Submitted by David Stockman – The Contra Corner Blog
Goldman’s Fed farm team was out in force today peddling some pretty heavy-duty malarkey about the up-coming rate liftoff at the December meeting. Its newly seconded man at the Dallas Fed, Robert Kaplan, reminded that “accommodative policy does not necessarily mean a zero fed funds rate.”
And the B-Dud himself was even more explicit. Speaking to a conference about regulation, the New York Fed head and former Goldman chief economist said,
“If we begin to raise interest rates, that’s a good thing. That’s not a bad thing,” he said during a question and answer session after his opening remarks, which were on financial regulation. “That’s a sign that the economy is actually returning to health, the Federal Reserve is getting closer to achieving our dual mandate objectives of maximum sustainable employment and price stability.”
Excuse me for fumbling for my tin foil hat, but did the Vampire Squid actually just trot out its minions at the Fed to suggest that you buy this rally?
Why, yes it did. The robo-machines were raging in response to the Fed minutes, and that’s a flashing red warning sign if there ever was one.
To wit, Goldman is putting out the final mullet call for this Bubble Cycle because it knows that this bull is dying; that insiders still have massive amounts of stock winnings to unload; and that the clock is fast running out.
The expiring clock is evident in the S&P 500’s one-year round trip to nowhere. Despite the fact that the Fed has ponied-up a stick save at every single meeting this year, the market’s 27 separate efforts to rally have all failed for the simple reason that the jig is up.
That is, we are now in month 83 of zero interest rates and the Fed has pumped $3.6 trillion of fiat credit into Wall Street, but there has been no genuine economic recovery on main street. In fact, the tepid expansion cycle that we have actually experienced is now being extinguished by ferocious headwinds emanating from the deflationary global economy.
That is more than evident in the third quarter earnings results for the S&P 500. Reported LTM profits at $94 per share were down 11% from prior year’s $106 per share, and the slide down the slippery slope has just started.
So the smart money has been steadily “taking profits” with each mini-rip, but now the situation is becoming urgent. Within months it will be evident that the US economy has entered a new recession, while even Wall Street’s egregious manipulation and crafting of ex-items earnings will not be able to hide the epic profit implosion now in motion.
Hence comes today’s ridiculous meme. Namely, the year end rally is at hand, the Fed still has your back and escape velocity is once again just around the bend.
The truth is, this bull has had an especially hard time expiring because it is on a monetary ventilator and the central bankers have been too petrified to pull the plug.
Yet they have finally just plain run out of excuses. After the tragic events of last Friday, there was even a feeble narrative about the Fed needing to wait for the decks to clear from Paris. But apparently even the most shameless bubblevision stock peddlers thought better—-after a few seconds of reflection—- about the notion of suicidal barbarians being in charge of the US central bank.
So the Fed likely will allow money market rates to rise by a hairs-breadth from the zero bound at the next meeting, but that ain’t because the economy is strong and getting stronger. In fact, business sales have already rolled-over, inventories are soaring and the inventory/sales ratio is practically screaming recession dead ahead.
In the most recent month, total business sales in the US economy—manufacturing, wholesale and retail—–amounted to $1.32 trillion and weredown 3.3% from their July 2014 peak.
Not only does this demonstrate that business activity has already deteriorated significantly; it also crystalizes what a farce this so-called recovery has actually been.
Since the July 2008 pre-crisis peak, nominal business sales have only expanded at a 1.1% annual rate. Throw in even a minimal dash of inflation and it is evident that they have hardly grown at all.
By contrast, during the first seven years after the dotcom peak, total business sales expanded at a 5.6% annual rate.
Yes, the Greenspan housing and credit bubble was not sustainable and by prior historical standards was nothing to write home about even then. But we are now at the point where this entire business expansion has been an exercise in treading water, and even those minimal gains are now giving way.
By contrast, what has been growing is business inventories and the inventory-sales ratio. Since the July 2014 peak, in fact, inventories have grown by $52 billion while monthly sales have fallen by $45 billion.
Needless to say, the inventory sales ratio is now at its October 2008 level. It is only a matter of time before production curtailments trigger a downward cycle of economic activity.
Indeed, spending for CapEx excluding the volatile aircraft category shows the same pattern. The top was put in more than a year ago—-with new orders down 7% and shipments not far behind.
Not surprisingly, the concurrent indicators of business activity have also turned south. During October, for example, the Cass Freight shipment index was down 5.3% from last year, while the DAT North American Freight Index hit is lowest level since 2010.
Even more telling are the activity rates at the nation’s largest port in Los Angeles. Container counts for imports in October were down by 3.3% from last year, but it is the count of outbound/export TEUs (Twenty-foot equivalent units) and empty containers which underscore the rapid deterioration underway.
