Statistics: The Bureaucrat’s Weapon

This post Statistics: The Bureaucrat’s Weapon appeared first on Daily Reckoning.

The government “shutdown” enters its second month.

But today we raise a celebratory cheer…

A cheer for the temporary unemployment of one subset of furloughed federal employees.

We refer to the government statisticians who collect, sort, analyze, worry, torture and weaponize economic data.

That is, those who throw false weights upon the scales in support of government policy x or government policy y.

For without statistics the government is all thumbs, a plodding doofus… a fumbling cyclops speared through its one and only eye.

This beast forms a greatly reduced menace to American liberty.

Explains the late libertarian economist Murray Rothbard (with a polite tip of the cap to old Daily Reckoning hand Gary North):

Certainly, only by statistics, can the federal government make even a fitful attempt to plan, regulate, control or reform various industries — or impose central planning… on the entire economic system. If the government received no railroad statistics, for example, how in the world could it even start to regulate railroad rates, finances and other affairs? How could the government impose price controls if it didn’t even know what goods have been sold on the market, and what prices were prevailing? 

More:

Statistics… are the eyes and ears of the interventionists: of the intellectual reformer, the politician and the government bureaucrat. Cut off those eyes and ears, destroy those crucial guidelines to knowledge and the whole threat of government intervention is almost completely eliminated.

That is, without statistics the government could not “govern” us as it would.

And to be governed, noted 19th-century philosopher Pierre-Joseph Proudhon:

Is to be watched, inspected, spied upon, directed, law-driven, numbered, regulated, enrolled, indoctrinated, preached at, controlled, checked, estimated, valued, censured, commanded… registered, counted, taxed, stamped, measured, numbered, assessed, licensed, authorized, admonished, prevented, forbidden, reformed, corrected, punished… drilled, fleeced, exploited, monopolized, extorted from, squeezed, hoaxed, robbed… repressed, fined, vilified, harassed, hunted down, abused, clubbed, disarmed, bound, choked, imprisoned, judged, condemned, shot, deported, sacrificed, sold, betrayed; and to crown all, mocked, ridiculed, derided, outraged, dishonored. 

We might file additional torts… but we operate on a strict word count.

And the federal government presently lacks an entire bucketful of data to govern us…

MarketWatch reports the current cataclysm may delay the following economic reports:

Durable goods orders (Jan. 25)… core capital equipment orders (Jan. 25)… new home sales (Jan. 25)… advance trade in goods (Jan. 29)… housing vacancies (Jan. 29)… gross domestic product (Jan. 30)… personal income (Jan. 31)… core inflation (Jan. 31)… construction spending (Feb. 1).

We prefer to be uninformed rather than misinformed.

We therefore relish the prospect of going uninformed about the latest GDP numbers, for instance.

Government at all levels is credited with a thumping 36% of U.S. GDP spending.

But assume the government pays a fellow to dig a hole. Assume further it pays him to refill it.

By the official telling, you have just witnessed an increase to the gross domestic product.

Imagine further that the charade was financed through debt.

In its GDP calculations, the Bureau of Economic Analysis suggests debt-financed government spending adds authentic oomph to the economy.

But financial advisory firm Baker & Co. says money government borrows must eventually be repaid.

Thus, it is not income. It is “artificial stimulus.”

Subtract the artificial stimulus, Baker argues… and real GDP has declined an average 7.45% each year since 2007.

On a similar note…

A fellow by the name of John Williams captains the website ShadowStats.

His stated purpose is to expose and analyze “flaws in current U.S. government economic data and reporting.”

The government adds a cup of water to a cup of milk, for example. Thus may it claim to produce two cups of “milk.”

Williams penetrates the shim-sham — two cups of watery milk is not two cups of whole milk.

Here is how official GDP stands against ShadowStats’:

Chart 1

Revealed is a roughly 4% difference.

Which data do you believe?

Redirect your attention to the inflation rate…

Last year the official consumer price index (CPI) indicated a 2.44% rate of inflation.

But if you measure inflation as the government measured inflation in 1980… a different sketch emerges.

By the standards of 1980, CPI increased not 2.44% last year, says ShadowStats — but 9.6%:

Chart 2

Go here should you seek additional light about ShadowStats.

Again, which do you believe?

Perhaps ShadowStats stretches the figures some. No cloak of infallibility surrounds it.

They nonetheless perform a capital service in our estimate:

Exposing the government’s statistical myths.

So today we hoist the black flag of anarchy… and raise three cheers for our liberation from the government statistician, however temporary.

“The only good bureaucrat is one with a pistol at his head,” said the irreplaceable Mencken.

We would add but one detail:

Be sure it’s loaded…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post Statistics: The Bureaucrat’s Weapon appeared first on Daily Reckoning.

Statistics: The Bureaucrat’s Weapon

This post Statistics: The Bureaucrat’s Weapon appeared first on Daily Reckoning.

The government “shutdown” enters its second month.

But today we raise a celebratory cheer…

A cheer for the temporary unemployment of one subset of furloughed federal employees.

We refer to the government statisticians who collect, sort, analyze, worry, torture and weaponize economic data.

That is, those who throw false weights upon the scales in support of government policy x or government policy y.

For without statistics the government is all thumbs, a plodding doofus… a fumbling cyclops speared through its one and only eye.

This beast forms a greatly reduced menace to American liberty.

Explains the late libertarian economist Murray Rothbard (with a polite tip of the cap to old Daily Reckoning hand Gary North):

Certainly, only by statistics, can the federal government make even a fitful attempt to plan, regulate, control or reform various industries — or impose central planning… on the entire economic system. If the government received no railroad statistics, for example, how in the world could it even start to regulate railroad rates, finances and other affairs? How could the government impose price controls if it didn’t even know what goods have been sold on the market, and what prices were prevailing? 

More:

Statistics… are the eyes and ears of the interventionists: of the intellectual reformer, the politician and the government bureaucrat. Cut off those eyes and ears, destroy those crucial guidelines to knowledge and the whole threat of government intervention is almost completely eliminated.

That is, without statistics the government could not “govern” us as it would.

