something is a far different factor than actually “doing” it.

For example, the survey stated that 28% of business owners are “planning” capital outlays in the next few months. That’s sounds very positive until you look at the trend which has been negative. In other words, “plans” can change very quickly.

This is especially the case when you compare their “plans” to the outlook for economic growth.

The “Trump” boom appears to have run its course.

This has significant implications to the economy since “business investment” is an important component of the GDP calculation. Small business “plans” to make capital expenditures, which drives economic growth, has a high correlation with Real Gross Private Investment.

As I stated above, “expectations” are very fragile. The “uncertainty” arising from the ongoing trade war is weighing heavily on that previous exuberance.

If small businesses were convinced that the economy was “actually” improving over the longer term, they would be increasing capital expenditure plans rather than contracting their plans. The linkage between the economic outlook and CapEx plans is confirmation that business owners are concerned about committing capital in an uncertain environment.

In other words, they may “say” they are hopeful about the “economy,” they are just unwilling to ‘bet’ their capital on it.

This is easy to see when you compare business owner’s economic outlook as compared to economic growth. Not surprisingly, there is a high correlation between the two given the fact that business owners are the “boots on the ground” for the economy. Importantly, their current outlook does not support the ideas of stronger economic growth into the end of the year.

Of course, the Federal Reserve has been NO help in instilling confidence in small business owners to deploy capital into the economy. As NFIB’s Chief Economist Bill Dunkleberg stated:

“They are also quite unsure that cutting interest rates now will help the Federal Reserve to get more inflation or spur spending. On Main Street, inflation pressures are very low. Spending and hiring are strong, but a quarter-point reduction will not spur more borrowing and spending, especially when expectations for business conditions and sales are falling because of all the news about the coming recession. Cheap money is nice but not if there are fewer opportunities to invest it profitably.”

Fantasy Vs. Reality

The gap between those employers expecting to increase employment versus those that did has been widening. Currently, hiring has fallen back to the lower end of the range and contrasts the stats produced by the BLS showing large month gains every month in employment data. While those “expectations” should be “leading” actions, this has not been the case.

The divergence between expectations and reality can also be seen in actual sales versus expectations of increased sales. Employers do not hire just for the sake of hiring. Employees are one of the highest costs associated with any enterprise. Therefore, hiring takes place when there is an expectation of an increase in demand for a company’s product or services. 

This is also one of the great dichotomies the economic commentary which suggests retail consumption is “strong.” While business remain optimistic at the moment, actual weakness in retail sales is continuing to erode that exuberance.

Lastly, despite hopes of continued debt-driven consumption, business owners are still faced with actual sales that are at levels more normally associated with the onset of a recession.

With small business optimism waning currently, combined with many broader economic measures, it suggests the risk of a recession has risen in recent months.

Customers Are Cash Constrained

As I discussed previously, the gap between incomes and the cost of living is once again being filled by debt.

Record levels of consumer debt is a problem. There is simply a limit to how much “debt” each household can carry even at historically low interest rates. In turn, business owners remain on the defensive, reacting to increases in demand caused by population growth rather than building in anticipation of stronger economic activity. 

What this suggests is an inability for the current economy to gain traction as it takes increasing levels of debt just to sustain current levels of economic growth. However, that rate of growth is on the decline which we can see clearly in the RIA Economic Output Composite Index (EOCI). 

All of these surveys (both soft and hard data) are blended into one composite index which, when compared to GDP and LEI, has provided strong indications of turning points in economic activity. (See construction here)

As shown, the slowdown in economic activity has been broad enough to turn this very complex indicator lower.

No Recession In Sight

When you compare this data with last week’s employment data report, it is clear that “recession” risks are rising. One of the best leading indicators of a recession are “labor costs,” which as discussed in the report on “Cost & Consequences Of $15/hr Wages” is the highest cost to any business.

When those costs become onerous, businesses raise prices, consumers stop buying, and a recession sets in. So, what does this chart tell you?

Don’t ignore the data.

Today, we once again see many of the early warnings. If you have been paying attention to the trend of the economic data, and the yield curve, the warnings are becoming more pronounced.

In 2007, the market warned of a recession 14-months in advance of the recognition. 

Today, you may not have as long as the economy is running at one-half the rate of growth.

