- Wall Street thrives, Main Street survives — barely
- No recession now, but what about 2016? Rickards weighs in
- China cuts rates — because it can!
- Pot prohibitionists vs. crony capitalists
- The Treasury postpones an auction… The 5 accused of “Kremlin propaganda”… individuals, not generations… and more!
“The financial system has become so divorced from the Main Street economy that even as the latter grew poorer, the value of financial assets and especially the stock market averages clambered to new heights on the back of corporate financial engineering gone wild…”
So wrote David Stockman in his book, The Great Deformation, published in the spring of 2013.
Two and a half years later, absolutely nothing has changed.
As we write this morning, the S&P 500 has erased its losses for the year, at 2,072. The Nasdaq opened 2% higher, climbing back above 5,000.
Earnings at Microsoft outpaced the vaunted “analyst expectations”; shares sit at a 15-year high. Alphabet, the new name for Google’s parent company, delivered a blowout earnings report, and shares jumped 9%. Amazon is up 6.5% because made it money in the quarter that just ended — which was a surprise.
And Facebook, the epitome of a company that makes boatloads of money while producing no new wealth (a feat once performed only by bankers), rests at an all-time high.
Meanwhile, more than half of all American workers brought home less than $30,000 last year. That’s according to new figures from the Social Security Administration.
Seeing as that’s the agency that collects FICA tax, we’re fairly sure we can believe the numbers….
For reference, the feds consider $28,410 the poverty level for a family of five.
We can say this much: At least we’re not hurtling toward another recession. Not now, anyway.
The regional Federal Reserve banks have issued the two most reliable recession indicators over the last two days. Yesterday brought the Chicago Fed National Activity Index. This index crunches no fewer than 85 economic numbers. It’s called every recession of the last 45 years except one — it was late with the 1973 oil shock.
Numbers below minus 0.7 signal a recession. As of now, the three-month moving average is a merely mediocre minus 0.09.
This morning, the Philadelphia Fed came out with its State Coincident Index. This index is a composite of four employment figures compiled from all 50 states. It too has a reliable history of calling recessions.
Here, the number that signals danger is plus 50. We came perilously close in the spring… but as of now, the number is a merely mediocre plus 70.
How likely is it that the “real economy” can get out of this perpetually low gear in 2016? Not very, says Jim Rickards.
He gets back to first principles in the latest issue of Rickards’ Strategic Intelligence. “If more people are working, the economy produces more,” he writes. “If each worker is more productive, the economy produces more.
“Add the workforce and productivity numbers together and you get growth in GDP. If the workforce grows 2% and the productivity of each worker grows 2%, then the economy grows 4%. You don’t need a Ph.D. to see that 2 + 2 = 4.”
“Unfortunately,” says Jim, “we are living in a 1 + 1 economy, with the labor force growing about 1% per year and productivity growing about 1% per year.”
The only reason the labor force is growing at all is immigration. Meanwhile the percentage of the working-age population in the labor force keeps shrinking — as we usually note on the first Friday of the month with the government’s job numbers. The labor force participation rate is now its lowest since October 1977.
“There are many reasons for this decline,” says Jim. “One reason is the rise of government benefits (why work when you can collect food stamps, rental assistance and free health care?). Another reason is discouragement (why work when there are no good jobs available?). A third reason is a mismatch of skills and job openings (a carpenter cannot easily become a computer programmer).”
And what about productivity? “For many years,” Jim writes, “this was the secret sauce of real growth. If the labor force were growing at only 1%, the economy could still grow at 3% if productivity growth were 2% (this is the 1 + 2 = 3 economy).”
Alas, productivity growth has hovered around 1% for most of the post-2008 “recovery”… and it’s moving in the wrong direction…
Why the flat-lining of productivity? It’s not just one thing, Jim suggests.
“One reason is that a lot of investment by U.S. companies is going abroad to foreign plants.
“Another reason is that U.S. investment is being delayed due to uncertainty about regulation, taxes, health care costs and other key factors in computing return on investment.
“A third reason is that the explosion in patent protection for business processes is restraining knowledge transfer among companies. Companies used to routinely copy each other’s best practices, resulting in improved profits for all. Today, such copying may be illegal because of patents.
“Finally, some analysts estimate that computer technology is making us less productive because of the amount of time we spend online shopping, playing video games and replying to an inbox jammed with email messages of no particular importance.”
And Facebook’s at an all-time high today, heh…
Bottom line: More mediocrity. “Labor force size and productivity trends are all you really need to understand growth prospects,” says Jim.
“Right now both factors look weak, and both will remain weak in the immediate future. The old 2 + 2 economy has become the new 1 + 1 economy.” No wonder the Fed keeps holding off raising interest rates — just as Jim forecast all year.
“Meanwhile,” says Jim, “the Fed’s easy money policies (due to low growth and low inflation) are leading to asset bubbles in commercial real estate, stocks and emerging markets. When these bubbles burst, the world will be pitched back into a crisis worse than 2008.”
[Ed. note: And the Fed will be helpless to do anything about it. Because whenever the next crisis comes, the Fed will be plunged into an accounting scandal. “I expect the fallout to reach $31.5 trillion,” Jim estimates — “which is 525 times bigger than Enron.”
Jim has a comprehensive strategy to help you batten down the proverbial hatches. Check out his full expose at this link.]
As stocks rise today, nearly everything else is sinking.
Bonds are slumping, the yield on a 10-year Treasury approaching 2.1%. Gold is slumping, about to crack through support at $1,162. Crude is back below $45 for the first time all month. And most of the major foreign currencies are in a funk, the euro down again today at $1.102.