And to be governed, noted 19th-century philosopher Pierre-Joseph Proudhon:

Is to be watched, inspected, spied upon, directed, law-driven, numbered, regulated, enrolled, indoctrinated, preached at, controlled, checked, estimated, valued, censured, commanded… registered, counted, taxed, stamped, measured, numbered, assessed, licensed, authorized, admonished, prevented, forbidden, reformed, corrected, punished… drilled, fleeced, exploited, monopolized, extorted from, squeezed, hoaxed, robbed… repressed, fined, vilified, harassed, hunted down, abused, clubbed, disarmed, bound, choked, imprisoned, judged, condemned, shot, deported, sacrificed, sold, betrayed; and to crown all, mocked, ridiculed, derided, outraged, dishonored. 

We might file additional torts… but we operate on a strict word count.

And the federal government presently lacks an entire bucketful of data to govern us…

MarketWatch reports the current cataclysm may delay the following economic reports:

Durable goods orders (Jan. 25)… core capital equipment orders (Jan. 25)… new home sales (Jan. 25)… advance trade in goods (Jan. 29)… housing vacancies (Jan. 29)… gross domestic product (Jan. 30)… personal income (Jan. 31)… core inflation (Jan. 31)… construction spending (Feb. 1).

We prefer to be uninformed rather than misinformed.

We therefore relish the prospect of going uninformed about the latest GDP numbers, for instance.

Government at all levels is credited with a thumping 36% of U.S. GDP spending.

But assume the government pays a fellow to dig a hole. Assume further it pays him to refill it.

By the official telling, you have just witnessed an increase to the gross domestic product.

Imagine further that the charade was financed through debt.

In its GDP calculations, the Bureau of Economic Analysis suggests debt-financed government spending adds authentic oomph to the economy.

But financial advisory firm Baker & Co. says money government borrows must eventually be repaid.

Thus, it is not income. It is “artificial stimulus.”

Subtract the artificial stimulus, Baker argues… and real GDP has declined an average 7.45% each year since 2007.

On a similar note…

A fellow by the name of John Williams captains the website ShadowStats.

His stated purpose is to expose and analyze “flaws in current U.S. government economic data and reporting.”

The government adds a cup of water to a cup of milk, for example. Thus may it claim to produce two cups of “milk.”

Williams penetrates the shim-sham — two cups of watery milk is not two cups of whole milk.

Here is how official GDP stands against ShadowStats’:

Chart 1

Revealed is a roughly 4% difference.

Which data do you believe?

Redirect your attention to the inflation rate…

Last year the official consumer price index (CPI) indicated a 2.44% rate of inflation.

But if you measure inflation as the government measured inflation in 1980… a different sketch emerges.

By the standards of 1980, CPI increased not 2.44% last year, says ShadowStats — but 9.6%:

Chart 2

Go here should you seek additional light about ShadowStats.

Again, which do you believe?

Perhaps ShadowStats stretches the figures some. No cloak of infallibility surrounds it.

They nonetheless perform a capital service in our estimate:

Exposing the government’s statistical myths.

So today we hoist the black flag of anarchy… and raise three cheers for our liberation from the government statistician, however temporary.

“The only good bureaucrat is one with a pistol at his head,” said the irreplaceable Mencken.

We would add but one detail:

Be sure it’s loaded…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post Statistics: The Bureaucrat’s Weapon appeared first on Daily Reckoning.

The United States: “Flawed Democracy”

This post The United States: “Flawed Democracy” appeared first on Daily Reckoning.

The annual edition of The Economist’s Intelligence Unit Democracy Index is out.

Across several democratic categories nations are ranked. These include but are not limited to:

Civil liberties…  the functioning of government… political participation… electoral process… pluralism… and political culture.

Where does the United States rank among the nations of the Earth?

Is it the most democratic? Perhaps the fifth? Or the eighth?

Answer shortly…

We admit it at the outset — we find the spectacle of democracy vastly amusing, grand and gorgeous.

The charming fraud, the innocent delusion… the mushy-headedness of it all.

The “people” give the orders in democracy say the civics books.

But did anyone ask you — for example — if invading Iraq was a grand idea?

Or if your tax dollars should bail out Wall Street in 2008?

Or if your government should bury itself under $22 trillion of debt?

At the community level the business is not necessarily improved.

Consider this case:

A red light camera was recently installed outside our Baltimore office. It presently mounts watch over the intersection of St. Paul and Madison Streets.

But were residents asked if we wished to be so deeply and elaborately policed?

What do you suppose would have been the answer if we were?

Yet the camera is on duty… hooking every felonious automobilist who crosses under one-billionth of one second too late.

Somehow it all seems beyond democratic agency, beyond all control.

It is simply the way the political machinery operates, a fellow concludes.

He may cluck-cluck his opposition to it… but he is largely a man resigned.

And if “the people own the government,” as the democratic gospel singers tell us, we suggest you put the theory to this test:

Approach the guardhouse at the nearest military installation. Demand immediate entrance, asserting your rights of property.

The ownership theory hinges upon the reaction you receive.

But to return to our question…

Where is the United States’ democratic ranking among the nations?

Is it first… third… sixth… perhaps — heaven forfend — ninth?

The answer, says The Economist’s Intelligence Unit Democracy Index, is…

Twenty-fifth — the United States is the 25th most democratic nation on Earth.

It finds itself sandwiched between Estonia and the Jeffersonian paradise known otherwise as Cabo Verde.

Thus America is sorted into the category of “flawed democracies,” coming beneath the “full democracies” of the world.

Listed here are the world’s top 10 “full democracies,” seriatim:

Norway, Iceland, Sweden, New Zealand, Denmark, Canada, Ireland, Finland, Australia… and Switzerland.

Of course, we recommend you take it all with requisite dose of table salt.

The Economist is globalist to the very tips of its fingers.

Unsurprisingly, the report labels Trump a unique menace to American democracy:

[President Donald] Trump has repeatedly called into question the independence and competence of the U.S. judicial system with regard to the ongoing federal investigation, led by Robert Mueller, into potential ties between Mr. Trump’s presidential campaign and Russia, and various courts’ efforts to block some of his policy orders, particularly regarding immigration… As a result, the score for political culture declined in the 2018 index.

Be it so.

But is democracy the gold standard of government?

Under our system We the People delegate the business of governing to officials we elect.