However, there are three lessons to be learned from this analysis:

  1. The economic “number” reported today will not be the same when it is revised in the future.
  2. The trend and deviation of the data are far more important than the number itself.
  3. “Record” highs and lows are records for a reason as they denote historical turning points in the data.

We do know, with absolute certainty, this cycle will end.

“Economic cycles are only sustainable for as long as excesses are being built. The natural law of reversions, while they can be suspended by artificial interventions, cannot be repealed.” 

Being optimistic about the economy and the markets currently is far more entertaining than doom and gloom. However, it is the honest assessment of the data, along with the underlying trends, which are useful in protecting one’s wealth longer-term.

The August Jobs Report Confirms The Economy Is Slowing

After the monthly jobs report was released last week, I saw numerous people jumping on the unemployment rate as a measure of success, and in this particular case, Trump’s success as President.

  • Unemployment November 2016: 4.7%
  • Unemployment August 2019: 3.7%

Argument solved.

President Trump has been “Yuugely” successful at putting people to work as represented by a 1% decline in the unemployment rate since his election.

But what about President Obama?

  • Unemployment November 2008: 12.6%
  • Unemployment November 2016: 4.7%

Surely, a 7.9% drop in unemployment should be considered at least as successful as Trump’s 1%.


Here’s a secret, neither one is important.

First, Presidents don’t put people to work. Corporations do. The reality is that President Obama and Trump had very little to do with the actual economic recovery.

Secondly, as shown below, the recovery in employment began before either President took office as the economic recovery would have happened regardless of monetary interventions. Importantly, note the drop in employment has occurred with the lowest level of annual economic growth on record. (I wouldn’t necessarily be touting this as #winning.)

Lastly, both measures of “employment success” are erroneous due to the multitude of problems with how the entire series is “guessed at.” As noted previously by Morningside Hill:

  • The Bureau of Labor Statistics (BLS) has been systemically overstating the number of jobs created, especially in the current economic cycle.
  • The BLS has failed to account for the rise in part-time and contractual work arrangements, while all evidence points to a significant and rapid increase in the so-called contingent workforce.
  • Full-time jobs are being replaced by part-time positions, resulting in double and triple counting of jobs via the Establishment Survey.  (Examples: Uber, Lyft, GrubHub, FedEx, Amazon)
  • A full 93% of the new jobs reported since 2008 were added through the business birth and death model – a highly controversial model which is not supported by the data. On the contrary, all data on establishment births and deaths point to an ongoing decrease in entrepreneurship.
  • Jobless claims have recently reached their lowest level on record which purportedly signals job market strength. Since hiring patterns have changed significantly and increasingly more people are joining the contingent workforce, jobless claims are no longer a good leading economic indicator. Part-time and contract-based workers are most often ineligible for unemployment insurance. In the next downturn, corporations will be able to cut through their contingent workforce before jobless claims show any meaningful uptick.

Nonetheless, despite a very weak payroll number, the general “view” by the mainstream media, and the Federal Reserve, is the economy is still going strong.

In reality, one-month of employment numbers tell us very little about what is happening in the actual economy. While most economists obsess over the data from one month to the next, it is the “trend” of the data which is far more important to understand.

The chart below shows the peak annual rate of change for employment prior to the onset of a recession. The current annual rate of employment growth is 1.4% which is lower than any previous employment level in history prior to the onset of a recession.

But while this is a long-term view of the trend of employment in the U.S., what about right now? The chart below shows the civilian employment level from 1999 to present.

While the recent employment report was slightly below expectations, the annual rate of growth is slowing at a faster pace. Moreover, there are many who do not like the household survey due to the monthly volatility in the data. Therefore, by applying a 3-month average of the seasonally-adjusted employment report, we see the slowdown more clearly.

But here is something else to consider.

While the BLS continually fiddles with the data to mathematically adjust for seasonal variations, the purpose of the entire process is to smooth volatile monthly data into a more normalized trend. The problem, of course, with manipulating data through mathematical adjustments, revisions, and tweaks, is the risk of contamination of bias. A simpler method to use for smoothing volatile monthly data is using a 12-month moving average of the raw data as shown below.

Near peaks of employment cycles, the employment data deviates from the 12-month average, but then reconnects as reality emerges.

