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Our Economic Arrogance Will Be Our Undoing

Our Economic Arrogance Will Be Our Undoing

Submitted by QTR’s Fringe Finance

Think seriously for a moment about what we were told about inflation…

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Our Economic Arrogance Will Be Our Undoing

Submitted by QTR's Fringe Finance

Think seriously for a moment about what we were told about inflation over the last two years. As everybody knows, both the government and the Federal Reserve swore up and down to us that inflation was going to be transitory and they were, of course, dead wrong.

This wholly incorrect prognostication will be filed next to Ben Bernanke’s “subprime is contained” statement as one of the all-time worst pieces of financial and monetary analysis provided by those who are supposed to have mastery of the subject at a consequential time, ever.

Putting aside whether or not the Fed is nefarious or simply incompetent, what is far more alarming is that we continue to ascribe credibility and relevance to the same people who not only seem to have a poor understanding of the basics of economics, but also a willingness to either put their stupidity on display, or lie to the public with a straight face. 

Which is why I feel like I can confidently declare exactly which “prediction” we are getting from the Fed and the Treasury that will turn out to be dead wrong: the idea that we are not headed, at warp speed, head-first into a recession.

As recently as last month, Janet Yellen was out telling the world that she didn’t anticipate a recession:

“The U.S. economy is obviously performing exceptionally well, with continued solid job creation, inflation gradually moving down, robust consumer spending," she said. "I'm not anticipating a downturn in the economy.”

That’s a lovely thought, Janet, but you’re likely going to be proven dead wrong in short order.

I predict that the next “shoe to drop” for the United States, economically and regardless of what the stock market does, will be the country slipping deep into recession. In fact, the data supports the idea that we are already in recession.


The beauty of Austrian economics is that I shouldn’t even need to reason as to why we are heading for a deep recession: the fact that rates are at 5% after sitting at 0% for a decade should be all you need to know.

Just a rudimentary understanding of the basics of finance - especially in a Keynesian system where spending is worshipped - tells you that such a pronounced ramp higher in rates is going to cause a severe economic slowdown eventually. My readers know I have been predicting this for 18 months now, and they also know I am not afraid of getting things wrong. In this case, I simply think I was early, and will be proven right soon.

After all, we know what we’ve been told. Could there be anything more pathetic than touting the line used specifically to make fun of market neophytes that “this time it’s different?”

 

Now here’s what the Fed’s own data shows.

Zero Hedge, in a great piece detailing the ins and outs of the Federal Reserve Bank of New York’s quarterly report on household debt and credit, pointed out some obvious signs of a slowing economy. First, they noted that this was the weakest quarterly debt increase in two years, which suggests that some tightening is taking place. By proxy it also casts a dim light on spending since, as ZH notes, our economy is entirely credit driven.

One of the largest standouts from Zero Hedge’s analysis is the plunge in mortgage originations, specifically among the most credit-worthy.

And auto loan originations are also starting to turn back toward pre-pandemic levels, even despite the trillions that the Fed firehosed out in 2020 and 2021.

Finally, delinquencies (where the rubber meets the recession road) ticked higher still, with a focus on autos and credit cards. “The delinquency transition rate for credit cards and auto loans increased by 0.6 and 0.2%, respectively approaching or surpassing their pre-pandemic levels,” Zero Hedge writes.

If it isn’t clear from these figures that the economy is heading in the wrong direction, I don’t know what to tell you. Now, layer on top of that the fact that most of this data is on several lags - the lag of it being Q1 data and the lag of the data responding to monetary policy changes. In other words the “spot” levels for this data as they stand today - and months from now in responding to today’s rates - is likely already far worse. And these aren’t trends that just quickly turn around, even with swift changes to monetary policy. These trends need to change direction like the Titanic: extremely slowly and over long periods of time (insert eventually hitting the iceberg anyway joke here).


The stock market is no longer a leading indicator for the economy. Instead it has become the “wild card” of the group, a la Charlie Kelly,

The stock market is the wild card because it no longer relies on anything involving macroeconomic data to determine which direction it’s going to move in.

In a sane world, the market would already be significantly lower than it is, pricing in future economic data like that which I’ve pointed out above. Instead, we’ve had several weeks of the market milling around and drifting upward - because we live in a world where the “market” is controlled less by actual data and more by the Fed’s incessant uber-inflationary policy as it relates to the dollar.