Should these officials execute their office to the dissatisfaction of voters, they are ousted from office.

Others come in.

But time often reveals the replacement is a scalawag on par with the original — if not worse.

It is easy to indict the politician as a whole. But if we haul the politician into the dock… We The People must go with him.

We perpetually holler about ‘them rascally, no-good, lyin’ politicians’…

Them silver-tongued, glad-handing, baby-smooching mugs who babble one thing to get elected — but do another once in office.

Kick the bums out is the eternal bellow.

But we contend the politicians act as they do… because We the People act as We do.

We demand a shining military machine with every bell and whistle… heaping doses of Social Security… Medicare… a Rolls-Royce education… a million gaudy baubles.

But we do not wish to pay for it all.

Hand it over, we bark out one corner of our mouth. But don’t dare raise our taxes, we belch out the other.

Many of us say we’re heart and soul for limited government

But We are heart and soul for limited government… as long as it’s the other fellow’s heart and soul feeling the blade.

Give me that tax break, says the one. No, give it to me, says the other.

You can both go scratching, says the third. I deserve it more.

A fourth files a claim of his own.

Meantime, the hard-luck farmer wants his back scratched. The hard-pressed businessman wants his belly rubbed. The overlabored teacher wants her apple.

And millions more are hard at the business…

All trying to work the angles, to get a bucket in the stream, to get a snout in the trough… to catch a penny.

It is the evil of “special interests” when the other fellow gets his.

But it is “democracy in action” when it butters our own parsnips.

We do not exempt ourself from criticism. We are out for No.1 as much as anybody.

Let the politician take an honest man’s attitude before the American public 

Let him tell us we can have either A. Or B. But not A and B — and certainly not A, B and C.

Not without paying for it, that is.

Then observe the fleets of rotting eggs and tomatoes raining upon his head.

Ten times of the 10, our honest Abe is licked by the silver tongue who tickles our ears with false but catchy jingles.

This is the man who wins our franchise when we enter the vote booth.

But still the circus goes on, entertaining as ever, paraded out daily in a dozen rings…

The great warfare of factions, the thundering collision of interests… each fellow trying to get it over on the next.

Pity the poor politician who has to referee and score the bout.

He cannot please us all. Yet he tries.

So today we lift our modest hymn of sympathy for the poor, fimble-fambling politician.

He is a man in an impossible fix.

Stow your objection that the nation is nearly $22 trillion in debt largely because the election-minded politician has thrown the Treasury doors wide open.

We will not listen!

Under what alternate type of government would you be so royally entertained?

A dictatorship, for example, offers no comparable entertainment. All oars pull in one direction. And the fantastic combats of democracy are unknown.

We will occasionally find ourself out of joint for one reason or the other.

But we always take solace in the pleasant fact that we are quartered under the democratic folds of the stars and stripes.

Yes, we concede that “democracies have ever been spectacles of turbulence and contention,” as James Madison notes in Federalist No. 10.

We further grant his point that democracies:

“Have ever been found incompatible with personal security or the rights of property; and have in general been as short in their lives as they have been violent in their deaths.”

All true and more.

We even admit the possibility that American democracy is closer to the end of the chapter than the beginning.

But this you cannot deny:

What a show while it lasts…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post The United States: “Flawed Democracy” appeared first on Daily Reckoning.

The Date Stocks Will Reach New Highs

This post The Date Stocks Will Reach New Highs appeared first on Daily Reckoning.

The S&P recently tumbled 19.8% before finding its legs — coming within an ace of the official 20% defining a bear market.

Bet let us declare it a bear market and have done.

Based on history’s telling, when can you expect stocks to recapture their early October 2018 highs?

A) 11.4 months

B) 1.6 years

C) 3.2 years

D) 5.7 years

The answer shortly.

But first a progress report…

The Dow Jones marched 164 points forward today.

The S&P added 20; the Nasdaq, 49.

Meantime, we see today that Daily Reckoning associate John Mauldin is lacing into the Federal Reserve.

For what reason?

Scientific incompetence — conducting a “two-variable” experiment.

That is, for raising interest rates while simultaneously trimming its balance sheet.

Do one. Or do the other.

But not both at once, he laments:

No serious scientist would run a two-variable experiment. By that I mean, you run an experiment with one variable to see what happens.

If you have two variables and something happens — either good or bad — you don’t know which variable caused it.

You first run the experiment with one variable, then do it again with the second one. After that, you have the knowledge to run an experiment with both.

So disturbed is Mr. Mauldin that he labels it “decidedly the stupidest monetary policy mistake in a long line of Fed mistakes.”

A remarkable achievement, if true. It is a line already stretching horizon to horizon.

But we suspect Mauldin has hooked onto something here.

The fed funds rate — whose range the Federal Reserve’s “Open Market” Committee establishes — stands presently between 2.25% and 2.50%.

But when combined with quantitative tightening, the “true” federal funds rate may approach 5%… or double the official rate.

Explains analyst Michael Howell of the CrossBorder Capital blog:

In other words,[it is] equivalent to the Fed undertaking around 20 rate hikes rather than the nine it has so far implemented this cycle.

Twenty rate hikes since December ’15!

How can it fail to leave its impact?

We have further suggested that the fed funds rate may now have crossed the “neutral rate” of interest.

Above the neutral line rates no longer offer economic support. Nor do they merely hold the scales even.

They instead form an active drag.

Meantime, global liquidity is evaporating before our eyes… like a puddle in the searing equatorial sun.

Global central banks heaved forth some $2.7 trillion of credit growth in 2017.

And in 2018?

Global credit contracted $410 billion.

Never before in history, Atlas Research reminds us, has the world witnessed a $3.1 trillion reversal in central bank liquidity.

Do you require further explanation for the market’s negative returns last year?

Or for the bear market October–December?

It is said one picture is worth a thousand words. Here is an example brilliantly in point:

Chart

No one should therefore be surprised to find the global economy going backward.

Chinese exports have plunged to two-year lows. Imports are also reversing.

Export powerhouse Germany is now reporting its steepest industrial decline in a decade.

As we reported this week:

The world has almost certainly sunk into recession if we take industrial growth as a thermometer of global economic health.