Sometimes, “simpler” gives us a better understanding of the data.

Importantly, there is one aspect to all the charts above which remains constant. No matter how you choose to look at the data, peaks in employment growth occur prior to economic contractions, rather than an acceleration of growth. 

But there is more to this story.

A Function Of Population

One thing which is not discussed when reporting on employment is the “growth” of the working-age population. Each month, new entrants into the population create “demand” through their additional consumption. Employment should increase to accommodate for the increased demand from more participants in the economy. Either that or companies resort to automation, off-shoring, etc. to increase rates of production without increases in labor costs. The chart below shows the total increase in employment versus the growth of the working-age population.

The missing “millions” shown in the chart above is one of the “great mysteries” about the longest economic booms in U.S. history. This is particularly a conundrum when the Federal Reserve talks about the economy nearing “full employment.” The disparity shows up in both the Labor Force Participation Rate and those “Not In Labor Force.”

Note that since 2009, the number of those “no longer counted” has dominated the employment trends of the economy. In other words, those “not in labor force” as a percent of the working-age population has skyrocketed.

Of course, as we are all very aware, there are many who work part-time, are going to school, etc. But even when we consider just those working “full-time” jobs, particularly when compared to jobless claims, the percentage of full-time employees is still well below levels of the last 35 years.

It’s All The Baby Boomers Retiring

One of the arguments often given for the low labor force participation rate is that millions of “baby boomers” are leaving the workforce for retirement.

This argument doesn’t carry much weight given that the “Millennial” generation, which is significantly larger, is simultaneously entering the workforce. The other problem is shown below, there are more individuals over the age of 55, as a percentage of that age group, in the workforce today than in the last 50-years.

Of course, the reason they aren’t retiring is that they can’t. After two massive bear markets, weak economic growth, questionable spending habits,and poor financial planning, more individuals over the age of 55 are still working because they simply can’t “afford” to retire.

However, for argument sake, let’s assume that every worker over the age of 55 retires. If the “retiring” argument is valid, then employment participation rates should soar once that group is removed. The chart below is full-time employment relative to the working-age population of 16-54.


The other argument is that Millennials are going to school longer than before so they aren’t working either. (We have an excuse for everything these days.)

The chart below strips out those of college-age (16-24) and those over the age of 55.

With the prime working-age group of labor force participants still at levels seen previously in 1988, it does raise the question o2f just how robust the labor market actually is?

Michael Lebowitz touched on this issue previously:

“Why are so many people struggling to find a job and terminating their search if, as we are repeatedly told, the labor market is so healthy? To explain the juxtaposition of the low jobless claims number and unemployment rate with the low participation rate and weak wage growth, a calculation of the participation rate adjusted unemployment rate is revealing.”

‘When people stop looking for a job, they are still unemployed, but they are not included in the U-3 unemployment calculation. If we include those who quit looking for work in the data, the employment situation is quite different. The graph below compares the U-3 unemployment rate to one that assumes a constant participation rate from 2008 to today. Contrary to the U-3 unemployment rate of 3.90%, this metric implies an adjusted unemployment rate of 8.69%.

Importantly, this number is much more consistent with the data we have laid out above, supports the reasoning behind lower wage growth, and is further confirmed by the Hornstein-Kudlyak-Lange Employment Index.”

(The Hornstein-Kudlyak-Lange Non-Employment Index including People Working Part-Time for Economic Reasons (NEI+PTER) is a weighted average of all non-employed people and people working part-time for economic reasons expressed as the share of the civilian non-institutionalized population 16 years and older. The weights take into account persistent differences in each group’s likelihood of transitioning back into employment. Because the NEI is more comprehensive and includes tailored weights of non-employed individuals, it arguably provides a more accurate reading of labor market conditions than the standard unemployment rate.)

One of the main factors which was driving the Federal Reserve to raise interest rates, and reduce its balance sheet, was the perceived low level of unemployment. However, now, they are trying to lower rates despite an even lower level of unemployment than previous.

The problem for the Federal Reserve is they are caught between a “stagflationary economy” and a “recession.” 

“With record low jobless claims, there is no recession on the horizon.” -says mainstream media.

Be careful with that assumption.