Don’t get me wrong, I still believe there will be a huge wreck in equity markets at some point, and I believe that this will cause the Fed to ease their policy, likely way too late. From there, it’ll become a tug-of-war between legitimate economic forces, pulling the market in one direction, and the cocktail of the central bank, mixed with generally lobotomized behavioral investor psychology, pulling it in the other.

In the words of Kerouac, “I have nothing to offer anybody except my own confusion.”

But what I am fairly certain of, however, is that we are going to see a crack up in some market somewhere - the “blowoff valve” that I wrote about at the beginning of the month and the consequences I wrote about last week, while discussing what positions I liked heading into the chaos.

I also think it’s important that people don’t underestimate the Central Bank’s ability to make a significant problem much worse. After all, the way that we determine policy in this country is often to blame the easiest, lowest hanging fruit, regardless of their actual culpability, mixed with trying every potential “quick fix” possible before eventually giving up and defaulting to an actual, often uncomfortable, solution, once its too late.

For an example of this, look no further than JP Morgan’s Jamie Dimon, who has been placing the blame on the very bank blowups he is taking advantage of on short sellers.

 

While it’s a great catchy headline that is easily digested by long investors that are scared of short selling “boogeymen”, most seasoned investors know it’s a case of the tail wagging the dog. People were short bank stocks because they saw the risk on their balance sheets…risk didn’t just suddenly appear on these banks’ balance sheets because someone was short, or because their equity moved lower.

Being short or long a bank stock doesn’t change the fact that it loaded its balance sheet with Treasuries when yields were at 0.5% and now, with rates at 5%, a hole has been blown in their boat the size of a cannonball.

And, to quote Penn & Teller’s Bullshit!: “…and then there’s this asshole”

Yet another example of deflecting blame to the “convenient” low-hanging fruit goes to Silicon Valley Bank CEO Greg Becker who, according to Bloomberg, blamed everyone - the Fed, social media, the fairy fucking godmother - but himself and his shitty portfolio of lousy assets that forced him to spook the market with a firesale, prior to the bank’s collapse:

“The messaging from the Federal Reserve was that interest rates would remain low and that the inflation that was starting to bubble up would only be ‘transitory,’” Becker said in written testimony prepared for a US Senate Banking Committee hearing Tuesday focused on Silicon Valley Bank and Signature Bank, both of which were seized by regulators in March. “Indeed, between the start of 2020 and the end of 2021, banks collectively purchased nearly $2.3 trillion of investment securities in this low-yield environment created by the Federal Reserve.”

He’s right that the Fed lied/was wrong about transitory inflation - but the Fed didn’t stock his bank’s balance sheet with trash - and the Fed isn’t your Chief Investment Officer. What happened to accountability?


As I said, it’s only after we’ve exhausted all of the wrong solutions that the market finally pukes back the final, correct solution (think Rolling Stones: you can't always get what you want, but if you try sometimes, well, you might find, you get what you need).

This means that, regardless of whether or not we can short sell banks, the underlying problem, herein after referred to as the economy sputtering to a halt like that engine in Captain Ron, isn’t going away.

“It's the genuine article, all right. Fairchild Marine. 1200 ponies.”

We saw the same type of arrogance when it came to Covid. We lunged at the quickest and easiest sounding fix in the absence of reviewing the data. As part of that lunge, we even went as far as to ridicule and shame people that suggested we think about things critically and slow down in our hasty decision making process.

It’s only now that the market has puked out the actual solution, which basically amounts to doing what we would do for the flu, that all of the nonsensical measures we put into place are seen for the asinine ideas they truly were.

As my friend Larry Lepard has predicted with me several times, the same thing will eventually happen to gold and bitcoin when it becomes clear that sound money has become our nation’s Achilles’ heel. Nobody will blame 50 years of horrific central banking policy, greed or excess among those who received bailouts, tied with abusive spending habits, as the reason for the dollar’s downfall. Instead, they will come for your gold, they will nationalize the miners and they will tax or ban bitcoin.

Hell, anything that can get you out of their system, while the system is crumbling, is going to be seen collectively as the enemy.

The enemy will be everything except the people and policies that created the problem to begin with. Those people get awards instead, as I detailed here:

Ben Bernanke Winning The Nobel Prize In Economics Is A Sick Joke

So brace yourself for an incoming recession.

What it means for markets, I wish I could tell you, other than it just feels to be a risk-off environment and here’s what I have in my portfolio.

