A perfect Storm has been brewing for nine years. Now a misleading set of payroll numbers and new Presidential rally hype are creating an air of triumphalism. Every indicator is saying ‘Crash2’. This time, I don’t see how we can evade it.
US non-farm payrolls are a minefield at the best of times, but as we’re now getting close to the worst of times, they’re a minefield sitting atop Chamber 3 at Fukushima. One of my big issues with all bourse-dominated capitalism is that data are received, but not understood….sometimes wilfully, always tragically. The problem really is that they’re rarely thought about in three key contexts: history, geography, and economic reality.
A talking head on one of the “business” stations yesterday (Friday) morning CET said (with no sense of irony or even humour) that “the jobs numbers will tell us what the markets think the Fed is thinking”. If you really want to get out there on the moon of a dying planet far from the star Mungo holding the Xanax solar system together, then basing an investment model on the markets watching the Fed watching the markets watching the numbers watching the Fed is the Fourth Dimension fast-track you require.
History. The history portents here are not good. In 2009 based on nonfarm payrolls, Wall Street convinced itself that “the worst is over”. Being eight years out on a timeline only 18 months long is like predicting a Dow Index heading towards 30k that ends up at 6k: it’s what we experts call a very big mistake.
Wage growth that looks good in a snapshot looks truly dreadful in a historical context. The YOY 3% growth in wages is slashed by almost half if seen in the light of 1.4% inflation. Viewed in the light of a thirty year trend of 30% US wage deflation, it means that this “growth” will have to keep going until 2037 before the blue collar American worker gets back to where he or she was in 1987.
In a nutshell, half a century spent working your nuts off to get precisely nowhere. And that’s the best scenario in which nothing else goes wrong.
History teaches us a lot of stuff, but mainly it tells anyone who’s awake how to avoid more self-inflicted health issues in the future. Broadly speaking, there are at least seven screaming, shouting cancer warnings to take on board with US payroll data:
- Service sector numbers are notoriously difficult to capture
- Seasonal (climate) factors speak forked tongue. (February was warm in the US)
- By the time you read them, the data are already 6 weeks behind the curve
- SME and self-employed reporting is compromised by the desire to evade tax
- Observers get more confused every year (and with every Administration) about Orwellian terms like ‘found employment’, ‘workforce participation’ and ‘economically inactive’
- In immediate terms, the February numbers reflect the so-called Trump Rally, during which several tens of thousands of morons saw his election as The New Paradigm and began hiring every passing stranger they could find….if only to help build the Mexican Wall
- In longer terms, much of the terminology was invented by Slick Willy Clinton, a man whose eccentric cigar usage misled the entire tobacco futures sector.
If ever there was a terminological inexactitude, then President Clinton was that man. Whether it was the exact he chewed – or Monica Lewinsky’s cigar orifice of choice – is a mystery that may never be solved.
But let’s move on from vulgar innuendo to the context of the numbers.
Geography. Four fifths of Americans do not own a passport, but that doesn’t mean the rest of the world isn’t existential. Payroll numbers persuade the US Fed to either cut or raise rates, and this has ramifications for all those who don’t have a green card, but do have a big fat Sovereign black hole.
It’s all very well to say (accurately) that US exports are less important than they were, but all things are relative: among the Brics, Dollar-denominated debt continues to rise….along with the US National Debt itself.
As I’ve boffed on about these past five years, the rates magma cannot be contained forever by sitting on Vesuvius: all that achieves is a later but more gigantic lava flow than might otherwise have been expected. The ECB yesterday effectively said it too will raise rates. For anyone who thinks this will produce solid long term investment in the euro, today’s last train for the Star system Mungo is about to depart. Be sure not to miss it.
I could mention dodgy Chinese projections and Japan’s failed QE insanity alongside demographic doom, but this would only depress people. So instead, I will point out that ‘geography’ is also about getting up in the helicopter to survey the lie of the land. The emphasis here is on lie.
The term being used in relation to yesterday’s payroll numbers is strong jobs growth. That’s the first lie in need of perspective.
In February 2017, the employment-to-population ratio rose exactly 0.1%. Projected forward, that will at best mean that 1 further American in 100 will have some kind of job by year end; but given the warm February, I’d suggest that 1 in 250 might be nearer the mark.
During this period, 235,000 jobs were added. That is 1 American in 500.
US employment department pointy-heads upped the jobs growth by just 11,000 people. So 1 in 16,000 US citizens more than expected found a job. It’s not what Charlie Dickens would’ve called Great Expectations.
But dig this: the civilian workforce participation rate (ie, NOT including retireds) is 63%. So almost 1 in 4 Americans who could work aren’t working.
And yet, the unemployment rate is faithfully recorded at 4.7%.