In November of 1969 jobless claims stood at 211,000, having risen slightly from the lows recorded earlier that year. Despite the low number of claims, a recession started a month later, and jobless claims would nearly double within six months.

This episode serves as a reminder that every recession followed interim lows in jobless claims and the unemployment rate. We are confident that the dynamics leading to the next recession will not be any different.

But then again, maybe the yield-curve is already giving us the answer.

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.


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.


  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.

Strongest Economy Ever? I Warned You About Negative Revisions

Over the last 18-months, there has been a continual drone of political punditry touting the success of “Trumponomics” as measured by various economic data points. Even the President himself has several times taken the opportunity to tweet about the “strongest economy ever.”

But if it is the “strongest economy ever,” then why the need for aggressive rate cuts which are “emergency measures” to be utilized to offset recessionary conditions?

First, it is hard to have an “aggressive rate-cutting cycle” when you only have 2.4% to work with.

Secondly, I am not sure we want to be like China or Europe economically speaking, and running a $1.5 Trillion deficit during an expansion, suspending the debt ceiling, and expanding spending isn’t that much different.

Nonetheless, I have repeatedly cautioned about the risk of taking credit for the economic bump, or the stock market, as a measure of fiscal policy success. Such is particularly the case when you are a decade into the current economic cycle.

Economic growth is more than just a reported number. The economy has been “in motion” following the last recession due to massive liquidity injections, zero interest rates, and a contraction in the labor force. Much like a “snowball rolling downhill,” the continuation of economic momentum should have been of little surprise.

As an example, we can look at full-time employment (as a percentage of 16-54  which removes the “retiring baby boomer” argument) by President. The rise in full-time employment has been on a steady trend higher following the financial crisis as the economic and financial systems repaired themselves.

As discussed previously, economic data is little more than a “wild @$$ guess” when it is initially reported. However, one-year and three-years later, the data is revised to reveal a more accurate measure of the “real” economy.

Unfortunately, we pay little attention to the revisions.

While there are many in the media touting “the strongest economy ever” since Trump took office, a quick look at a chart should quickly put that claim to rest.

Yes, there was a spurt in economic growth during 2018, which did seem to support the claims that Trump’s policies were working. As I warned then, there were factors at play which were obfuscating the data.

“Lastly, government spending has been very supportive to the markets in particular over the last few quarters as economic growth has picked up. However, that “sugar-high” was created by 3-massive Hurricanes in 2017 which has required billions in monetary stimulus which created jobs in manufacturing and construction and led to a temporary economic lift. We saw the same following the Hurricanes in 2012 as well.”

“These “sugar highs” are temporary in nature. The problem is the massive surge in unbridled deficit spending only provides a temporary illusion of economic growth.”

The importance is that economic “estimates” become skewed by these exogenous factors, and I have warned these over-estimations would be reversed when annual revisions are made.

Last week, the annual revisions to the economic data were indeed negative. The chart below shows “real GDP” pre- and post-revisions.

This outcome was something I discussed previously:

With the Fed Funds rate running at near 2%, if the Fed now believes such is close to a ‘neutral rate,’ it would suggest that expectations of economic growth will slow in the quarters ahead from nearly 6.0% in Q2 of 2018 to roughly 2.5% in 2019.”

However, there is further evidence that actual, organic, economic growth is weaker than the current negative revisions suggest. More importantly, the revisions to the 2019 data, in 2020, will very likely be as negative as well.

This is also the case with the employment data which I discussed previously:

“Months from now, the Establishment Survey will undergo its annual retrospective benchmark revision, based almost entirely on the Quarterly Census of Employment and Wages conducted by the Labor Department. That’s because the QCEW is not just a sample-based survey, but a census that counts jobs at every establishment, meaning that the data are definitive but take time to collect.”

“The Establishment Survey’s nonfarm jobs figures will clearly be revised down as the QCEW data show job growth averaging only 177,000 a month in 2018. That means the Establishment Survey may be overstating the real numbers by more than 25%.”

There is nothing nefarious going on here.

It is the problem with collecting data from limited samples, applying various seasonal adjustment factors to it, and “guesstimating” what isn’t known. During expansions, the data is always overstated and during recessions it is understated. This is why using lagging economic data as a measure of certainty is always erroneous.

Debt-Driven Growth

I recently discussed the “death of fiscal conservatism” as Washington passed another spending bill.