There’s a small group of us out there that will be proven right when the recession takes place, but no one will notice, we won’t be taken seriously, and everybody who got it wrong will have a new set of excuses and jargon to try to justify how deeply ineffective and morally bankrupt their predictions and policies have become.

I imagine that with every new incoming Treasury Secretary and every new Fed chair, there is a tiny bit of worry that the whole thing will come undone under their watch. And while the Fed may believe it still has some tools it can use, like yield curve control, anything short of responsible policy and cutting spending is still going to have us trending in the wrong direction. Maybe it won’t blow up on Powell’s watch and maybe Janet Yellen will escape scot- and guilt-free for the rest of her life. But I’m certain of one thing: when we look back half a century from now, it’ll be clear that our arrogance to think we never have to stomach uncomfortable solutions will have been our nation’s monetary and economic undoing.

Please share if you enjoyed -- and you can subscribe to QTR's Fringe Finance for free here

QTR’s Disclaimer: I am not a guru or an expert. I am an idiot writing a blog and often get things wrong and lose money. I may own or transact in any names mentioned in this piece at any time without warning and generally trade like a degenerate psychopath. In pieces that I did not write, but that I aggregated from other sources, I did not personally fact check them and am republishing them, with permission, because I found the content useful and believe my readers will too. This is not a recommendation to buy or sell any stocks or securities or any asset class - just my opinions of me and my guests. I often lose money on positions I trade/invest in and I’m sure have lost more than I’ve made in my time in markets. I may add any name mentioned in this article and sell any name mentioned in this piece at any time, without further warning. Positions can change immediately as soon as I publish this, with or without notice. You are on your own. Do not make decisions based on my blog. I exist on the fringe. The publisher does not guarantee the accuracy or completeness of the information provided in this page. These are not the opinions of any of my employers, partners, or associates. I did my best to be honest about my disclosures but can’t guarantee I am right; I write these posts after a couple beers sometimes. Also, I just straight up get shit wrong a lot. I mention it three times because it’s that important.

Tyler Durden Tue, 05/16/2023 - 10:45

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February Employment Situation

By Paul Gomme and Peter Rupert The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000…

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By Paul Gomme and Peter Rupert

The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000 average over the previous 12 months. The payroll data for January and December were revised down by a total of 167,000. The private sector added 223,000 new jobs, the largest gain since May of last year.

Temporary help services employment continues a steep decline after a sharp post-pandemic rise.

Average hours of work increased from 34.2 to 34.3. The increase, along with the 223,000 private employment increase led to a hefty increase in total hours of 5.6% at an annualized rate, also the largest increase since May of last year.

The establishment report, once again, beat “expectations;” the WSJ survey of economists was 198,000. Other than the downward revisions, mentioned above, another bit of negative news was a smallish increase in wage growth, from $34.52 to $34.57.

The household survey shows that the labor force increased 150,000, a drop in employment of 184,000 and an increase in the number of unemployed persons of 334,000. The labor force participation rate held steady at 62.5, the employment to population ratio decreased from 60.2 to 60.1 and the unemployment rate increased from 3.66 to 3.86. Remember that the unemployment rate is the number of unemployed relative to the labor force (the number employed plus the number unemployed). Consequently, the unemployment rate can go up if the number of unemployed rises holding fixed the labor force, or if the labor force shrinks holding the number unemployed unchanged. An increase in the unemployment rate is not necessarily a bad thing: it may reflect a strong labor market drawing “marginally attached” individuals from outside the labor force. Indeed, there was a 96,000 decline in those workers.

Earlier in the week, the BLS announced JOLTS (Job Openings and Labor Turnover Survey) data for January. There isn’t much to report here as the job openings changed little at 8.9 million, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.

As has been the case for the last couple of years, the number of job openings remains higher than the number of unemployed persons.

Also earlier in the week the BLS announced that productivity increased 3.2% in the 4th quarter with output rising 3.5% and hours of work rising 0.3%.

The bottom line is that the labor market continues its surprisingly (to some) strong performance, once again proving stronger than many had expected. This strength makes it difficult to justify any interest rate cuts soon, particularly given the recent inflation spike.

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Mortgage rates fall as labor market normalizes

Jobless claims show an expanding economy. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.