The so-called Organisation for Economic Cooperation and Development (OECD) runs its own economic health diagnostic.

Its composite leading indicator ran to 99.3 in November (the most recent available data).

The December number will likely dip beneath 99.3.

For 50 years running, we learn from Reuters, the United States has entered recession whenever the index slips below 99.3.

The roster includes 1970, 1974, 1980, 1981, 1990, 2001 — and 2008.

1998 supplied the lone exception.

But to return to our original question — how long must you wait before the stock market makes good its 20% losses?

The answer assumes added significance the nearer you come to retirement.

Assume the recent bear market knocked you back 20%.

Must you wait up to six years to merely catch up?

Or perhaps you are already retired and things are tight.

Must you now confront the nightmare reality of running out of money?

An Allianz Life survey reveals retirees fear going broke more than death itself.

61% to 39% they preferred the grave to the gutter.

And so… can you expect the stock market to recover its bear market losses in:

A) 11.4 months

B) 1.6 years

C) 3.2 years

D) 5.7 years

Stretching back to 1900, financial journalist Mark Hulbert ran the numbers through his mill… in search of light.

He took account for dividends and inflation to give the truest reading.

What was the final answer?

C — 3.2 years.

Not 11.4 months, that is — but not 5.7 years either.

If the historical average holds, the stock market will attain new heights in December 2021.

But examine the median recovery, says Hulbert — “such that half of the bear market recoveries were shorter and half longer” — and a brighter image emerges.

The median recovery period is 1.9 years… putting the market at new heights next September.

But statistics are lovely liars.

The market may recover quicker yet… or slower yet.

We suspect slower as we gaze out upon the gathering gloom.

Recall, the Federal Reserve is executing “decidedly the stupidest monetary policy mistake” in its history.

Recall further that global liquidity is in deep contraction.

Recall further still that leading economic data suggest the world is sinking into recession.

But we concede… we have no answer.

Veritatem dies aperit, said the Roman Seneca — time reveals truth.

Time — only time — will tell.

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post The Date Stocks Will Reach New Highs appeared first on Daily Reckoning.

Markets Hang “Between Order and Chaos”

This post Markets Hang “Between Order and Chaos” appeared first on Daily Reckoning.

Today we bear dramatic news:

Markets have entered a “phase transition zone”… the “magic space between order and chaos.”

This we have on the authority of the brains at Fasanara Capital.

But what will emerge on the other side — order or chaos?

Today our mood is heavy, our brow creased with thought… as we hunt the answer.

We begin with a hypothesis:

Since the financial crisis, central banks have acted as an overprotective parent… or an overzealous referee of a prize fight.

They have kept the bears separated from the bulls, chained in a neutral corner where they could do no harm.

That is, they have throttled off the violent combats, the savage brawls of the market.

“This stock is worth x,” shout the bulls in a normal market. “No — it is only worth y,” roar the protesting bears.

They are soon upon each other’s throats.

Into a cloud of dust they vanish, arms, legs, elbows, flying — and may the better man win.

Ultimately a winner emerges with the proper price.

The professional men call it price discovery. 

Price discovery represents, to mix the figure a bit, the democracy of the marketplace.

Each investor has a vote. His vote may contrast bitterly with the other fellow’s.

But the better ideas will generally win the election… and the worse will lose.

The world is left with better mousetraps, superior companies, happier customers.

An Amazon cleans out a Sears. An Apple pummels a Compaq into nonexistence. A Google shows an AOL its dust.

And so on. And so on.

But after the financial crisis, the central banks rolled in with their tanks… and declared martial law.

The democracy of the marketplace went under the treads.

Is this company superior to that one? Does it deserve its stock price?

No one could say.

QE and zero interest rates put blindfolds over everyone’s eyes… and tape over their mouths.

“Passive” investing waged additional war on price discovery.

“Passively” managed funds make no effort to pinpoint winners. They track an overall index or asset category — not the individual components.

Passive investing has rendered actively picking stocks a fool’s errand.

Some 86% of all actively managed stock funds have underperformed their index during the last 10 years.

Explains Larry Swedroe, director of research at Buckingham Strategic Wealth:

“While it is possible to win that game, the odds of doing so are so poor that it’s simply not a prudent choice to play.”

Despite the gaudy averages, only a handful of stocks accounted for most of the market’s gains these past few years.

Through last August, for example, the FAANG stocks  — Facebook, Amazon, Apple, Netflix, Alphabet (Google’s parent company) —  accounted for half of the S&P’s gains.

But it was the false stability of Saddam Hussein’s Iraq. Hang the leader and the place goes to pieces.

In October the FAANGs began going to pieces. A period of vast instability resulted.

And the stock market came within an inch of a bear market by year’s end.

Since investors were all going blind, who could take up the load?

Markets began approaching Fasanara’s “phase transition zone.”

In a word… central banks have destroyed the market’s “resilience.”

Fasanara:

The market has lost its key function of price discovery, its ability to learn and evolve and its inherent buffers and redundancy mechanisms. In a word, the market has lost its “resilience”… 

Our inability as market participants to properly frame market fragility and the inherent vulnerability of the financial system makes a market crash more likely, as it helps systemic risk go unattended and build further up. 

It is this systemic risk and loss of resilience that heightens the likelihood of a crash:

Conventional market and economic indicators (e.g., breaks of multiyear equity and home price trendlines, freezing credit markets, softening global [manufacturing]) have all but confirmed what nontraditional measures of system-level fragility signaled all along: that a market crash is incubating, and the cliff is near. 

But how close is the cliff?

Complex systems like markets, argues Fasanara (and Jim Rickards), are especially vulnerable in this “phase transition zone.”

The butterfly flaps its wings in Brazil and normally that is that.

But in highly unstable conditions, the butterfly flaps its wings and whips up a hurricane off Florida.

Small inputs, that is, have outsized effects under instability… shifting “order” into “chaos.”

What are some of the flapping butterflies that could conjure the hurricane?

Among the eight Fasanara identifies:

Trade war. China. Oil. Trump and the Mueller investigation.

Any one of these —  in theory — could tip markets over the chaotic border.

“Given our overall view for market system instability,” warns Fasanara, “it becomes crucial to monitor upcoming catalyst events, as any of them may be able to accelerate the large adjustment we anticipate.”