Helping propel today’s stock rally — another interest rate cut in China. That’s the sixth in less than a year, if you’re keeping count.
The People’s Bank of China also cut the amount of cash banks have to keep as reserves.
“I told you all that we would continue to see rate cuts and reserve ratio reductions from China, and here we go!” wrote Chuck Butler in today’s Daily Pfennig. “But isn’t it nice that a country has interest rates to cut when they need to stimulate their economy?”
Crony capitalist update from Ohio: Buckeye State residents appear to be of mixed minds when it comes to legalized marijuana, and little wonder.
As we mentioned last month, voters go to the polls on Nov. 3 to decide whether Ohio becomes the fifth state to legalize recreational weed. However, growing marijuana would be allowed at only 10 locations… investors have already locked up those locations… and the investors are the ones pushing Issue 3, the legalization referendum.
A poll commissioned by the NBC station in Cleveland finds a majority of voters supporting Issue 3. But the poll also finds a majority supporting Issue 2 — which would effectively nullify Issue 3.
Issue 2 was the brainchild of pot prohibitionists, who wrote the ballot language specifically to make people squeamish about the crony capitalist aspect of Issue 3. Seems to be working, too.
What happens if both referenda pass? “The only certainty is litigation,” says Kent State political scientist Ryan Claassen, who helped conduct the poll. Good times…
“I was wondering if this was a big deal?” writes a reader who noticed the U.S. Treasury has postponed an auction of 2-year notes next week. The rationale is to stay under the debt ceiling, which Treasury Secretary Jack Lew says is in danger of being breached as early as Nov. 3.
“Well,” says our reader, “if the House could decide on a speaker to replace Boehner, they could raise it, but if there’s no chairman, they are dead in the water. Of course, if they get a speaker who doesn’t even want to raise the limit, where are we? Are we on the edge of an abyss? And the Dow went up 300 points yesterday!”
The 5: Sounds as if Paul Ryan is in line to be the next speaker, and we’d be surprised to see him put up a fight.
Jim Rickards weighed in on the postponed auction, too…
“When are you going to cut the crap about the supposed ‘U.S.-engineered coup in Kiev’?” writes an irritated reader after yesterday’s episode.
“You spew Kremlin propaganda as well as phony libertarian Ron Paul and his acolytes. Yanukovych did an about-face in November 2013 over integration with the West and Ukrainians said, ‘Enough is enough.’ They took to Maidan square, where many of them were gunned down by Yanukovych government ordered snipers.
“Agora should turn honest for a change and stop spewing Kremlin garbage.”
The 5: “It truly was the most blatant coup in history,” says George Friedman, head of the private intelligence outfit Stratfor, sometimes called the “Shadow CIA.” Friedman’s not exactly a fringe figure.
And what makes you so sure the snipers were acting on orders from the Yanukovych government — as opposed to the neofascists from Svoboda or Right Sector? Even the BBC — again, hardly a fringe outlet — produced a documentary this year with witness accounts that at the very least cast doubt on the “official” story.
Regardless, we’re still waiting for someone to cogently explain what vital U.S. interest is at stake over there…
“Maybe the millennials should have some pride and ambition,” a reader writes, “and not strut around overweight and out of shape with their pants dragging the ground and their plumber’s crack showing.”
[Clearly, our generational food fight is running out of gas. But it was quality entertainment for a week and a half…]
“They have had so much handed to them it’s no surprise they lack the ambition to launch. There was a time in this country when pride was so high we wanted our gas pumps to look good.”
“It’s time to stop talking about whole generations as if we’re all the same, when everyone who has ever been to high school is well aware that such groups are not homogeneous,” writes our final correspondent.
“It’s most unfortunate that my class (born in 1955) elected the ‘popular kids’ to public office, but note that they were largely nonpoliticians (Reagan was an actor, Carter a peanut farmer) — although ‘we’ also were generally referred to as ‘apathetic’ about politics, so ‘we’ may have done this pretty superficially. Further, our elders nominated them, so ‘we’ didn’t have many better options. We did get draftees the vote, at least.
“I learned (textbook by Milton Friedman) not to rely on Social Security (another case of the name describing the opposite of what it really is) or the government in 1973. I also long ago joined the Libertarian Party and have a clean conscience about all our politically caused woes. I met Ron Paul last century at an LP of California convention. You can’t blame me for any of this mess, despite my age.
“Every generation has their simple-minded and their ignorant. I don’t have children (true social security if you parent correctly), so the children and grandchildren of my peers will have to pay my share of the national debt, despite my futile (so far) efforts to free them from the burden. I’ve been telling myself for years that it has to get worse before it gets better. We need to lose all faith in the ‘authorities’ in office. That and declare bankruptcy as a nation.”
The 5: Amen. Although such musings always remind us of Doug Casey’s quip about events that are inevitable aren’t necessarily imminent…
Have a good weekend,
Dave Gonigam
The 5 Min. Forecast
P.S. We try to avoid conspiracy theories.
But once in a while, we come across a story that’s so unusual, and told with so much detail…
It must be true.
This secret was suppressed by government authorities for 21 years
But that didn’t stop one Maryland man from launching an unauthorized investigation into it…
As he puts it: “Once you know how this secret of the privileged elite works, a lot of powerful people are going to get ticked off about it…”
For obvious reasons, this page could come down at any time.
I can’t even promise you this link will still be up 24 hours from now.
Don’t wait. Take a look right now.