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Everyone was waiting to see if this week’s jobs report would send mortgage rates higher, which is what happened last month. Instead, the 10-year yield had a muted response after the headline number beat estimates, but we have negative job revisions from previous months. The Federal Reserve’s fear of wage growth spiraling out of control hasn’t materialized for over two years now and the unemployment rate ticked up to 3.9%. For now, we can say the labor market isn’t tight anymore, but it’s also not breaking.

The key labor data line in this expansion is the weekly jobless claims report. Jobless claims show an expanding economy that has not lost jobs yet. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.

From the Fed: In the week ended March 2, initial claims for unemployment insurance benefits were flat, at 217,000. The four-week moving average declined slightly by 750, to 212,250


Below is an explanation of how we got here with the labor market, which all started during COVID-19.

1. I wrote the COVID-19 recovery model on April 7, 2020, and retired it on Dec. 9, 2020. By that time, the upfront recovery phase was done, and I needed to model out when we would get the jobs lost back.

2. Early in the labor market recovery, when we saw weaker job reports, I doubled and tripled down on my assertion that job openings would get to 10 million in this recovery. Job openings rose as high as to 12 million and are currently over 9 million. Even with the massive miss on a job report in May 2021, I didn’t waver.

Currently, the jobs openings, quit percentage and hires data are below pre-COVID-19 levels, which means the labor market isn’t as tight as it once was, and this is why the employment cost index has been slowing data to move along the quits percentage.  

2-US_Job_Quits_Rate-1-2

3. I wrote that we should get back all the jobs lost to COVID-19 by September of 2022. At the time this would be a speedy labor market recovery, and it happened on schedule, too

Total employment data

4. This is the key one for right now: If COVID-19 hadn’t happened, we would have between 157 million and 159 million jobs today, which would have been in line with the job growth rate in February 2020. Today, we are at 157,808,000. This is important because job growth should be cooling down now. We are more in line with where the labor market should be when averaging 140K-165K monthly. So for now, the fact that we aren’t trending between 140K-165K means we still have a bit more recovery kick left before we get down to those levels. 




From BLS: Total nonfarm payroll employment rose by 275,000 in February, and the unemployment rate increased to 3.9 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, in government, in food services and drinking places, in social assistance, and in transportation and warehousing.

Here are the jobs that were created and lost in the previous month:

IMG_5092

In this jobs report, the unemployment rate for education levels looks like this:

  • Less than a high school diploma: 6.1%
  • High school graduate and no college: 4.2%
  • Some college or associate degree: 3.1%
  • Bachelor’s degree or higher: 2.2%
IMG_5093_320f22

Today’s report has continued the trend of the labor data beating my expectations, only because I am looking for the jobs data to slow down to a level of 140K-165K, which hasn’t happened yet. I wouldn’t categorize the labor market as being tight anymore because of the quits ratio and the hires data in the job openings report. This also shows itself in the employment cost index as well. These are key data lines for the Fed and the reason we are going to see three rate cuts this year.

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Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Last month we though that the January…

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Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Last month we though that the January jobs report was the "most ridiculous in recent history" but, boy, were we wrong because this morning the Biden department of goalseeked propaganda (aka BLS) published the February jobs report, and holy crap was that something else. Even Goebbels would blush. 

What happened? Let's take a closer look.

On the surface, it was (almost) another blockbuster jobs report, certainly one which nobody expected, or rather just one bank out of 76 expected. Starting at the top, the BLS reported that in February the US unexpectedly added 275K jobs, with just one research analyst (from Dai-Ichi Research) expecting a higher number.

Some context: after last month's record 4-sigma beat, today's print was "only" 3 sigma higher than estimates. Needless to say, two multiple sigma beats in a row used to only happen in the USSR... and now in the US, apparently.

Before we go any further, a quick note on what last month we said was "the most ridiculous jobs report in recent history": it appears the BLS read our comments and decided to stop beclowing itself. It did that by slashing last month's ridiculous print by over a third, and revising what was originally reported as a massive 353K beat to just 229K,  a 124K revision, which was the biggest one-month negative revision in two years!

Of course, that does not mean that this month's jobs print won't be revised lower: it will be, and not just that month but every other month until the November election because that's the only tool left in the Biden admin's box: pretend the economic and jobs are strong, then revise them sharply lower the next month, something we pointed out first last summer and which has not failed to disappoint once.