These are the sort of numbers that would’ve had Jonathan Swift going to work on a new novel entitled Gullible Travels. The gap between 4.7 and 37 cannot be explained by incapacity alone….unless you want to suggest that a third of all non-retired US citizens are seriously disabled.
Socio-economic reality. Whichever way you cut it, wealth distribution in the US is now back to where it was in Edwardian times. The wealthiest 1% of Americans hold 35% of national wealth even before you factor in their property ownership. Six members of the Walmart family have more money than 1.8 million average American families. Between 2005 and 2009 alone – just four short years – that average family saw an eye-popping 16% reduction in its wealth.
Setting aside the social and political instability consequences of this headlong rush by the USA to try and become Bourbon France by 2025, there remains the purely commercial reality of how a mass consumption globalist economic model based on ever more rapid replacement purchases can possibly work when mass consumers have less and less to spend.
Since 1970, the answer has been credit. But even the lowest credit costs in modern recorded history cannot overcome the emotional lack of confidence consumers from Washington via Walsall to Woomera display. Maxed-out credit cards will become a further consumption-killing burden if something as inexactly potty as US payroll numbers persuade the Fed to raise rates again…..just before the markets top out and collapse.
The pause between Crash1 and Crash2 now stands at nine years. Given that no C1 structural problems have really been addressed (beyond some US banking firms), this has been an amazing achievement by the Sovereigns of the world, but you have to remember that they did it with our money: they paid us less, they reduced our levels of welfare, and they shut us out of truly profitable investment. When the collapse comes, it will wipe out all those who didn’t already get their wealth cut in the Naughties after C1. And once cash goes, all tax evasion or avoidance will be impossible for we the proles, while tax rises will follow….immediately withdrawn via EFT at point of deposit….which I suppose we should now call EFTPOD.
As annye fule know, this will cut consumption by around 40% over time (and They control the time-frame, not Us); then rising rates plus bank collapses will turn a land flowing with credit money into a wilderness – sufficient to wipe out another 25%. Only the rich and the comfortably debt-free retired would be able to carry on.
So unless you believe that the New World Orderers will then settle down to eat us all (which I emphatically don’t) it’s highly likely to result in heads rolling down hills like it was Easter Sunday every day….heads of banks, global concerns, governments, bureaucracies, legislatures and States.
The smart people like Jamie Dimon – “the EU is the greatest human achievement of all time” he told Bloomberg last Thursday – know perfectly well that the end is nigh. So as always, they want to extract every last drop of munneeee left before most of it becomes worthless.
This is why every day brings another brokerage whore onto a website or TV set near you saying that the Trump rally will run and run…hurry now while legs last!! It’s why market introducers are bringing death-traps like Snapchat onstage for IPOs. It’s why the Italian Banks story has been gently dropped like a radioactive diode. And it’s why speculators pulled the saps into a baseless rise in oil’s value. But what the media can’t ignore for much longer is that, at the opinion-leader level below Dimon and Yellen, those with nothing to lose are saying that all the mammories are pointing at the sky.
Nor can they ignore the signs that such opinion leaders don’t really need to point out, they are so obvious.
Very little could be more obvious than the growing withdrawal of central bank stimulation. The ECB followed suit last Thursday….and based on one jobs report plus flakey Trump Rally hype, the Fed is now talking of four rises this year….precisely what we need for the perfect storm. The crack addict is going to get the cold turkey treatment. Good luck with that one, Janet.
The fabricated oil boom has stalled. Crude fell from a high of $52.92, reaching a bottom of $48.67.It’s long overdue: the Energy Information Administration has reported nine weekly crude stockpile rises in a row. If the price manages to stay above $45 I’ll be very surprised. In short, real market forces have resisted speculator bullshit.
There is still far too much sovereign leverage everywhere. China is the best example: retail, manufacturing and fixed asset investment numbers seem encouraging, but lending has soared. Jim O’Neill I know remains bullish, but in reality, the Chinese economy would be going nowhere without a very loose lending policy.
For over a year now, publicly quoted results have included a dividend sweetener composed of borrowed money. The idea that stock prices can keep rising while interest rates are rising is even more silly than the 3-card borrowing trick itself. Why quoted companies are even allowed to do this baffles me: but legal or not, they won’t be pulling that trick if rates start to normalise.
The NYSE may be 200% up, but banking firm margin debt is up 700%. This can only accelerate stock price falls as margin calls have to be made.
PE ratios which should be around 16 are averaging 27.
Stock market volumes are massively down….a large percentage of investors don’t want anything to do with it. (I’m one of them). I’m losing bigtime at the moment….but it will only take a 25% correction to get me ahead again. I’m expecting one, in the end, of around 60%.
Keep an eye on Gold. If the Fed raises rates next week, I’m going to buy all I can afford.
Good luck
The Slog 