Meantime, we remain, suspended in the “magic space between order and chaos.”

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post Markets Hang “Between Order and Chaos” appeared first on Daily Reckoning.

REVEALED: When Recession Starts

This post REVEALED: When Recession Starts appeared first on Daily Reckoning.

Today we reveal the time frame of the next recession — to within three months.

The surprising details anon. But first to a far more immediate catastrophe…

We are informed the partial government “shutdown” has entered a record-extending 25th day.

It is information we must take on faith, and at second hand.

That is because we have suffered not the slightest disruption to our affairs… nor has anyone within our orbit.

We would prolong the calamity until the very last cow reports to the butcher… or the first honest politician reports to Washington.

That is, we would prolong the calamity permanently.

But those more publicly minded insist we are mistaken.

They claim the shutdown is already casting a shadow, broad and heavy, over the United States economy.

Over 800,000 federal employees have been thrown from the public payrolls, they argue.

Data technology company Enigma estimates the shutdown has “blown a nearly $5 billion hole in federal workers’ finances.”

And the economy is deprived of their labor’s fruit.

Private contractors who guzzle from the federal trough are likewise going thirsty.

In turn, so are merchants downstream of the central catastrophe.

Moody’s chief economist Mark Zandi says the shutdown will drain 0.5% from first-quarter GDP:

We estimate (the shutdown) will reduce first-quarter real GDP growth by approximately 0.5 percentage points. Of this, about half will be due to the lost hours of government workers, and the other half to the hit to the rest of the economy.

But we would remind the calamity-howlers:

All furloughed federal employees will be issued full back wages once the “shutdown” ends.

And all water drained from first-quarter GDP will go back in the tub.

Meantime, the paid vacationers can snooze deep into the day, laze before the television, munch popcorn… secure in the knowledge that all back pay is due them.

But to return to the question under consideration… the time frame of the next recession.

Global growth is coming to a crawl.

Chinese exports have plunged to two-year lows. December imports also dropped 7.6% — a portent of softening domestic demand.

Meantime, European factory output wallows at three-year lows.

If we use global industrial growth as a proxy for global economic health, Zero Hedge reminds us, the world has almost certainly sunk into recession.

The United States economic machine still runs forward. But at a reducing rate.

Morgan Stanley, for example, projects U.S. growth will slip to 1% by 2019’s third quarter.

All the while, growth of global central bank balance sheets went negative last August.

Bank of America reports global money growth (measured by M1 money supply) nears its lowest point since mid-2008.

And Morgan Stanley confirms that each time M1 money supply growth tips negative — as it presently is — trouble of some type is on tap:

Chart

So is recession dead ahead… like an iceberg in the North Atlantic night?

Here our tale gathers pace…

The Federal Reserve has essentially announced a halt to its rate hikes.

A March hike has already been removed from the card table. Later hikes are also in question.

But will it be enough to sustain the show?

Once a global slowdown becomes obvious even to the Federal Reserve, it may be forced to take one additional step… and actually cut rates again.

That will be the point we suspect recession is close.

But is it not common knowledge that Federal Reserve tightening precedes a recession — not loosening?

Yes, but monetary policy features a delayed fuse.

Previous tightening will have already worked its damage. By the time it is appreciated, it is time again to back off.

The Fed begins cutting rates. But it is too late.

Let the record show:

The past three recessions followed within 90 days of the first rate cut that ended a hike cycle.

Explains Zero Hedge.

While many analysts will caution that it is the Fed’s rate hikes that ultimately catalyze the next recession and every Fed tightening ends with a financial “event,” the truth is that there is one step missing from this analysis, and it may come as a surprise to many that the last three recessions all took place [within] three months of the first rate cut after a hiking cycle!

Does the rate cut itself frighten the horses… and turn a slowdown into a rout?

One can argue that it was the Fed’s official admission of economic weakness — by cutting rates — that triggered the economic contraction that was gathering pace as a result of [previous]higher rates and tighter financial conditions.

Once again — if the past three recessions are true indicators:

The next recession will commence within three months of the next rate cut.

The supreme irony:

Wall Street will consider the rate cut a beautiful omen for the stock market…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post REVEALED: When Recession Starts appeared first on Daily Reckoning.

EXPOSED: the “Green” New Deal

This post EXPOSED: the “Green” New Deal appeared first on Daily Reckoning.

We took command of The Daily Reckoning fully aware of the bodily risk, reduced here to words by our co-founder Bill Bonner:

In our trade as newsletter publishers, hardly a day passes without a good laugh. Our only occupational hazard is a rupture of the midriff.

Each day tosses up a fresh roster of fools, scoundrels, frauds, knaves, rogues, ne’er-do-wells, world improvers, lunatics and pitchmen.

Sometimes — though rarely — they combine in the form of a single person.

The trouble with them all is that they are vastly amusing. Hence the constant threat of an abdominal tear.

Sunday night the odds caught up with us… our belly was ripped from its moorings…

For there she was on 60 Minutes, the latest political sensation, Alexandria Ocasio-Cortez — AOC from here forward.

A former waitress, AOC was serving food 1.5 years ago. As the newly installed representative of New York’s 14th Congressional District, today she is serving notice…

Notice that a New Deal is in prospect — a “Green” New Deal…

That every American is to be guaranteed productive employment…

That Medicare for all will cure the nation’s ailments…

That free college is as elemental a right as life itself…

And that the ultra-rich will pay all the freight.

AOC’s solution is a 70% tax on all income exceeding $10 million per year.

“There’s an element where, yeah, people are going to have to start paying their fair share in taxes,” said she in the Queen’s English.

We have no objection to a man paying his fair share.

But what is fair? And who decides?

“Render unto Caesar what is Caesar’s,” said Jesus our Lord.

But He never specified precisely what was Caesar’s.

Was it 5%… 20%… 60%… 99%?

For the United States government, the answer was 7% when the income tax went upon the law books in 1913.

This was the top combined tax rate for those earning $500,000 or more.

Incidentally… $500,000 in 1913 dollars equals $12,729,191.92 in 2019 dollars.

But America is a much fairer society today.

It is such a shame the AOC plan will never make it ashore.