“In 2018, the Federal Government spent $4.48 Trillion, which was equivalent to 22% of the nation’s entire nominal GDP. Of that total spending, ONLY $3.5 Trillion was financed by Federal revenues, and $986 billion was financed through debt.

In other words, if 75% of all expenditures is social welfare and interest on the debt, those payments required $3.36 Trillion of the $3.5 Trillion (or 96%) of revenue coming in.”

The “good news” is, if you want to call it that, is that Government spending does show up in economic growth. The “bad news” is that government spending has a negative “multiplier” effect since the bulk of all spending goes to non-productive investments. (Read this)

Nonetheless, the President suggests we are “winning.”

The problem is that economic growth less government spending is actually “recessionary.” 

As shown in the chart below, since 2010 it has taken continually increases in Federal expenditures just to maintain economic growth at the same level it was nearly a decade ago. Such a “fiscal feat” is hardly indicative of “winning.”

As Mike Shedlock noted, part of the issue with current economic estimates is simply in how it is calculated.

In GDP accounting, consumption is the largest component. Naturally, it is not possible to consume oneself to prosperity. The ability to consume more is the result of growing prosperity, not its cause. But this is the kind of deranged economic reasoning that is par for the course for today.

In addition to what Tenebrarum states, please note that government transfer payments including Medicaid, Medicare, disability payments, and SNAP (previously called food stamps), all contribute to GDP.

Nothing is “produced” by those transfer payments. They are not even funded. As a result, national debt rises every year. And that debt adds to GDP.”

This is critically important to understand.

While government spending, a function of continually increasing debt, does appear to have an economic benefit, corporate profits tell a very different story.

The Real Economy

I have been noting for a while the divergence between “operating earnings” (or rather “earnings fantasy”) versus corporate profits which are what companies actually report for tax purposes. From “Earnings Growth Much Weaker Than Advertised:”

“The benefit of a reduction in tax rates is extremely short-lived since we compare earnings and profit growth on a year-over-year basis.

In the U.S., the story remains much the same as near-term economic growth has been driven by artificial stimulus, government spending, and fiscal policy which provides an illusion of prosperity.”

Since consumption makes up roughly 70% of the economy, then corporate profits pre-tax profits should be growing if the economy was indeed growing substantially above 2%.”

We now know the economy wasn’t growing well above 2% and, as a consequence, corporate profits have been revised sharply lower on a pre-tax basis.

The reason we are looking at PRE-tax, rather than post-tax, profits is because we can see more clearly what is actually happening at the corporate level.

Since corporate revenues come for the sale of goods and services, if the economy was growing strongly then corporate profits should be reflective of that. However, since 2014, profits have actually been declining. If we take the first chart above and adjust it for the 2019-revisions we find that corporate profits (both pre- and post-tax) are the same level as in 2012 and have been declining for the last three-years in particular.

Again, this hardly indicates the “strongest economy in history.”

These negative revisions to corporate profits also highlight the over-valuation investors are currently paying for asset prices.  Historically, such premiums have had rather horrific “paybacks” as markets eventually “reprice” for reality.

Trump’s Political Risk

While the media is quick to attribute the current economic strength, or weakness, to the person who occupies the White House, the reality is quite different.

Most fiscal, and monetary, policy changes can take up to a year before the impact shows in the economic data. While changes to “tax rates” can have a more immediate impact, “interest rate” changes take longer to filter through.

The political risk for President Trump is taking too much credit for an economic cycle which was already well into recovery before he took office. Rather than touting the economic numbers and taking credit for liquidity-driven financial markets, he should be using that strength to begin the process of returning the country to a path of fiscal discipline rather than a “drunken binge” of spending.

With the economy, and the financial markets, sporting the longest-duration in history, simple logic should suggest time is running out.

This isn’t doom and gloom, it is just a fact.

Politicians, over the last decade, failed to use $33 trillion in liquidity injections, near zero interest rates, and surging asset prices to refinance the welfare system, balance the budget, and build surpluses for the next downturn.

Instead, they only made the deficits worse and the U.S. economy will enter the next recession pushing a $2 Trillion deficit, $24 Trillion in debt, and a $6 Trillion pension gap which will devastate many in their retirement years.