To be fair, not every aspect of the jobs report was stellar (after all, the BLS had to give it some vague credibility). Take the unemployment rate, after flatlining between 3.4% and 3.8% for two years - and thus denying expectations from Sahm's Rule that a recession may have already started - in February the unemployment rate unexpectedly jumped to 3.9%, the highest since February 2022 (with Black unemployment spiking by 0.3% to 5.6%, an indicator which the Biden admin will quickly slam as widespread economic racism or something).

And then there were average hourly earnings, which after surging 0.6% MoM in January (since revised to 0.5%) and spooking markets that wage growth is so hot, the Fed will have no choice but to delay cuts, in February the number tumbled to just 0.1%, the lowest in two years...

... for one simple reason: last month's average wage surge had nothing to do with actual wages, and everything to do with the BLS estimate of hours worked (which is the denominator in the average wage calculation) which last month tumbled to just 34.1 (we were led to believe) the lowest since the covid pandemic...

... but has since been revised higher while the February print rose even more, to 34.3, hence why the latest average wage data was once again a product not of wages going up, but of how long Americans worked in any weekly period, in this case higher from 34.1 to 34.3, an increase which has a major impact on the average calculation.

While the above data points were examples of some latent weakness in the latest report, perhaps meant to give it a sheen of veracity, it was everything else in the report that was a problem starting with the BLS's latest choice of seasonal adjustments (after last month's wholesale revision), which have gone from merely laughable to full clownshow, as the following comparison between the monthly change in BLS and ADP payrolls shows. The trend is clear: the Biden admin numbers are now clearly rising even as the impartial ADP (which directly logs employment numbers at the company level and is far more accurate), shows an accelerating slowdown.

But it's more than just the Biden admin hanging its "success" on seasonal adjustments: when one digs deeper inside the jobs report, all sorts of ugly things emerge... such as the growing unprecedented divergence between the Establishment (payrolls) survey and much more accurate Household (actual employment) survey. To wit, while in January the BLS claims 275K payrolls were added, the Household survey found that the number of actually employed workers dropped for the third straight month (and 4 in the past 5), this time by 184K (from 161.152K to 160.968K).

This means that while the Payrolls series hits new all time highs every month since December 2020 (when according to the BLS the US had its last month of payrolls losses), the level of Employment has not budged in the past year. Worse, as shown in the chart below, such a gaping divergence has opened between the two series in the past 4 years, that the number of Employed workers would need to soar by 9 million (!) to catch up to what Payrolls claims is the employment situation.

There's more: shifting from a quantitative to a qualitative assessment, reveals just how ugly the composition of "new jobs" has been. Consider this: the BLS reports that in February 2024, the US had 132.9 million full-time jobs and 27.9 million part-time jobs. Well, that's great... until you look back one year and find that in February 2023 the US had 133.2 million full-time jobs, or more than it does one year later! And yes, all the job growth since then has been in part-time jobs, which have increased by 921K since February 2023 (from 27.020 million to 27.941 million).

Here is a summary of the labor composition in the past year: all the new jobs have been part-time jobs!

But wait there's even more, because now that the primary season is over and we enter the heart of election season and political talking points will be thrown around left and right, especially in the context of the immigration crisis created intentionally by the Biden administration which is hoping to import millions of new Democratic voters (maybe the US can hold the presidential election in Honduras or Guatemala, after all it is their citizens that will be illegally casting the key votes in November), what we find is that in February, the number of native-born workers tumbled again, sliding by a massive 560K to just 129.807 million. Add to this the December data, and we get a near-record 2.4 million plunge in native-born workers in just the past 3 months (only the covid crash was worse)!

The offset? A record 1.2 million foreign-born (read immigrants, both legal and illegal but mostly illegal) workers added in February!

Said otherwise, not only has all job creation in the past 6 years has been exclusively for foreign-born workers...

Source: St Louis Fed FRED Native Born and Foreign Born

... but there has been zero job-creation for native born workers since June 2018!

This is a huge issue - especially at a time of an illegal alien flood at the southwest border...

... and is about to become a huge political scandal, because once the inevitable recession finally hits, there will be millions of furious unemployed Americans demanding a more accurate explanation for what happened - i.e., the illegal immigration floodgates that were opened by the Biden admin.

Which is also why Biden's handlers will do everything in their power to insure there is no official recession before November... and why after the election is over, all economic hell will finally break loose. Until then, however, expect the jobs numbers to get even more ridiculous.

Tyler Durden Fri, 03/08/2024 - 13:30

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