It is fatally holed below the waterline… like the Titanic by its iceberg.

Any third-rater can see there aren’t enough super-rich to fleece.

Our agents inform us some 16,000 Americans earn over $10 million per annum — at least as of 2016.

What is the tax haul once the 70% rate kicks in?

According to Mark Mazur, former Treasury Department official now laboring for the Tax Policy Center — some $72 billion annually when all factors are considered.

But how will a slight $72 billion bump substantially fund a Green New Deal… jobs for all… universal Medicare… free college tuition?

And that is assuming the rich sit still, waiting for the tax man to seize them by the collar.

But the rich are moving targets

They tuck into loopholes within the tax code. They dodge into overseas tax shelters. They hide under shell companies.

Who knows how much money the tax would haul aboard once the accountants are done with it?

And as anyone who has looked at it honestly knows — the great broad middle class is where the real tax money is.

As famous bank robber Willie Sutton supposedly answered when asked why he robbed banks:

“That’s where the money is.”

But the fact is best not mentioned in polite company… or at campaign rallies.

Ah, but the great and the good have leapt to AOC’s defense, including Paul Krugman — winner of the Nobel Memorial Prize in Economic Sciences:

Peter Diamond… in work with Emmanuel Saez — one of our leading experts on inequality — estimated the optimal top tax rate to be 73%. Some put it higher: Christina Romer, top macroeconomist and former head of President Obama’s Council of Economic Advisers, estimates it at more than 80%.

But how would they know?

Have any of them ever earned over $10 million per year?

If they did… might they think of better things to do with their millions than hand them off in taxes?

But our enthusiasts will counter that the top tax rate exceeded 90% during the 1950s — when Eisenhower’s America bestrode the world like an economic Colossus.

It was obviously to no detriment whatsoever, they say. To the contrary in fact.

Yes, but misguided roosters claim credit for the dawn…

We might remind the 70%-90% crowd that the United States industrial machine was unscratched by WWII.

Meantime, much of the industrial world remained under rubble in the 1950s.

Thus America stole a lovely march on the competition. How could it be other than first?

The 8th Air Force likely explains the business far better than any tax on America’s rich.

And American economic kingship gradually yielded as Europe and Japan rebuilt the factories.

But to return to our budding young democratic socialist…

Sunday night AOC pounded her tom-toms for a “Green New Deal.”

Its objectives include “eliminating greenhouse gas emissions from the manufacturing, agricultural and other industries” and “meeting 100% of national power demand through renewable sources.”

But if you think its purpose is to simply lower a global fever, you are far off the facts.

AOC:

The Plan for a Green New Deal shall recognize that a national, industrial, economic mobilization of this scope and scale is a historic opportunity to virtually eliminate poverty in the United States and to make prosperity, wealth and economic security available to everyone participating in the transformation.

Was any Soviet five-year plan one fraction so ambitious?

The communists could never get a handle on their own steel, iron and rubber.

But AOC and her fellows would command Nature herself… and dictate her temperature across all four corners of Earth.

And eliminate poverty into the bargain!

This much is certain:

It would be a “green” New Deal in one sense:

Loads of green would fall into the pockets of the clean energy industry.

It cannot go on its own without massive taxpayer subsidies.

Thus the corporations AOC normally thunders against would get their buckets in the stream, their snouts in the trough… and their hands in taxpayer pockets.

There is a term for it: crony capitalism. Endorsed, no less, by a socialist.

Let it never be said that politics lacks ironies.

If you happen to believe the plan is radical, you are in excellent company. AOC herself:

“If that’s what radical means, call me a radical”

We have nothing against radicals. In fact, we much esteem them.

They are far more interesting to listen to than members of the rotary club… or dentists… or presidents of banks.

Those who actually believe the absurdities issuing from their own mouths take on additional fascination.

We suspect AOC is pleasant enough off duty.

In her personal life she may be amiable, engaging and — like most people — reasonably sane.

But put her in power, put a nightstick in her hand… and you have unleashed a public menace.

She becomes the humanitarian with the guillotine.

As the great Mencken styled it:

“The urge to save humanity is almost always a false front for the urge to rule it.”

A nation can survive its fools, argued writer Taylor Caldwell — but not its traitors.

But we begin to suspect it’s the other way around…

The fools are far more common. And much more likely to succeed.

But what spectacle it all provides, what theater, what circus. And we enjoy a front-row seat to the entire show.

We would not give it up for all the perfume of Arabia.

A man in our seat is truly a man enthroned…

Despite the occupational hazard of a ruptured midriff…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post EXPOSED: the “Green” New Deal appeared first on Daily Reckoning.

Are Stocks Cheap Again?

This post Are Stocks Cheap Again? appeared first on Daily Reckoning.

Are stocks “cheap” again?

Is it time once again to cast your bread upon the waters… and buy?

Today we rise above the daily hurly-burly of the market… take the long view… and ransack the past for clues about the future.

The major averages were negative for 2018. And the stock market has just emerged from its bleakest December since 1931.

But the market has found a toehold, bleats the consensus. The way ahead is higher. It is time to hunt bargains.

There is doubtless justice here — in specific cases and in the short run at least.

But are stocks cheap overall? And what can you expect for the next 10 years?

In general terms…

If stocks are cheap today, you can expect — generally, again — lovely returns for the following decade.

The reverse obtains if stocks are expensive today.

So once again: Are stocks presently cheap? Is it time to buy?

Warren Buffett’s preferred metric is the TMC/GNP ratio.

That is, the ratio of total market cap to U.S. GNP (which approximates but does not equal GDP).

If the total valuation of the stock market is less than GNP, stocks are cheap.

If it is greater than GNP… stocks are dear.

Mr. Buffett claims this formula is “probably the best single measure of where valuations stand at any given moment.”

Any ratio below 50% means stocks are “significantly undervalued.”

A ratio above 115% means they’re “significantly overvalued.”

Stretching four decades, the TMC/GNP ratio was lowest in 1982 — at 35%.

Not coincidentally, 1982 marked the onset of the lengthiest bull market of all time.

In violent contrast, the TMC/GNP ratio was highest in 2000, at 148%.

The dot-com catastrophe was close behind.