While Donald Trump talked about “Yellen’s big fat ugly bubble” before he took office, he has now pegged the success of his entire Presidency on the stock market.

It will likely be something he eventually regrets.

“Then said Jesus unto him, Put up again thy sword into his place: for all they that take the sword shall perish with the sword.” – Matthew 26, 26:52

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%


  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.

Questions About The “Stellar” June Jobs Report (Which Also Confirm The Fed’s Concerns)

On Wednesday, Jerome Powell testified before Congress the U.S. economy is “suffering” from a bout of uncertainty caused by trade tensions and slow global growth. To wit:

“Since [the Fed meeting in mid-June], based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook.”

That outlook, however, would seem to be askew of the recent employment report for June from the Bureau of Labor Statistics last week. That report showed an increase in employment of 224,000 jobs. It was also the 105th consecutive positive jobs report, which is one of the longest in U.S. history.

However, if employment is as “strong” as is currently believed, which should be a reflection of the underlying economy, then precisely what is the Fed seeing?

Well, I have a few questions for you to ponder concerning to the latest employment report which may actually support the Fed’s case for rate cuts. These questions are also important to your investment outlook as there is a high correlation between employment, economic growth, and not surprisingly, corporate profitability.

Let’s get started.

Prelude: The chart below shows the peak annual rate of change for employment prior to the onset of a recession. The current annual rate of employment growth is 1.5%, which is lower than any previous employment level prior to a recession in history.

More importantly, as noted by Lakshman Achuthan and Anirvan Banerji via Bloomberg:

“A key part of the answer lies with jobs ‘growth,’ which has been slowing much more than most probably realize. Despite the better-than-forecast jobs report for June, the fact is the labor force has contracted by more than 600,000 workers this year. And we’re not just talking about the disappointing non-farm payroll jobs numbers for April and May.

Certainly, that caused year-over-year payroll growth, based on the Labor Department’s Establishment Survey – a broad survey of businesses and government agencies – to decline to a 13-month low. But year-over-year job growth, as measured by the separate Household Survey – based on a Labor Department survey of actual households – that is used to calculate the unemployment rate is only a hair’s breadth from a five-and-a-half-year low.”

Question: Given the issues noted above, does it seem as if the entirety of the economy is as robust as stated by the mainstream media? More importantly, how does 1.5% annualized growth in employment create sustained rates of higher economic growth going forward?

Prelude: One thing which is never discussed when reporting on employment is the “growth” of the working age population. Each month, new entrants into the population create “demand” through their additional consumption. Employment should increase to accommodate for the increased demand from more participants in the economy. Either that or companies resort to automation, off-shoring, etc. to increase rates of production without increases in labor costs. The next chart shows the total increase in employment versus the growth of the working age population.

Question: Just how “strong” is employment growth? Does it seem that 96%+ of the working-age population is gainfully employed?

Prelude: The missing “millions” shown in the chart above is one of the “great mysteries” about one of the longest economic booms in U.S. history. This is particularly a conundrum when the Federal Reserve talks about the economy nearing “full employment.”

The next several charts focus on the idea of “full employment” in the U.S. While Jobless Claims are reaching record lows, the percentage of full time versus part-time employees is still well below levels of the last 35 years. It is also possible that people with multiple part-time jobs are being double counted in the employment data.

Question: With jobless claims at historic lows, and the unemployment rate below 4%, then why is full-time employment relative to the working-age population at just 50.10% (Only slightly above the 1980 peak)?

Prelude: One of the arguments often given for the low labor force participation rates is that millions of “baby boomers” are leaving the workforce for retirement. This argument doesn’t carry much weight given the significantly larger “Millennial” generation that is simultaneously entering the workforce.

However, for argument sake, let’s assume that every worker over the age of 55 retires. If the “retiring” argument is valid, then employment participation rates should soar once that group is removed. The chart below is full-time employment relative to the working-age population of 16-54.

Question: At 50.38%, and the lowest rate since 1981, just how big of an impact are “retiring baby boomers” having on the employment numbers?

Prelude: One of the reasons the retiring “baby boomer” theory is flawed is, well, they aren’t actually retiring. Following two massive bear markets, weak economic growth, questionable spending habits, and poor financial planning, more individuals over the age of 55 are still working than at any other time since 1960.