To wit, outbound TEUs for the October report were 134,964 or nearly 15% below the 158,182 figure recorded last year. Likewise, of the total 704,589 units in port during October, 211,000 or 30% were empty. That’s the highest ratio since 2009!
To be sure, unless you are smoking the “decoupled” stuff, none of this should be surprising. The most recent readings indicate that total US exports are now down 8% from their peak, while exports of industrial supplies and materials—-which reflected the leading edge of the China/EM boom—–have now plunged by 24% from their 2012 highs.
Are the PhDs domiciled in the Eccles Building not aware of these slumping trends? Does the Goldman economics department not realize that recession is near?
Well, yes and no. If you wear Keynesian-tinted glasses and rely on an utterly flawed so-called DSGE (dynamic stochastic general equilibrium) model of the economy, the warning signs in plains sight will be filtered out.
To wit, the BLS establishment survey is showing relatively healthy monthly job count gains, and from that single variable all other goods things are assumed to flow by the Fed’s DSGE model.
Stated differently, it’s all about filling the purported macroeconomic bathtub full to the brim. When that condition is achieved owing to the Fed’s deft “accommodation”, which as Dallas President Kaplan reminded can continue well beyond the technical end of ZIRP, wage rates will start to rise and main street incomes will accelerate.
The latter, in turn, will finally unleash the American consumer, which we are reminded over and over accounts for 70% of the economy. And when consumers gets back into enthusiastically shopping until they drop, the US economy will be off to the races——or at least toward 3%+ escape velocity.
Here’s the thing. The monthly BLS jobs numbers amount to meaningless, seasonally maladjusted noise. They are inherently a lagging indicator because the do not measure freshly each month what is actually happening in the real main street economy.
Instead, they reflect the BLS’ trend-cycle adjusted models of what Keynesian logic says should be happening. And what “should” be happening, of course, is that the 175,000 or so average monthly job gains of recent years will extrapolate themselves forward on the edge of a straight ruler.
That is, there are no inflection points—–at least until the 12 wise men and women of the FOMC declare that full-employment has been achieved and that “accommodation” can be quietly withdrawn.
During the “goldilocks” summer of 2007 this exact syndrome played out. The Fed’s straight-edged ruler projected that monthly job gains would continue apace and the Wall Street hockey sticks forecast that current “ex-items” earnings of about $90 per share would rise to $115 in 2008.
Then without warning the bottom fell-out of the credit fueled housing and consumption boom, causing the C-suites of corporate America to panic and begin frantically unloading hoarded labor, especially after the September 15, 2008 Lehman failure.
At that point, the BLS’s trend-cycle adjusted model blew up and was thrown into reverse. Whereas jobs growth had averaged 155,000 per month from January 2005 through the January 2008 peak, it plunged to a loss of 360,000per month for the next two years.
Yet even today it is impossible to know by how much the first figure is still over-stated after endless revisions of the data and fiddling with the seasonals; and, likewise, by how much the latter figure represents “de-trending” of earlier data as opposed to real workers being thrown on the street during the recession
One thing is certain, however. The BLS establishment survey is a confection of lagging statistical noise and provides no clue whatsoever as to what lies just around the economic corner.
Accordingly, today’s bullish assurance by the B-Dud that rates are being raised at long last because the US economy “is actually returning to health…..(and) getting closer to achieving our dual mandate objectives of maximum sustainable employment and price stability” might as well have been cut and pasted from statements made in the white space below:
What actually happened after the US economy slipped into the grey area above is that Wall Street’s hockey sticks were obliterated. By the June 2008 LTM period, actual reported earnings came in at $46 per share, not $115; and finally ended up at just $15 for the full year of 2008.
In short, the global recession is already underway and the US economy stands directly in harms’ way. The permabulls are whistling past the grave once again because that’s how Goldman and its Wall Street confederates call in the sheep for the last slaughter.
Even then, a tinfoil hat is not actually necessary in order to decode today’s phony stock rally. Just read the following gibberish from the Fed’s statement; it conveys all you need to know about the strength of the “all clear” signal being peddled by the Vampire Squid and its minions at the Fed:
“Members emphasized that this change was intended to convey the sense that,while no decision had been made, it may well become appropriate to initiate the normalization process at the next meeting, provided that unanticipated shocks do not adversely affect the economic outlook and that incoming data support the expectation that labor market conditions will continue to improve and that inflation will return to the Committee’s 2 percent objective over the medium term. Members saw the updated language as leaving policy options open for the next meeting. However, a couple of members expressed concern that this wording change could be misinterpreted as signaling too strongly the expectation that the target range for the federal funds rate would be increased at the Committee’s next meeting.