What is the TMC/GNP ratio today, Jan. 9, 2019?

127.5%.

That is, despite the worst December since 1931… by this measure stocks remain “significantly overvalued.”

Chart

What does that 127.5% imply for the stock market over the next decade, based on the historical record?

Negative 0.5% returns per year, including dividends.

You can expect negative returns for the next decade — if you take this TMC/GNP ratio as your guide.

Is it an infallible prophet?

It is not. None exists this side of eternity.

But financial journalist Mark Hulbert tracks eight market indicators he deems most credible. And he ranks it among the better of them.

But could negative 0.5% returns per year for the next decade — including dividends — actually be optimistic?

John Hussman captains a hedge fund, Hussman Strategic Advisors by name.

Mr. Hussman is what is known as a “perma-bear.”

Yet his crystal ball occasionally yields frightfully accurate pictures.

For example:

In March 2000 he soothsaid tech stocks would soon plummet 83%. How much did the Nasdaq lose between 2000 and 2002?

83%.

He also forecast in March 2000 that the S&P would post negative returns the following decade. It did.

In April 2007 Hussman said the S&P could plunge 40%. His vision was only off slightly. The S&P lost 55% from 2007–09.

And what does Hussman’s crystalline sphere reveal for the decade ahead?

First another question…

Assume you bought the S&P in 1999. You have held ever since — over hill, over dale, through every peak, every valley.

Keep in mind the S&P has raged some 300% since bottoming in 2009.

What has been your average yearly gain since 1999?

4.8% — again, dividends included.

A gain, yes.

But boring old gold would have yielded you a superior return since 1999… incidentally.

Perhaps “buy and hold” should read “buy and hope.”

But to return to the question at hand…

What can you expect for the next 10 years based on current stock market valuations?

Hussman:

At the March 2000 bubble peak, an understanding of market history… enabled my seemingly preposterous but accurate estimate that large-cap technology stocks faced potential losses of approximately 83% over the completion of the market cycle…

At the 2007 market peak, by contrast, stocks were generally overvalued enough to indicate prospective losses of about 55%…

And this market cycle?

In our view (supported by a century of market cycles across history), investors are vastly underestimating the prospects for market losses over the completion of this cycle… We presently estimate median losses of about 63% in S&P 500 component stocks over the completion of the current market cycle.

Kind heaven, no — a negative 63% return!

Take this vision with a heaping spoon of table salt… as you should with any forecast.

And the further out the reading the heavier the dose.

But if a hangover exists in direct proportion to the binge that caused it… investors may be laid up for the next decade.

Regards,

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post Are Stocks Cheap Again? appeared first on Daily Reckoning.

The Origin of the Next Financial Crisis

This post The Origin of the Next Financial Crisis appeared first on Daily Reckoning.

Today, additional evidence that recession — or worse — is in sight.

But first, it appears the “Powell put” may extend the countdown clock…

Since Jerome Powell’s dovish comments on Friday, the Dow Jones has been up and away… as an addict thrills to the promise of additional stimulant.

It leaped another 256 points today.

Both S&P and Nasdaq have been similarly seduced.

The S&P ended the day up another 24 points; the Nasdaq, 73.

Thus Mr. Powell becomes the latest dealer to backstop Wall Street’s addiction to easy credit.

First came the “Greenspan put” after October 1987’s Black Monday.

The “Bernanke put” was on tap after 2008 — and was it ever.

This was of course succeeded by the “Yellen put.”

And now… Jerome Powell.

But the stuff at Powell’s disposal is far weaker his predecessors’.

The fed funds rate rose as high as 4.75% in September 2007 — as the foundations gave way on the housing market.

But it squatted at 1.50% when Powell came on station last February.

That is, he has far less space to cut rates.

Meantime, Bernanke and Yellen were able to inflate the balance sheet from a pre-crisis $800 billion to a delirious $4.5 trillion.

Powell could not possibly work an operation on that scale.

This at least partly explains why he has been withdrawing the narcotic since he came aboard — to rebuild his stocks for future use.

But Mr. Powell suggested last Friday that he is willing to call a halt “if needed.”

And so Pavlov’s dogs began drooling. And the stock market began its merry run.

But it is a false promise — as the promise of the needle is false — or the promise of the bottle.

It may put off reckoning day… but it only intensifies the ultimate and inevitable withdrawal.

Come we now to our evidence that recession is within view…

We have argued previously that sub-4% unemployment means recession is almost invariably close by.

Today we observe that recession is also close when corporate debt attains present heights.

U.S. corporate debt swelled a preposterous $2.5 trillion post-financial crisis… some 40% higher than its 2008 summit.

Corporate debt presently equals some 46% of GDP — the highest percentage on record.

And whenever corporate debt rises to present levels, recession is in the air… at least for the past 40-odd years:

Corporate Debt Far Into Red Zone

But whom shall we blame?

As is our wont, we point an accusing finger at the Federal Reserve…

Year upon year of ultra-low interest rates hammered borrowing costs lower and lower.

Marginal corporations that would have been denied access to credit under normal circumstances took on debt.

And many corporations have issued bonds to raise funds rather than issue stock. It has proved less expensive given the bargain rates.

Did corporations use the borrowed money to increase productivity… increase research and development… or expand operations?

No, not particularly.

Many corporations have been using the money to purchase their own stock, which has artificially inflated their prices.

And as we have stated before, corporations have been the largest source of all stock purchases.

But interest rates have been climbing… like water in a flooding basement.

And the cost of existing debt is rising with it.

How will they meet their debts?

Bonds rated “BB” are considered “junk bonds.”

“BBB” is one level removed from junk.

MarketWatch informs us that the volume of the bond market rated BBB currently rises to $2.5 trillion — a record high.

That is, 50% percent of all investment-grade corporate bonds are presently one inch from junk status.

And once they start going over… watch out.

Explains Daily Reckoning associate John Mauldin:

This is the sort of thing that can quickly snowball into a financial crisis. Something similar happened with commercial paper in 2008, but this has the potential to be even worse… and, if it happens, could come at a time when the Federal Reserve and Treasury can’t help much. I see serious risk of a corporate bond crisis in 2019…

Analyst Jesse Colombo is similarly alarmed:

The U.S. corporate debt bubble will likely burst due to tightening monetary conditions, including rising interest rates. Loose monetary conditions are what created the corporate debt bubble in the first place, so the ending of those conditions will end the corporate debt bubble. Falling corporate bond prices and higher corporate bond yields will cause stock buybacks to come to a screeching halt, which will also pop the stock market bubble, creating a downward spiral. 