The other argument is that Millennials are going to school longer than before so they aren’t working either. The chart below strips out those of college age (16-24) and those over the age of 55. Those between the ages of 25-54 should be working.

Question: With the prime working age group of labor force participants still at levels seen previously in 1988, just how robust is the labor market actually?

Prelude: Of course, there are some serious considerations which need to be taken into account about the way the Bureau of Labor Statistics measures employment. The first is the calculation of those no longer counted as part of the labor force. Beginning in 2000, those no longer counted as part of the labor force detached from its longer-term trend. The immediate assumption is all these individuals retired, but as shown above, we know this is not exactly the case.

Question: Where are the roughly 95-million Americans missing from the labor force? This is an important question as it relates to the labor force participation rate. Secondly, these people presumably are alive and participating in the economy so exactly how valid is the employment calculation when 1/3rd of the working-age population is simply not counted?

Prelude: The second questionable calculation is the birth/death adjustment. I addressed this in more detail previously, but here is the general premise.

Following the financial crisis, the number of “Births & Deaths” of businesses unsurprisingly declined. Yet, each month, while the market is glued to the headline number, they additions from the “birth/death” adjustment go both overlooked and unquestioned.

Every month, the BLS adds numerous jobs to the non-seasonally adjusted payroll count to “adjust” for the number of “small businesses” being created each month, which in turns “creates a job.”  (The total number is then seasonally adjusted.)

Here is my problem with the adjustment.

The BLS counts ALL business formations as creating employment. However, in reality, only about 1/5th of businesses created each year actually have an employee. The rest are created for legal purposes like trusts, holding companies, etc. which have no employees whatsoever. This is shown in the chart below which compares the number of businesses started WITH employees from those reported by the BLS. (Notice that beginning in 2014, there is a perfect slope in the advance which is consistent with results from a mathematical projection rather than use of actual data.)

These rather “fictitious” additions to the employee ranks reported each year are not small, but the BLS tends even to overestimate the total number of businesses created each year (employer AND non-employer) by a large amount.

How big of a difference are we talking about?

Well, in the decade between 2006 and 2016 (the latest update from the Census Bureau) the BLS added roughly 7.6 million more employees than were created in new business formations.

This data goes a long way in explaining why, despite record low unemployment, there is a record number of workers outside the labor force, 25% of households are on some form of government benefit, wages remain suppressedand the explosion of the “wealth gap.” 

Question: If 1/3rd of the working-age population simply isn’t counted, and the birth-death adjustment inflates the employment roles, just how accurate is the employment data?

Prelude: If the job market was as “tight” as is suggested by an extremely low unemployment rate, the wage growth should be sharply rising across all income spectrums. The chart below is the annual change in real national compensation (less rental income) as compared to the annual change in real GDP. Since the economy is 70% driven by personal consumption, it should be of no surprise the two measures are highly correlated.

Side Question: Has “renter nation” gone too far?

Question: Again, if employment was as strong as stated by the mainstream media, would not compensation, and subsequently economic growth, be running at substantially stronger levels rather than at rates which have been more normally associated with past recessions?

I have my own assumptions and ideas relating to each of these questions. However, the point of this missive is simply to provide you the data for your own analysis. The conclusion you come to has wide-ranging considerations for investment portfolios and allocation models.

Does the data above support the notion of a strongly growing economy that still has “years left to run?”  

Or, does the fact the Fed is considering cutting interest rates to stimulate economic growth suggests the economy may already be weaker than headlines suggest?

One important note to all of this is the conclusion from Achuthan and Banerji:

“But there’s even more cause for concern. Months from now, the Establishment Survey will undergo its annual retrospective benchmark revision, based almost entirely on the Quarterly Census of Employment and Wages conducted by the Labor Department. That’s because the QCEW is not just a sample-based survey, but a census that counts jobs at every establishment, meaning that the data are definitive but take time to collect. 

The Establishment Survey’s nonfarm jobs figures will clearly be revised down as the QCEW data show job growth averaging only 177,000 a month in 2018. That means the Establishment Survey may be overstating the real numbers by more than 25%.”

These facts are in sharp contrast to strong job growth narrative.

But then again, maybe the yield-curve is already telling the answer to these questions.