Saturday, May 28, 2016

The Fed Is Entering A New Bull Market In Confusion

The Federal Reserve these days seems to want to focus on employment as a reason to justify rate normalization, hinting just this week about an "active" June meeting coming up.  Of course, there are many reasons put forth to dismiss the reported numbers as being phony as a three dollar bill, with Shadowstats reporting a real unemployment rate at around 23%. 

There are many variations of how to track the "unemployed", but according to founder John Williams, there has been a migration in headline reporting away from those who quit looking for jobs and the "marginally attached" workers who are the part time job holders, who can be almost migrant workers - like the farm workers the "nonfarm payroll employment" numbers are supposed to factor out.  Williams puts out stats that reflect more the days of yore (pre '80s) when you had a job if you were loyally attached full time to a company and expected to retire from there.  The BLS government reporting has an unemployment measure where they include part time (U-6) which is much higher than headline, but Williams prefers "the U-6 rate as it was calculated until December 1993" according to the Wikipedia report on his methods.  In the '90s, he claims, some fudging in the sampling took place to deemphasize the inner cities.

But let's take the government reporting at its word for a moment and view this current employment recovery in the context of past employment recoveries from past recessions, apples to apples: (click on images to enlarge)

This chart is from Calculated Risk per a 6/25/15 update comparing the 2001 recession's recovery with our current jobs recovery.  It shows that there seems to be some growing problem with each subsequent employment recovery that slows it down from what a normal downturn and recovery in the economy should look like.  What has been growing in recent decades with regard to economic downturns?  I'll give you three hints - "F" "E" "D" - and its middle initial is Federal Reserve Board.

What's the problem with these ever slowing recoveries?  With our high-powered Fed, now more high-powered than ever, you would think we could snuff out a nagging problem like this.  But maybe that's just the problem.  Our Fed has been busy snuffing out problems for so long that it has created a problem that can't be snuffed out - the mountain of debt left over from all the snuffing:

If you compare the above charts, you can see that the sharply growing employment lag back to normal in each recession recovery from 1980 onward in chronological order correlates well with the sharply growing debt level.  As we attempt to normalize from our last recession, we appear to be going up against some kind of wall with real employment as measured by Shadowstats actually  climbing even as the Fed frantically mashes its machinery into a screaming over-heated condition.

We hear a lot about all the Fed's largess going to repair the mortgage ravaged balance sheets of banks, making them hesitant to lend. But the mortgage ravaging was the left-over of the Fed's previous snuffing project, loose money home ownership. I guess these repairs get to be a bigger job each time.

For all the trouble the Fed's debt creation causes, we are getting less and less bang for the debt dollar as the decades roll by:

This Marc Faber chart formulated 15 years ago shows the diminishing positive effect of each debt dollar on GDP growth.  Clear back then, he projected "zero hour" - when piling on new monetary debt gets us nothing but pathetic real economic growth.  This was projected to come at around the year 2015.   Fifteen years ago, few could find fault with the wonderful help from the Fed's activity.  Here in 2015ville the feeling is quite different.  This out-of-control debt dynamic is nothing new in history.  A fascinating article over at Zerohedge points out the math of debt creation vs the math of economic growth and how previous civilizations have had to deal with this diminishing return on debt path.  We may be approaching such a point now in America.

What we need to normalize isn't interest rates, that appears to be impossible now.  What we need to normalize is the economic cycle, where blundering managements have their properties taken away from them and handed over to whole new teams in bankruptcy courts.  Jim Rogers has been saying this for a long time, and he is finding lots of company these days.  We need to stop subsidizing incompetence.  Capitalism can't work this way.  Bankruptcy and banishment of the foolish was the way it worked for hundreds of years before the Fed, and no sword of Damocles debt burden swept over the world.  It was just isolated countries going through the debt binge/bust exercise with limited global collateral damage. Now the eight major central banks have extended this to the global village.

The Fed is talking higher interest rates to cool down this overheating economy while we suffer at nano% growth with virtually every reliable lead indicator pointing down:

  • The ECRI Weekly Lead Index chart
  • The transports
  • The small caps
  • The banks, especially Europe
  • Aggregate corporate SPX revenue
  • Copper 
And there are more, but you don't have to look very far beyond the dismal fact that 20% of Americans are on food stamps and similar aid, up 25% since 2004, and most are living paycheck to paycheck - the worst real economy since the Depression.  The Fed is confusing a lot of investors, raising rates against this backdrop.

In case you haven't noticed, there is a growing resentment against the Fed's business as usual.  The Tea Party this time was a revolt not against England's meddling with our colonies, but against another foreign entity meddling with our freedoms - the Federal Reserve System.   I always used to think Jim Rogers' call for abolishing the Fed to be a little extreme.  Now I see a poll out from 2010   with the stunning title "More Than Half Of Americans Want The Fed Reined In Or Abolished". 

Since then, this feeling has only grown with several recent presidential candidates, including one still in the race right now, calling for public disclosure of full FOMC transcripts within six months, not the secretive five years now being done.  This current candidate claims that if we had made this change in the early 2000s, Americans would have been dismayed by the housing bubble well in advance of the financial crisis, perhaps in time to avert it.  I won't say who this candidate is because I am Disenchanted Voter and I do not approve of their message.  

This same person, by the way, is the only serious candidate for the presidency ever to advocate reinstating Glass-Steagall.  This banking run inspired safeguard from the 1930s would put a serious crimp in the bankers' dangerous toying with depositors' money that is returning to the scene of the crime today.