In conclusion:

There are extreme consequences from central bank market-meddling, and we are about to learn this lesson once again.

From where we sit… the only question is when.

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post The Origin of the Next Financial Crisis appeared first on Daily Reckoning.

Today’s “Huge” Jobs Report Is a Bad Omen

This post Today’s “Huge” Jobs Report Is a Bad Omen appeared first on Daily Reckoning.

Markets paced the floor this morning… like a man condemned awaiting word on his final appeal.

For the December unemployment report was due out at 8:30.

A poor jobs report would send stocks spiraling down the greasy pole — again.

The market staggered into 2019 off its worst December since the Great Depression. It is also off to its worst start in 19 years.

Could it absorb another blow?

Economists as a whole forecast 176,000 jobs.

What number did the report actually reveal?

312,000 jobs — a “blowout” number — and the largest monthly increase since last February.

We were also informed that American wages increased a gorgeous 3.2% over the previous December.

Only once since April 2009 has this 3.2% year-over-year increase been equaled.

And the sweet scarlet treat atop the sundae:

The unemployment level increased from 3.7%… to 3.9%.

Come again, you say?

How in the name of all things holy is higher unemployment good news?

For this reason:

It means more Americans are entering the labor force.

If they cannot secure immediate positions, they are counted among the unemployed… and the unemployment rate increases.

In December, 419,000 previously idle Americans volunteered for duty.

And the labor force participation rate increased to 63.1% — up from November’s 62.9%.

Wall Street went and had itself a day at the races…

The Dow Jones stormed back 747 points today.

The S&P surged 84.

The Nasdaq leaped 275 points — a thumping 4% rally.

(The unemployment report alone does not account for today’s raucous numbers. Answer below).

From the cheering section rose exultant gloats and howls today…

“The far-bigger-than-expected 312,000 jump in nonfarm payrolls in December would seem to make a mockery of market fears of an impending recession,” beamed Paul Ashworth, chief U.S. economist at Capital Economics.

“What recession?” mocked Stu Hoffman of PNC Financial.

Jared Bernstein — former chief economist for Joe Biden — says it “looks like the jobs market didn’t get the recession memo.”

Just so.

But let us dispatch a recession memo of our own…

As we have illustrated before, an unemployment rate below 4% is no cause to celebrate.

The proof is clear as gin… and every bit as stiff:

Recession is never far behind when unemployment sinks below 4%.

U.S. unemployment dipped beneath 4% last May.

Unemployment previously slipped beneath 4% in April 2000 — at the peak of the dot-com derangement.

The economy was in recession by March 2001 — less than one year later.

A similar schedule would put this April on recession watch.

Before 2000, unemployment had previously fallen below 4% in December 1969.

The economy was sunk in recession shortly thereafter.

Do we stretch the facts to fit into a theory?

We do not.

Nicole Smith is chief economist at Georgetown University’s Center on Education and the Workforce.

From whom:

If we look historically at other times when the unemployment rate has fallen below 4%… what we find is that the low unemployment rate is often associated with a boom phase just before a recession. It’s almost a precursor for a recession or a precursor for another slumping economy.

Perhaps you are unconvinced.

We therefore hammer you upon the head with the following evidence — a chart giving the history since 1950.

On each occasion the unemployment rate fell below 4%, it reveals, recession was on tap:

Chart

Of course… recessions are not always occasioned by unemployment rates below 4%.

But once again, the chart proves it beyond all cavil:

When the official unemployment rate sinks beneath 4%… recession is close by.

In pleasant reminder, unemployment presently hovers at 3.9%.

But why should recession rapidly follow peak employment?

Mainstream economics equates extremely low (official) unemployment with an “overheating” economy.

Central banks must therefore raise interest rates to lower the temperature, to bring the business under control.

Our own central bank has been following the operator’s manual.

But instead of slowing things down… the clods end up slamming the engine into reverse.

As the following chart informs us, rising interest rates preceded each U.S. recession since 1950:

Chart

Confirms analyst Jesse Colombo:

Economic recessions, financial crises and bear markets have occurred after virtually all Fed rate hike cycles, and there is no reason to believe that the current one will be an exception.

Which brings us now to Mr. Jerome Hayden Powell, chairman of the Federal Reserve System…

He appears to be a man with a bit between his teeth.

He has seemed determined, that is, to increase interest rates at any excuse.

Last month, for example — as the stock market was plunging into correction, no less — he went ahead anyway.

Many analysts believed the continued stock market horrors would back him off.

But will today’s go-go jobs report encourage him to press ahead?

MarketWatch on Powell’s dilemma:

On the one hand, the markets are reflecting fears of a deceleration in activity, but more fundamental sources of information on the economy show the danger of an overheating economy remain present.

“This will be very difficult for Powell to reconcile,” warns Carl Tannenbaum, chief economist at Northern Trust.

But what does the man himself have to say?

Powell addressed the American Economic Association this morning.

His comments suggest a new flexibility

He said he is “prepared to adjust policy quickly and flexibly.”

What about the balance sheet?

We contend that quantitative tightening (QT) has throttled markets far more than a series of pinprick rate hikes.

Last month Powell said QT was running “on autopilot,” a remark that sent stocks careening.

Not today.

The chairman said this morning the Fed is “listening carefully” to markets.

He further pledged to announce a halt “if needed,” adding, “We wouldn’t hesitate to change it.”

By sheerest coincidence… the Dow Jones jumped 400 points following the remarks.

We can only come to one conclusion:

The Federal Reserve will never truly “normalize” its balance sheet — despite all gabble to the contrary.

Wall Street will simply not allow it.

But it will not be enough to keep the show going.

We stand by our 2019 forecast:

Dow 18,000 by year’s end.

And recession — just look at the unemployment rate.

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post Today’s “Huge” Jobs Report Is a Bad Omen appeared first on Daily Reckoning.