One thing is certain, the Fed is not viewed the same as in years past.  Most Americans don't want too-big-to-fail anymore, and they don't want too-big-to-bail either.  The Fed model has run into the ditch, and we may not be too excited about pulling it back onto the road.

This is raising chatter about just bypassing all the Fed's complication and debt creation and resorting to helicopter money - just printing money supply and mailing it to each citizen - at the risk of instability and inflation. This radical move would be an embarrassing admission of failure of the Fed.

Taking all the federal debt created by measures of the Fed over the last 5 years of economic resuscitation and dividing it by the number of households in the US, you get some $14900 per household.  The proceeds were given to Wall Streeters. They bought Mercedes, yachts, Rolexes, and stocks with it. That temporarily benefited the makers of the yachts, and the market of course, and then we have the same old zero growth economy suffocating in taxes to pay for all the central planning.

If the helicopter changes its targeting away from the 1% to a direct, debtless gift to the 99%, the $14900 would be spent on bars, casinos, cigarettes, roller derbies, and vacations to Las Vegas. Studies noted by the Wikipedia account  have found that after the last episode of direct check mailing from the government to fix the economy, the January, 2008 stimulus checks, consumer spending was goosed by 3.5%.  One study noted that almost a third of that, 1.1% apparently went to increased emergency room visits for alcohol and narcotics related issues.  It is unclear exactly how much of the boost went to finance bad habits.  And it did wonders to avert a recession, didn't it? A new helicopter blast would temporarily benefit Joe Six Pack's lifestyle, and then we would again have the same old zero growth economy suffocating in taxes to pay for all this brilliant central planning.

If you look at a historical chart of what the helicopter charity is supposed to save, personal consumer spending, you find that it really doesn't need much saving:

In past recessions, even before the Fed's almighty hand was so dominate, personal spending pretty much went on as before, with or without destabilizing debt creation or currency debasement.  That's simply because the vast majority of people spend most of their money on the things they have to have - rent, soap, and electricity, which are typically going up no matter how the economy is doing.  In a weak economy, a graph like the one above can just be a reflection of how fast the average American is becoming poorer.
All the above mentioned federal debt creation of $14900 per household from all the extreme, convoluted monetary measures of the last five years, by far and away the biggest in history, amounts to about 3.5% of all annual personal spending - the same as the spending boost in early 2008.  After the foolish waste, it apparently doesn't amount to much of a lasting economy saver.  It didn't in 2008, and it probably won't again.

If you want a good, clear, scientific explanation of all this, I refer you to something just out this month at  A Scientific Economic Paradigm Project  (  called "Helicopter Money In Operation".  They point out that the only thing modern about it is the reference to a helicopter coined by Milton Friedman:
The new idea to avoid increasing government debt, which is actually centuries old, is simply to create helicopter money. The idea is to create spending money (“out of thin air”) and freely distribute it to consumers without at the same time creating government debt or future debt servicing obligations. This idea of printing money and spending it without future obligations is as old as paper money itself. Helicopter money only sounds new because flying helicopters around has been possible for less than one hundred years
They point out that going clear back to the Yuan Dynasty of the 1300s, many governments have utilized this. They state that,  "All past fiat currencies were abandoned eventually due to hyperinflation caused by helicopter money".  We are in an accelerating dash to that conclusion now in AmericaIn essence, we have already been doing helicopter money for years:
... QE is defined as the central bank printing money to buy private or public debt securities, a procedure also known as debt monetization. While QE injects base money as liquidity into the economy and substantially expands the balance sheet of the central bank with debt securities, the intention always has been to retract the liquidity later by selling those securities back into a stronger economy, particularly through repurchase agreements (Repos). But several years after the initial QE in 2009, central bank balance sheets remain distended and growing.
Should the government debt sit permanently on the central bank’s balance sheet, then it is de facto MFFP or helicopter money because government spending has been financed by printing money ... Another way to see that the central bank’s government debt is helicopter money is to note that in theory, if not in practice, the US Federal Reserve can cancel or write-down to zero the US Treasury securities it has purchased. It would be a “debt jubilee” of the government to itself. ... A “debt jubilee” would make it obvious that the US government is printing money purely and simply.
But it's really missing the point to argue over what to do with all the debt.  The David Stockman point about The Great Deformation (the title of his book) in Debt World resulting from years of interest free money certainly applies to the problem in general.  But as for the federal chopper money, whether financed or free, what government managed money does is wreck the economic cycle:
At the risk of over simplification, we conclude that government budget deficit spending and helicopter money will not work because they increase consumption and inflation, without increasing economic production. It is an enduring Keynesian fallacy that stimulating consumer demand leads to higher economic growth
They point to IMF data that show the clear inverse relation between government over meddling and poor economies, not just in the US but globally:

I have added the green line in the global map as my fit of the data - running from Singapore (where Jim Rogers fled to) on down to the hero of the socialists, Greece. 

What government needs to give a helping hand to is the business owner, instead of doing everything they can to destroy them. You have to wonder what kind of confidence build would transpire if the Fed radically turns from interest rate normalization this June to the extreme check mailing of the dark past.  In 2008, those checks were a message from our government saying, "the economy is in deep trouble and we don't know what to do".  Now after many years of complicated monetary Fed maneuvers, if they do any check mailing again, the message would be, "We give up. We are clueless as to how to really fix the economy".  All the confidence based activity  (hiring, investing, taking on loans, planning of all sorts) could be very badly influenced.  A new bull market in confusion would surely be underway.

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